Author Topic: Need help running numbers on a car purchase  (Read 3572 times)

auryn0151

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Need help running numbers on a car purchase
« on: September 09, 2013, 11:29:10 AM »
Hey all - I'm currently driving a used 2009 BMW that I picked up about 7 months ago. I'm looking to unload because while I'm a car guy, this car isn't doing anything for me. I know being a car guy isn't really MMM, but I do like to indulge in some areas. Here is my question: I can get about 15k for the car, and I'll have 10k left over once I pay it off. I have two options: buy a cheap car for about 8k (including sales tax) and invest the rest (2K). Or, lease a car for approximately what my car payment is now ($270) or less, and then just take the entire 10K and invest it.

I know leases are frowned upon, but I'm having trouble numerically convincing myself that the used car is the way to go. With a lease, I will choose a car that lets me put zero down, and has maintenance included. So, for the 3 year lease term, I will be guaranteed to pay $0 in maintenance costs, while the used car could cause me any amount of trouble, even if I get something like a Civic. Leasing a new car will also provide greatly improved gas mileage over the used car I'd likely buy, reducing operating costs of the vehicle. I'd seriously consider a diesel for the mpg.

I'm trying to decide if investing much more money now and leaving it to grow long term will overtake the money I pay for the lease now. Thoughts? I'd love if someone could show me some numbers to help my decision! Thanks!

matchewed

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Re: Need help running numbers on a car purchase
« Reply #1 on: September 09, 2013, 11:37:04 AM »
Well that's simple. Buy a used car for the 8k you propose. In the end you will own a used car and have leftover money. If you lease you will not have a used car, in fact you will have 0 car at the end of the lease and 10k less over three years because of it. I'm not sure why you need much more math than that. If you do enough research and look for the right car you will minimize your odds of needing to do 2k worth of work on the used car.

auryn0151

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Re: Need help running numbers on a car purchase
« Reply #2 on: September 09, 2013, 11:57:14 AM »
I understand that leasing the car will leave me without a car. the math I'm looking for is accounting for the fact that if I lease the car I can instantly invest 10k dollars, whereas if I buy a car for 8, I'm buying a further depreciating assett and don't have that money available to invest.

matchewed

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Re: Need help running numbers on a car purchase
« Reply #3 on: September 09, 2013, 12:28:30 PM »
Scenario 1 - Lease Scenario

10k invested now. Potential return after 3 years (assuming 7% a year which is a terrible assumption due to the short term window) - you'll have $12250.43 (again terrible assumption).

Scenario 2 - Buy Used

2k invested now. Add 3240 per year (what you would have used in the lease). Potential return after 3 years (same terrible assumption) - you'll have 12866.36.

Way oversimplified numbers.

davisgang90

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Re: Need help running numbers on a car purchase
« Reply #4 on: September 09, 2013, 12:31:21 PM »
Scenario 1 - Lease Scenario

10k invested now. Potential return after 3 years (assuming 7% a year which is a terrible assumption due to the short term window) - you'll have $12250.43 (again terrible assumption).

Scenario 2 - Buy Used

2k invested now. Add 3240 per year (what you would have used in the lease). Potential return after 3 years (same terrible assumption) - you'll have 12866.36.

Way oversimplified numbers.
Scenario 2 also includes a car at the end of 3 years, unlike Scenario 1

Spudd

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Re: Need help running numbers on a car purchase
« Reply #5 on: September 09, 2013, 12:33:37 PM »
How long would you keep the used car? The used car will retain some of its value at the end of the term compared to the leased car which you will have to return.

Let's say you keep the used car for 3 years, vs leasing a car for 3 years.

At the end of the 3 years, you can sell your 8k used car for 4k. (A 2007 Honda Civic is 7k KBB while a 2004 is 4k KBB so this seems like a reasonable guess). So you have spent 4k for 3 years of driving.

If you lease the car, you spend $10k for 3 years of driving.

You would have to make up 6k in your stock market returns for an 8k investment, almost doubling your money over a 3 year period. This seems unlikely. Therefore, you are better off buying the used car.

