# Comprehensive Lease vs Buy Financial Comparisons

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#### evnow

##### Well-known member
I'm going to show various comparison calculations - and also post the spread sheets for you to make changes and do your own calculations. The posts will evolve over next couple of weeks.

I've a separate thread on non-financial basis of comparison (but more from my POV of why leasing is better for me).

http://www.mynissanleaf.com/viewtopic.php?f=23&t=1628

The key takeaway is that lease vs buy comes down to
- Extra fees you pay for leasing (Acquisition of 595 and disposition of 350)
- Difference between the 4.9% offered by Nissan and the interest rate offered by your lender

Hope this will help demystify the lease.

We are dealing with 2 basic scenarios.

1. Lease the car and buy it after the end of lease term. Correct comparison to this would be buying the car and keeping it for the long term.
2. Lease the car and return it after the end of lease term. Correct comparison to this would be buying the car and selling it off within a few years.

To make things simple, I'm going to make a few assumption.

1. No sales taxe. I know this doesn't hold good for most states - except NW states (WA, OR). I may do a special comparison for CA, since we have a large contingent from the "golden" state - if I understand the situation well enough ;-)

2. Use NPV method to compare. I'll also show the "dumb" adding up of all amounts. But that is always incorrect since money has time value. Afterall, this is the principle of modern economic setup (yes, even in "no-interest" Islamic countries).

3. Assume you can sell the car for residual value, when you buy the car. This won't be correct, but helps you understand what happens if the actual reslae value is higher or lower.

Update : I've cleaned up a bit and uploaded the spreadsheet. But it is nowhere being close to self-service. It is just for reference.

Sell Off : Lease & Return. Buy & Sell.

As you can see the a discount rate of 5% gives a difference of only \$400 in the buy out scenario and \$700 in the Sell off.

If you reduce the discount rate, the difference between leasing & buying keeps going up - all the way to what you see in Non NPV i.e. just simple addition of all payments when discount rate is 0.

There are a bunch of assumptions here. I'll mention the important ones.
- This uses the Net Present Value to calculate the current value of future revenues (like when you sell the car) or costs (like lease and residue payments). See this article in wiki http://en.wikipedia.org/wiki/Net_present_value .
- No sales taxes
- 3 Year lease
- I'm assuming December delivery and April Income Tax returns - so you get the 7,500 in April
- Using the SV model's MSRP as the selling price

Since discount rate plays such an important role, here is the table showing the numbers for different discount rates. Note that the main reason for the difference is that Nissan lease rate is 4.9%. Obvisouly if we use lower interest rates, lease will look more expensive.

In the next post I'll use the example of lease vs financed buy. I'll cleanup my excel sheet and post for everyone's use later.

Here is another way to compare. In this case, I'm taking a loan such that the pay off left on loan is exactly equal to the lease residual (balloon loan). In the case of buy out, you would either pay the residual or pay cash to close the loan. In the case of sell off, you would sell the car and use that money to pay off the loan.

Notice that since I'm using 5%, the difference is close to the acquisition cost, which is extra in lease. I've left out any financing fees etc you may have to pay to the bank in the case of financed buy. In the case of sell off - the difference is greater because of disposition fee. Again, I'm ignoring the selling cost.

Again, as you lower the int rate, the bigger the difference between lease and buy becomes.

So, when you compare this way, you see that lease vs buy comes down to
- Extra fees you pay for leasing (Acquisition of 595 and disposition of 350)
- Difference between the 4.9% offered by Nissan and the interest rate offered by your lender

Hope this helps demystifying the lease.

