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I want a Tesla Model 3. Like this guy How to determine car loan length as a function of how long I plan to keep a car I (using his words):

...plan to keep for 3 years (see below for why)

I am buying a piece of technology on wheels...and as such it's future value is highly unknown, given the pace of tech

I am an early tech adopter and since tech moves so fast, I am going to want the latest and greatest version of that model after this one. That's why I plan to hold for a short period of time. (3 years)

HOWEVER, unlike that poster I am fully open to leasing. I am trying to decide lease vs. buy in my case given the above factors.

The lease money factor is not favorable relative to other non-Tesla leases (it's .002133), however the lease does specify a residual value of 64% (car price is $56,190, residual of $36,200) - I think it would be highly optimistic to think I cold sell that car for $36,200 after 3 years of ownership - so the lease protects me against this uncertainty, which as I stated earlier I feel that future price uncertainty is higher with a Tesla than other cars.

So, looking at lease vs buy:

Lease:

I configured a no-money down lease (except for 1st payment and fees), 36 months, 15k miles a year (this is more than enough, I am keeping an existing car), car as configured is $56,190, residual of 64%, payments of $812 per month. Since Tesla lease there is no option to buy but as I said my plan is not to keep longer than 3 years anyway.

Finance:

60 month loan @ 2.74% with $15k down results in the same monthly payment as the lease.

UPDATE: Possibly a more succinct way to express this:

Given that my plan is to keep the car 3 years, an easy way to look at this choice is one of total cost over that period.

Lease: $30,086 (yes, $10k of this is interest, however, we are looking at total financing [lease vs loan] cost over the period only)

Loan: I configured a loan to arbitrarily result in the same monthly cost as the lease - about $812. The car with taxes, fees, etc. is $60.5k. At a 5 year loan and a rate of 2.74% with $15k down that gets me to $812 per month.

Loan scenario 1: assume same resale value after 3 years as lease has for residual - $36k (64%) - I consider this highly optimistic. Results:

Down payment: $15,000 36 months of payments: $29,340 Remaining due on loan: $19,013 Resale amount: $36,000 Net spent over 36 months: $27,353

Loan scenario 2: assume $30,000 resale value after 3 years. Results:

Down payment: $15,000 36 months of payments: $29,340 Remaining due on loan: $19,013 Resale amount: $30,000 Net spent over 36 months: $33,353

Loan scenario 3: assume $25,000 resale value after 3 years. Results:

Down payment: $15,000 36 months of payments: $29,340 Remaining due on loan: $19,013 Resale amount: $30,000 Net spent over 36 months: $38,353

Thoughts?

  • Leasing is a good choice if you just want to "test drive" the car or want to get rid of the potential expensive maintenance and part replacement. – mootmoot Sep 2 at 8:21
  • @mootmoot But if I'm in the warranty period (which I would be because I plan to keep the car 3 years) then this potential expensive maintenance and parts replacement is eliminated anyway right? – Emilio Sep 2 at 19:03
  • So you're going to spend $800 a month to rent a car you don't need for three years? – D Stanley Sep 4 at 19:42
  • @DStanley Thanks for the wise guy comment. Obviously I just want the car. I assume you've bought something that was a luxury item that you didn't "need". What is the value in your comment? Please consider if you really needed to make the comment before you respond back and a flame war ensues. – Emilio Sep 5 at 16:17
  • @Emilio Sorry, that came across more critical than I intended. My point was more that you're effectively renting the car for 3 years (leases are a bit of a pet peeve of mine). But that's completely your right, and it's not the point of your question. – D Stanley Sep 5 at 16:30
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Your added scenarios simply highlight the core problem here. Ultimately, in a scenario as narrowly defined as yours, it comes down to residual value. When you lease, you lock in to a known residual value - and outside of blatantly damaging the vehicle, going over mileage, or other significant issues, there's basically no way either party can change that locked in number after the fact. Essentially, the car dealer assumes responsibility for any difference between that locked in number and the actual value the vehicle has at the end of the period. If the actual value is higher, they win. If the actual value is lower, you win. The advantage for the consumer is knowing, up front, what will happen. For traditional mainstream vehicles from mainstream brands, this problem is relatively straightforward, because residual values are very stable and generally predictable - to the point that people take this question for granted.

Meanwhile, when you buy, you take on the responsibility for the residual value. You get your loan, make payments for three years, and at that point you own (at least a portion of) a vehicle that has some value, which you can choose to sell. If you lease, the net change in finances is essentially the sum of your lease payments. If you buy, it's the sum of your loan payments, minus whatever value you sell it for. You need to guess that value, now, before making your decision.

Look at your three scenarios and compare them to your lease scenario. In all cases, you're assuming that you give the vehicle up at the end of the 3 year period. If your optimistic guess at residual turns out to be true, then you should buy it on a loan. If either of your other guesses turns out to be true, then you should lease the vehicle.

So - you need to answer this question for yourself based on one thing. How well do you think you can predict the residual value of a relatively new vehicle in a relatively new market segment, that's changing rapidly?

If you think you can predict that value accurately and confidently, and you think your optimistic guess is correct, then you should buy the vehicle on a loan. If you are not sure if you can predict the value, or you think you can predict it but your other two guesses are more accurate, then you should lease it.

If Tesla continues to dominate the premium EV segment, and they do well with maintenance, service, and support - even though they're growing rapidly, and potentially facing a lot of strain on a relatively unproven logistics and support network - you may end up winning by buying on a loan.