Nords

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Re: Need help running numbers on a car purchase
« Reply #6 on: September 09, 2013, 08:42:02 PM »
I understand that leasing the car will leave me without a car. the math I'm looking for is accounting for the fact that if I lease the car I can instantly invest 10k dollars, whereas if I buy a car for 8, I'm buying a further depreciating assett and don't have that money available to invest.
Classic mental accounting.  Build a spreadsheet that includes all the money and all the cars (or leases) and all the cash flows.  You'll come out ahead by buying used and driving it into the ground.

If you buy the used car you still have $270/month to invest, because you're not spending that money on a lease contract.  Over the next three years that amounts to $9720 (which you'll invest) and at the end of it you still have a car.

If you lease a car for $270/month, at the end of three years you've spent $9720 and have nothing.  Meanwhile if you buy a used car for $8K and use it for three years, at the end of that three years you'd be able to sell the car for at least $4K.  In other words it cost you no more than $112/month.  The reality is that you'd keep that car for at least another three years, giving you another $9720 to invest instead of spending it on another car lease.

$270/month seems like a high price to pay for repair insurance.  (The car dealer is getting the better side of that bet!)  Used cars in the 2-5-year range are a lot more reliable, and it's quite possible that the only "repair" you'd be on the hook for is a new starter battery.

Of course all of the foregoing is a financial answer.  If you see a car as an entertainment expense instead of basic transportation then you can ignore all the financial analysis and just do whatever makes a car guy feel good.  You're the one who's willing to work for it.

randymarsh

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Re: Need help running numbers on a car purchase
« Reply #7 on: September 09, 2013, 08:57:43 PM »
I will be guaranteed to pay $0 in maintenance costs, while the used car could cause me any amount of trouble, even if I get something like a Civic. Leasing a new car will also provide greatly improved gas mileage over the used car I'd likely buy, reducing operating costs of the vehicle. I'd seriously consider a diesel for the mpg.

IMO, it's not the actual cost of repairs that are the issue with used/high mileage cars. It's the unpredictability and need to still drive somewhere. So examine your lifestyle and figure out if you really need that bulletproof reliability + no costs + loaner (I assume dealers give you a loaner car if your lease is in the shop?). Most people probably don't. This is why reducing your need for a car is often stressed. The less you depend on your car >>> Reduced need for great reliability >>> Buy older/higher mileage >>> Cheaper costs.

I don't understand why a lease would get you way more MPG than a used car? Civics/Corollas/xA/Fit/etc. will easily get 30MPG+. I don't even drive for MPG in my Civic and I've gotten 34MPG this summer. Worst ever was my first tank last winter at 29 MPG. The MPG difference between vehicles would have to be very large for that to be a factor or you'd have to be driving a ton of miles.

auryn0151

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Re: Need help running numbers on a car purchase
« Reply #8 on: September 10, 2013, 08:01:01 AM »
I understand that leasing the car will leave me without a car. the math I'm looking for is accounting for the fact that if I lease the car I can instantly invest 10k dollars, whereas if I buy a car for 8, I'm buying a further depreciating assett and don't have that money available to invest.
Classic mental accounting.  Build a spreadsheet that includes all the money and all the cars (or leases) and all the cash flows.  You'll come out ahead by buying used and driving it into the ground.

If you buy the used car you still have $270/month to invest, because you're not spending that money on a lease contract.  Over the next three years that amounts to $9720 (which you'll invest) and at the end of it you still have a car.

If you lease a car for $270/month, at the end of three years you've spent $9720 and have nothing.  Meanwhile if you buy a used car for $8K and use it for three years, at the end of that three years you'd be able to sell the car for at least $4K.  In other words it cost you no more than $112/month.  The reality is that you'd keep that car for at least another three years, giving you another $9720 to invest instead of spending it on another car lease.

$270/month seems like a high price to pay for repair insurance.  (The car dealer is getting the better side of that bet!)  Used cars in the 2-5-year range are a lot more reliable, and it's quite possible that the only "repair" you'd be on the hook for is a new starter battery.

Of course all of the foregoing is a financial answer.  If you see a car as an entertainment expense instead of basic transportation then you can ignore all the financial analysis and just do whatever makes a car guy feel good.  You're the one who's willing to work for it.

Thank you Nords - this is what I was looking for! Unfortunately I am a car guy, so the thought of buying a 2005 civic is super unappealing, despite the cost savings. Tough decision!