Reserved :twisted:

I think you messed up on NPV of tax credit. You are assuming 1/3 year, but if you buy in January, as you say, and file on a standard year basis, then you can't claim the credit until you file your 2011 tax return in 2012, so you would need to calculate NPV for 1.33 years. (Of course there are ways around this, like reducing payroll deductions, but that's another subject.)

nice to see you added the discount from Rairdons.

i think one that varies it by down payment amounts and interest rates. i my very limited investigations, i have noticed that new car purchases seem to qualify for lower interest rates. ~3 % verses top tier lease of 5%?

the chart is nonetheless eyeopening. its easy to see now that unless you can easily max your tax deduction then the financial difference is much smaller. i am not married but have a child so its much more advantage for us to file single and single/head of household. so most of our tax liability is on me, but i have 20% of my income is being diverted which lowers my tax liability quite a bit.

Question: Is a discount rate of 5% realistic in the present economic environment, considering what is projected to occur in the next 3 years? Seems like this is a key assumption.

I have to agree w/ planet4ever that the time frame for tax credit should be longer if purchasing in Jan. Payback will not occur until 2011 return is filed in 2012. Even assuming some strategy of reducing withholding, it will take many months for cash equivalent to return to the buyer's pocket.

Looking forward to your modeling including finance charges for purchase. My CU is offering a promotional rate of 1.99% through the end of the year. Compared to the lease rate of 4.9% that I've heard mentioned, there should be some savings there.

Other than the cost factors, there are still some large variables involved in the lease/buy decision for me revolving around the unknown details of the battery life, warranty and replacement cost. Only time and explicit details being released by Nissan will resolve some of those questions, while the unknown pace of technological/manufacturing advances over the next decade leave the question on battery replacement cost pretty wide open. If I wanted to keep this car for 20 years, like my previous vehicles, what am I really facing when I need to replace the battery pack completely after 8-10 years? That's a big question mark.

TT

1.99% wow, that is awesome

DaveinOlyWA said:
1.99% wow, that is awesome
Ya, but we haven't met with them yet to see if we qualify--there is some "fine print" involved in the offer that I noticed. Our credit score is excellent, but there are some minimum income requirements that we may not meet due to being retired. That should be negotiable, though, as we have assets that could be moved to the CU to guarantee loan payments, etc. We'll see in Dec. when we apply, if and only if we decide to purchase and not lease. Fortunately, financing is not a necessity--we could just pay cash for the car if necessary, but a 1.99% rate is hard to ignore.

TT

ttweed said:
DaveinOlyWA said:
1.99% wow, that is awesome
Ya, but we haven't met with them yet to see if we qualify--there is some "fine print" involved in the offer that I noticed. Our credit score is excellent, but there are some minimum income requirements that we may not meet due to being retired. That should be negotiable, though, as we have assets that could be moved to the CU to guarantee loan payments, etc. We'll see in Dec. when we apply, if and only if we decide to purchase and not lease. Fortunately, financing is not a necessity--we could just pay cash for the car if necessary, but a 1.99% rate is hard to ignore.

TT

LOL!@ oh ya, been there, done that! i did a Cap One auto finance online and was approved for loan at 2.94% then received letter in the mail 3 weeks later stating that i was declined based on my credit report. reason; incomplete or missing credit history

income wise, i am kinda in the same boat. i am single (living with partner and have child we raise) diverting 20% of income to 401K and making slave wages (done to maintain my custom work schedule so we do not have to do outside day care)

now, i did sell my house at a very good time and banked money which i used to pay cash for the cars i have, so although my income is not great, i do have assets both personal and liquid.

evnow said:
Sell Off : Lease & Return. Buy & Sell.

As you can see the a discount rate of 5% gives a difference of only \$400 in the buy out scenario and \$700 in the Sell off.

If you reduce the discount rate, the difference between leasing & buying keeps going up - all the way to what you see in Non NPV i.e. just simple addition of all payments when discount rate is 0.

There are a bunch of assumptions here. I'll mention the important ones.
- This uses the Net Present Value to calculate the current value of future revenues (like when you sell the car) or costs (like lease and residue payments). See this article in wiki http://en.wikipedia.org/wiki/Net_present_value .
- No sales taxes
- 3 Year lease
- I'm assuming January delivery and April Income Tax returns - so you get the 7,500 in April.

