Lease a Car or Buy a Car? Excel Sheet Comparison

Question

I did an Excel Sheet trying to compare between a Car Lease and a Car Purchase.

• By "Car Lease" I mean maybe to what is called "hire purchase scheme"; a monthly payments that at the end of the period (usually 3 years) you can pay the balance remained and own the car, or continue the payments and keep rolling, maybe to a new car.

At first, I thought that Leasing is a total theft as at the end of the period (3 years) I must pay the remaining balance which is $20,000 above the car value!

Furthermore, it seems like the Car Lease Company is having a 30% Yield on this loan.

But, as I sum all the expenses I must pay when I purchase a car (as insurance) it seems like it pretty much the same cost.

My Comparison:

I have 2 options: get a loan by myself (at the bank) and buy a car, or go to a lease company which lends me a new car with monthly payments for 3 years (that includes insurance). At the end of the 3 years the "lease" company offers me to pay off and own the car, or to continue rolling with the payments (or upgrade to a new car with the same terms).

The value of this new car is around 75K (don't mind the currency). Assuming it depreciates 15% each year, it turns out that at the end of these 3 years the car can be sold for 44,831. With the loan from the bank, I can have a baloon loan which at the end of the 3 years the remaining balance to be paid will be that exact amount (44,831). But, with the lease company, at the end of the 3 years they want 62,731. Which is 20K above the value of the car.

So to calculation:

The monthly payment if I take a loan from the bank:

The monthly payment if I take the loan from the lease company: I considered the initial payment they want (of 8,900) and the difference from the payment at the end of the period (62K) and the value of the car (44K), and thought that I'd take a loan to cover these expenses (assumed interest of 5% and calculated roughly as you can see below, which adds 817 to the monthly payment).

Am I wrong? Am I missing something? Can someone look at that Excel Spreadsheet and approve/disapprove it?

https://drive.google.com/file/d/1LfONfHDC-RN-oL8sKnyVcXVzSzncSEUt/view?usp=sharing

• Now I have realized that I took into consideration the Depreciation when I calculated the costs of buying a car, but didn't consider it in Leasing a car. Am I Right? That was my mistake?

Answer 1

The market is efficient

If there is free competition, I think you'll find that most car leasing companies will price their services in a fair manner. If the car leasing sector is charging too high prices, competitors will appear, they will compete to drive down the price, and the pricing will become fair.

It doesn't make sense to drive a new car and discard it after small number of years

Generally, if you want to minimize costs of driving a car, you will probably want to discard it at very old age, not very young age. Thus, typical car leasing companies that lease a new car for 3 or 4 years or so will result in too high costs. If you could drive the car for 10 years, your costs would become lower.

Owning a car with known history is valuable

If you buy a car, you will know its full history. Most likely, if the car is not a lemon, the full history is very valuable knowledge. If you sell the car, the buyer does not know the full history and due to risk management purposes needs to pay less than what it's worth to prepare for potential purchase of a lemon. If leasing, there may not be the possibility to purchase the very car you have been driving. Thus, you're losing a very valuable benefit.

If the car is yours, you can get rid of it at any point of time

What if you become unemployed and no longer need the car? If it's a leased car, and if lots of other people get unemployed at the same time, chances are the leasing company will not allow you to cancel the lease contract. Then you are bound by the contract. If you purchase the car, the car is yours to sell. Perhaps in a bad market condition you will need to wait for few months to sell it, but that's about the worst that can happen. There is no contract, so nothing to prevent you from getting rid of the car.

Conclusion: lease only if possibility to purchase the exact car at end and cancel the contract anytime

You should lease only if you have the possibility to purchase the exact car you have been driving at the end of the lease period, and possibility to cancel the contract at any point of time.

In addition to leasing, there are loan schemes which guarantee that you can get rid of the car at a guaranteed known price at the end of the loan period. You should consider these, as well. Of course the guaranteed known price is rather low, so you probably want to keep the car unless it's a lemon. But it could be the thing just for you, something comparable to leasing allowing you to have known full ownership costs.

Answer 2

Disclaimer: I didn't opened the spreadsheet, I only answer to things you put in your question.
RSP - Retail Sale Price
RSV - Retail Sale Value

or to continue rolling with the payments (or upgrade to a new car with the same terms).

False. There is 100% chance that after the first lease the payments will be up (been there, done that, seen it have been done) for a 3 year old car you don't own. This is to, as you put in brackets, encourage you to switch to a new car. With NEW terms. It'll be three years from now. Even if the car you've driven will be the same model the RSP could be different, insurance cost could be different, etc.

Assuming it depreciates 15% each year

Somewhat false. It depreciate in value 15%. After first drop of 10% after you "bought" it and AFTER 20% dip after first year. YES, the lease companies use the 15% in their simulation but ONLY for the cars with their limited milleage and assumed "perfect" condition. And including color.

My real life example: My car RSV 44K. After 2 years and 20k miles I had option to buy it back for 31K. Same cars, same models, less milleage, from same leaser where cheaper. Why? Mine was "raspberry red".
Now, same MY, same color, higher milleage from private sellers where cheaper. Mind you we're talking 2 year old cars, still have warranty, all services done on time, full technical review. a) they had to compete with Leasing company prices b) they had more pressue to sell cr and get money back.
As a private seller you will be in the same position, your MAX selling price will be lower than the one calculated with 15%.

Again, from personal experience: Lease is a good way of having new, reliable car with no additional problems for fixed amount of years (mine lease included replacement car if mine was in service or broken and mutiple other benefits). You basically just pour gas and wiper fluid.
If you think in longer term of owning a car or think "Mmm maybe if I like it I will buy it from them" then go for bank loan. Much better in the long run and If you use car for 6 years the final price will be spread among 6 years. And at the end you will have a possesion you can sell and get some money back. If I went with buying with same installment for 4 instead of 2 years I would own the car.

Advice: think about buying a 1-2 year old car. Lease companies have a lot of such as not everyone stick to the lease. Such cars have warranty, are in good condition, have small mileage and are after initial, biggest, price drops. Even dealers will have such cars with 3 miles on them. And you can still get that price down if you come with your own financing. Dealers want to get ride of last (or one before) year models.
I've just done a quick check, a RSP of 67k on manufacturer site. Lat year model at dealer 64K. The exact same car by this dealer on third party sale site 62K.