From: joec@fid.morgan.com (Joe Collins)
Subject: car lease vs car loan vs outright purchase
Organization: Morgan Stanley & Co., New York, NY
Date: Fri, 31 Jul 1992 16:48:58 GMT

I saw a note about the complexity of financing cars and thought
I would repost the below article. The numbers will be different 
for any individual case but the approach still should work. The 
math can be done on a financial calculator like the HP 12C or the 
HP 17B or in your favorite spreadsheet.
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Orignal posted (slightly different form) on  Jun  5 EDT 1991

Car:            Saturn SC, list $15000
Trade-in value:                  $1000  (1982 maxima, 115000 miles)

LEASE PROPOSAL FROM THE DEALER:
Monthly payment is $291 a month, for 48 months.
I can buy the car back from them in 48 months at $5400 + $250 fee
Up front, I pay one payment in advance + $100.
I also give them $1000 up front now, in the form of a tradein.
The sales tax is not paid now but in 48 months on the difference
 between $15000 (cost today) vs $5400 (cost then)
The 'money factor' is 3.8% (whatever that is) - I told them there was
 no such term in my financial textbooks and he relented and said
 the apr was 9.12%

So, I can do the above or buy the car for cash at $15,000 less $1000
for my tradein. Buying it now would be done with my existing home
equity line of credit (no fees) and thus give me a tax writeoff on
the interest.

A COMMENT ON USING A CAR LOAN.
I could take out a car loan as well but I chose not for these reasons:
1-The interest is no longer deductible, unlike the interest on 
  a home equity loan.
2-I would be taking a loan for the value of the car, when its brand-new.
  But cars depreciate although my loan doesn't. Think in terms of another
  loan - a home mortgage- this is deductible and also homes generally
  appreciate at the rate of 8-8.5% per year (although not lately :-( ).
  Thus, my car may be worth 1/2 only its original value in three years but
  my loan is still for some percentage of the original value, and may be 
  considerably more than the cars (now-depreciated) value.
  I am not saying this quite right but you get the idea. In GENERAL, its
  a bad idea to take out loans on depreciating assets. 

LEASE AND BUYBACK:
 The Present value of the $291 per month for 48 months at 9.12% works
   out to be $11,667.
 The Present value of the $5650 (5400+250) 48 months from now at 9.12% works 
   out to be $3,985.
 The present value on $672 sales tax (7% of 15000-5400) 48 months from now 
   at 9.12% works out to be $474.
 Lease and buyback in 4 years: 11667+ p.v. of cash flow to dealer
                                3985+ p.v. of buyback to dealer
                                 291+ upfront payment to dealer
                                 100+ upfront payment to dealer
                                1000+ (trade in value)
                                 474+ p.v. of 7% sales tax
                            ---------
                             $17,517  Total cost of lease, in todays dollars

BUY NOW FOR CASH AND HOLD FOR AT LEAST 4 YEARS.
                              $15000+retail cost of car
                               $1000-value of tradein
                                $980+net sales tax (.0714000)
                            ----------
                             $14,980  Total cost of purchase, in todays dollars


NETTING IT OUT:
                              17,517  lease cost
                              14,980- purchase cost
                             -------
                               2,537  Additional cost of lease over purchase

Thus, buying now and paying cold cash seems better than leasing by $2537
although if I lease, I have the cash to invest over the 4 years. But
if I buy and write off on a home equity loan, I get to write off my
interest. Its more money with interest, but my income taxes go down.

Assuming my math is correct and the other factors just mentioned work out to
be a wash, it seems better not to lease under these conditions, unless
I like giving away $2537 to the dealer.

The dealer said a lease is even more attractive if I lease a shorter period
of time but my gut says that is true for the dealer and not for me.

I think leases are quite popular because the payments are less than a standard
car loan from the dealer/bank and if you will have trouble making the monthly
payments on a standard car loan, the lease will look quite attractive since
it is less. BUT, you give away the car in 4 years (in the lease). And that
is certainly one reason the lease payments are less than other loan payments.

Most folks don't know how to factor in the hidden costs of a lease (i.e
the present value of a cash flow) and thus take the lease, paying more
out of ignorance. In my case, it would have been $2,537 more.

Note: a lease calculation would be different if the car was used and
      paid for by a business. In that case, the lease payments are 
      a cost of doing business and can be written off to reduce tax
      liabilities. This has the effect of reducing the lease payments,
      thus making the lease approach more attractive.

joec@morgan.com
Usual disclaimers apply....
Newsgroups: rec.autos