When it comes to cars, should you lease or should you buy?
By E. Dennis Zahrbock, CFP
Many of our readers have thought about the question of whether to lease or buy a car. We felt it was worth some research and want to share what we’ve found.
The long awaited opening of the newest coffee shop in Rice Lake – The Cottage – finally happened in October. This cute little red house is a complete renovation from the falling down shack it once was. Sally Schieffer and Susan Fenton are the co-proprietors who won "The Entrepreneur" contest held in the spring which was created in order to find a suitable business for the space.
There is no correct answer. The statement that car salesmen make about leasing being a “better write off” on your taxes is not necessarily so! We’ve checked with several accountants and they tend to agree that the net tax effect is about the same whether you buy or you lease. One accountant however has a very basic premise. His statement was that you “rent (lease) assets that depreciate and you own (buy) assets that appreciate.” He further commented that “the rich” own their homes and lease their cars while the “not so rich” own their cars and rent their homes. I don’t know if I agree with him but this accountant has been in the business for 40 years and was adamant about his position.
So what has our investigation turned up? We can find many cases for leasing and many cases for buying. Here are some thoughts:
- If interest rates being charged to own and to lease are the same you will usually be better off buying if you intend to drive the car for at least five years. You will usually be better off leasing if you intend to drive the car for three years or less. If between three and five years, it’s a toss up.
- In most cases all things are not equal. That is, the interest cost for leasing and the interest cost for borrowing is often quite different. Here’s an example: You can lease at an interest rate of 5% or you can buy at an interest rate of 7%. Now let’s look at some numbers:
Assume the car cost $30,000 (after all discounts). You have three choices:
You can lease the car for $500 per month. Of this amount monthly sales tax at 6% would be $28.30. They will tell you up front that the car will have a residual value of $17,145 at the end of 36 lease payments. Thus you know up front that you will pay $18,000 in total cost to use the car for the next three years. If by chance the car is worth more than $17,145 at the end of three years you can buy it for $17,145 and sell it for what you can get. If it is worth less, you don’t owe anything, it’s the lease company’s problem. Also understand that when you lease the car, dealers have a leasing cost (similar to closing costs on homes) which we have assumed at $500 priced into the lease. Remember this example assumes a lease financing rate of 5%.
- You can lease the car for $500 per month. Of this amount monthly sales tax at 6% would be $28.30. They will tell you up front that the car will have a residual value of $17,145 at the end of 36 lease payments. Thus you know up front that you will pay $18,000 in total cost to use the car for the next three years. If by chance the car is worth more than $17,145 at the end of three years you can buy it for $17,145 and sell it for what you can get. If it is worth less, you don’t owe anything, it’s the lease company’s problem. Also understand that when you lease the car, dealers have a leasing cost (similar to closing costs on homes) which we have assumed at $500 priced into the lease. Remember this example assumes a lease financing rate of 5%.
- Your second choice is to buy and 100% finance (including the sales tax, which is paid monthly on a lease and is included in the prior example). Now you must finance $30,000 plus a 6% sales tax, so you finance $31,800. Now you begin to pay $500 per month (so you can easily compare to the lease option) with a balloon at the end. At the end of 36 months you would still owe $19,241.98 in this example (remember finance rate was 7%). Even if finance rates were at 6% your “amount owing at the end of 36 months would be $18,386. In both finance cases, leasing is better in this example. Remember you’ve spent the same $18,000 in payments on your loan to own!
- Or you say why don’t I just write a check for $31,800 and sell the car in three years? The big question is what is the car worth in three years? If it’s worth less than $17,145 you would have been better off leasing. If it’s worth more than $17,145 you would still have been better off as you could have purchased for $17,145 then instead of now. You can argue that you only spent $14,655 (instead of $18,000) but don’t forget you gave up what your money could have
By E. Dennis Zahrbock, CFP
Summer 2006 was hot with little rain but we planted "no mow" grass last spring and it remained green all summer. I recommend this product as you don't need to mow – thus the name! You must be willing to live with 5-6 inches of grass but that is the only inconvenience!
We've increased our total staff to ten. We now have six in Wayzata and four in Rice Lake (counting me...as I'm there slightly over 50% of the time). Both offices are very busy.
Sue and I, together with Don and Pauli Storm, Dave and Sue Hildebrand and Dave and Sonja Wilson took the "circle tour" of Lake Superior in September. It took us four days to drive around the big water and we all had a great time. We are in hopes that next year will be Africa. We’ll keep you posted!
Grandkids Camp #1 was held in August at our home on Silver Lake. Four of our five grandkids attended and had a great time. Grandpa spent two nights in the loft of the "kids cabin" with two kids on each side and Grammy had some great lunches and dinners for all. We look forward to hosting Grandkids Camp #2 next summer.
Duck season on the Delta Marsh began in late September and goes to early November. Opening weekend was an okay hunt, but the late October hunt proved to be a hunt of a lifetime. In six days with six hunters a day we totaled over 160 ducks. Go to www.decoyinn.com to view the pictures.
Jim and Anne Eidsvold invited us along with David and Jeanine Landswerk to a Wooden Boat show in early July. Sue liked what she saw so we are now the new owners of a 1955 Alexandria Boat Works wooden runabout. They tell us that it will take four days to "swell" when we put it in the water next spring so don't plan on any spur of the moment trips.
The long wait for the opening of “The Cottage” (the little house turned coffee shop next to our Rice Lake office) took place in October. We are all very excited about this adventure and hope the two proprietors will be very successful and become owners of the business within the year.
BULLETIN BOARD OF
Dennis traveled to Akron to attend the ValMark Advisory Board Meeting. He is serving in the capacity of Board Member for the 2006 calendar year.
Dennis and Sue traveled to Seattle to visit with friends. While there we spent four days in the San Juan Islands on a private tug boat with good friends Roger and Rhonda Groves.
Sarah attended MDRT Practice Management Committee Meeting at MDRT Headquarters in Chicago.
The first Zahrbock Family Reunion was hosted at Lutsen. This included the families of each of E. Dennis’ four brothers and sisters.
Steve and Sarah attended sessions for the Strategic Coach program.
The month started with B & E conducting a Life Settlement Seminar at the Wayzata Country Club.
Sarah, Steve and Dennis traveled to Orlando, FL to attend ValMark’s School of Life.
Dennis and Sue as well as Steve, Lori and kids traveled to Palm Springs for the Million Dollar Roundtable Top of the Table convention.
November brings the semi-annual Deadwood R & R for Sarah and Darvin.
Steve and Sarah attended their next Strategic Coach session in Chicago.
Dennis and daughter Stephanie traveled to Montego Bay, Jamaica for a five day mission trip as part of the ValMark 4th Annual Mission Jamaica event.
Top Of Page
Meet our Advisory Board Members
Wayzata Advisory Board
Q. How did you first become acquainted with Business & Estate Advisers? Dennis and I grew up in the same area so I have known him and Sue for over 40 years. I am a lifelong client of Dennis’ as I bought my first College Master policy in 1969.
Q. What, in your opinion, makes Business & Estate Advisers different from other financial services firms? B& E has always made me feel like they care about me and my family. Dennis and the staff always seem to be on the leading edge of what is new in the insurance and financial planning areas.
Burnell Hanson, Jr.
Rice Lake Advisory Board
Q. How did you first become acquainted with Business & Estate Advisers? Dennis and Sue were customers of ours at Burnell’s Decor.
Q. What, in your opinion, makes Business & Estate Advisers different from other financial services firms? One of the unique things about B& E is that they tend to seek out business while others tend to wait for it to come their way.