In the next post I'll use the example of lease vs financed buy. I'll cleanup my excel sheet and post for everyone's use later.
I am going to lease then buy because I think my income is going down a bit. I may only get \$5, or \$6,000 of the credit so that make the lease to buy closer then I see in the chart maybe lease is about \$1,500 more then staight out buying the car .
Is that correct?

planet4ever said:
I think you messed up on NPV of tax credit. You are assuming 1/3 year, but if you buy in January, as you say, and file on a standard year basis, then you can't claim the credit until you file your 2011 tax return in 2012, so you would need to calculate NPV for 1.33 years. (Of course there are ways around this, like reducing payroll deductions, but that's another subject.)

You are right. I'm assuming December delivary.

May be I should change - since most people will be getting cars in Jan/Feb.

DaveinOlyWA said:
diverting 20% of income to 401K and making slave wages
I'm in a similar situation. I may substantially reduce my 401K contribution from 20% for next year only to both increase my tax liability so I can claim as much of the \$7500 as possible, and also to get another \$15K in additon to the \$20K I've already got waiting in the bank so I can eliminate finance charges entirely. In 2012 I'll go back to 20% 401K contribution. However, there are no state or local incentives where I live (PA), nor do there seem to be plans for much infrastucture in the near future.

DaveinOlyWA said:
nice to see you added the discount from Rairdons.

Actually, I've not. I'm using SV's MSRP.

Any way to do this for a 4 year lease? THANKS!

ttweed said:
Question: Is a discount rate of 5% realistic in the present economic environment, considering what is projected to occur in the next 3 years? Seems like this is a key assumption.
Yes - this is a key %. As I noted, as the discount rate is decreased, the difference increases. But if you invest in even broadbased ETFs, you would expect 5% returns. But the CDs bear very low interest now - 1.5% in ING. Mortgage seems to be around 4%.

I'l include another version with a lower discount rate for comparison.

tps said:
DaveinOlyWA said:
diverting 20% of income to 401K and making slave wages
I'm in a similar situation. I may substantially reduce my 401K contribution from 20% for next year only to both increase my tax liability so I can claim as much of the \$7500 as possible, and also to get another \$15K in additon to the \$20K I've already got waiting in the bank so I can eliminate finance charges entirely. In 2012 I'll go back to 20% 401K contribution. However, there are no state or local incentives where I live (PA), nor do there seem to be plans for much infrastucture in the near future.

wow, i dont know if that is a good idea. i originally had planned to buy the Leaf cash. but with the low interest rates, unsteady financial environment, employment that is really no longer guaranteed for nearly anyone, super low interest rates, very favorable lease terms and the greatest thing, the unknown rate of technological advances in a market that currently has no traction due to lack of information and exposure by the general public.

lets face it; other than a small pocket of EV enthusiasts here and there, practically nothing concrete is known about EVs and misinformation and misconceptions are rampant.

i drive an EV daily and at least 3-10 times a week someone will ask me "how often i have to put gas in if i charge it every day". i mean, its amazing to me what the average person's impression of EVs is.

but we put 100,000 EVs on the street, we will have 10-20 people exposed to it. i have to think that EVs will gain traction and fast and that will push the innovation and more importantly the money and legislation to reduce the cost of owning one down the road.

Any way to do this for a 4 year lease? THANKS!
Yes, that is possible. Check the Lease information sticky. You can check with your PD for actual numbers.

Discount rate of 5% seems high. Current 3yr t-bills are running 0.5%. If you are comparing to cash purchase I think the opportunity cost and time value of money should reflect the alternative low risk investment if that capital were to be used elsewhere.

opencar said:
Discount rate of 5% seems high. Current 3yr t-bills are running 0.5%.
T-bills are in the toilet right now. A \$20K, 3-year CD is earning around 2% APY right now, and meets your qualification of a "low risk investment." I think a reasonable discount rate for this exercise might be 1/2 of the 5% used above.

TT