But what if premium EVs from Audi, M-B, BMW, and other well established luxury brands start squeezing Tesla out? Look at the future plans for any other luxury brand - while several of them have dipped their toe in the EV market, pretty much all of them are in the midst of major plans to release complete lineups of EVs. No matter how you feel about Tesla, or any other particular brand, the only thing we know for sure is, the market is changing very quickly right now. What if Tesla "wins" in terms of market share, but has issues supporting their rapidly growing customer base? What if EVs continue to improve so quickly that they follow tech consumable trends (no one wants yesterday's iPhone) more closely than they follow auto market trends?

Those what-ifs are where your answer lies. And as a footnote - while I don't intend to pick on another answer, look at Rocky's - on the one hand, he is stating that you can confidently expect the vehicle to retain half it's value after 5 years. On the other hand, he's telling you that it's possible to get screaming deals on a used Tesla Model S. While you're not asking about the Model S, the fact that you can buy them very cheaply on the used market may give you some food for thought in terms of trying to predict the residual on a Model 3.

  • You articulated your points EXCELLENTLY. "For traditional mainstream vehicles...this problem is relatively straightforward, because residual values are very stable and...predictable..." <- PERFECTLY said. "So - you need to answer this question for yourself based on one thing. How well do you think you can predict the residual value of a relatively new vehicle in a relatively new market segment, that's changing rapidly?" <- It's easy! I can't and no one can! It's all guesses. What you articulated so well is this all comes down to risk tolerance. If I could upvote your answer 3X I would. – Emilio Sep 5 at 16:23
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Buying is the better option. When you lease a car, you are still paying interest, in the sense that the lease payments add up to more than the amount the car depreciates during the lease term. Over three years, your $812 payments add up to almost $30k. With a residual of $36k, that's $10k in interest you're paying over just three years on a $56k car.

Leases hide this interest by calling it a "lease factor", and in this case your lease factor seems quite high.

You'd be better off buying and getting a loan at a 2.74% rate. Also keep in mind at the end of a lease, you have to turn in the car and you have zero equity. When you finance a purchased vehicle, you still own the car at the end of the term and it retains some value.

With Teslas, over 5 years you can expect the car to retain perhaps half its value. So after 5 years of $812 payments you've paid ~$49k + $15k down payment so ~$64k, and about the same amount of interest at the lease. But, critically, you would still own a used car worth around $25k.

And if you like the Model S, there are screaming deals on used Model S.

EDIT/UPDATE based on comments and updated question:

I think we're losing track of the question: what's better financially, lease or buy? Leasing is almost always a worse choice because it costs you more money in the long run. We cannot compare scenarios without knowing the interest rate of the loan and the interest rate ("lease factor") of the lease. For Teslas, recent lease APR ranges from 6.5% to 8.33%. That's horrible compared to current auto loan rates.

Just based on the interest rates, leasing is a poor choice and you would be better off buying the car and selling it after three years. We can quibble over how much a Tesla will lose in value over three years, but 20% in the first year followed by 10% each additional year is reasonable based on industry averages, and I've found Teslas to do a bit better than that, especially when sold privately. Anecdotally, I sold a 5-year-old Model S for 50% of its original price (after tax credits).

So rather than go over each of OP's scenarios to determine which is better, lease or buy, I suggest simplifying the calculation and look at interest rates on both sides, plus reasonable estimates on residual value when selling after three years. With Tesla lease factors so high, you'll find buying to make more sense financially.

Typically, leasing makes sense when some or all of the following are true:

  1. You cannot afford the down payment to buy the car and/or want to pay a premium interest rate/lease factor in order to have lower monthly payments.
  2. You want the luxury of having a new car every three years and don't mind paying a premium for that perpetual "new car feeling".
  3. You can write off some of the cost of the lease payments as a business expense.
  4. You don't want to deal with the process of selling and buying your car every three years and would prefer to pay more to just turn it in for a new one. Rinse, lather, repeat.

Item #1 is a whammy and the reason a lot of people lease: the monthly payment is lower than buying. But you're always making a car payment. Buying costs much less in the long run because you own the car and can either sell it or pay it off. It's a wonderful feeling to have no car payment!

And frankly, if you desire a Tesla, the best thing you can do is buy a used one that has already depreciated. I think you'll find the best deal is on a 1-2 year old Model 3, or a 3-5 year old Model S. And if you buy a car that is less than four years old, it will still be under warranty.

If, after three years, you won't need any car at all, then I can sort of understand the convenience of a lease, even if it costs a bit more. But if you're planning on getting another car in three years, the best decision financially is to stay away from the insidious cycle of never-ending automobile leases. You can always decide to keep your car, pay it off, sell it, get a new one, get a used one, etc. Buying is cheaper and more flexible.

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    The leasing site indicates the federal tax credit is already factored in, so if it's not factored into the financed option then that makes financing even more compelling. – Hart CO Sep 2 at 3:40
  • @Rocky <<With Teslas, over 5 years you can expect the car to retain perhaps half its value.>> Well that's my concern-to me, this is anything but certain. In 3 years it is a VERY different landscape.The EV market will have matured much more. Also, my plan was to keep the car for 3 years not 5.If I only keep the car 3 years and I finance it, I will have parted with $15k downpayment during that time, while the monthly payments are the same as the lease, and in the lease there's nothing down.And to me the future resale value of the M3 is highly uncertain, and the lease protects me from this. – Emilio Sep 2 at 19:08
  • @HartCO Agreed -good point. I'd have to subtract ~$52 per month off my financing #. – Emilio Sep 2 at 19:08
  • If you buy the car and sell it after three years, you will have paid less than 10k interest and the car will retain more than half its value. At 2.74 percent interest it is very unlikely you will be upside down on the loan. The lease factor you were quoted is simply too high for leasing to be a financially better option. – Rocky Sep 2 at 21:32
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    With Teslas, over 5 years you can expect the car to retain perhaps half its value source for that? – dwizum Sep 3 at 13:02

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