[RAV41996]

I always hear financial gurus like Clark Howard and Dave Ramsey refer to leasing as "fleecing."

They say leasing a car is like throwing money down the drain.

We are tagged as an idiot if lease a new car.

But this never made sense to me.

Fortunately, I hooked up with Leo Vaserbakh - a Toyota salesman in Canada.

He claims that leasing ALWAYS is cheaper than buying a car.

(I found Leo posting in the comment section of a financial advice website.)

So I contacted Leo...

And over the last month, we traded many emails (and expensive phone calls) discussing this.

Leo's information blew me away about leasing.

I could not debunk any of his reasonings on why leasing was cheaper than buying a new car.

As a result, I came up with this spreadsheet - comparing 3 consecutive leases to driving a Toyota RAV4 into the ground over 9 years:

The math confirms leasing costs less than driving the same new car into the ground.

Here is the most surprising "Wow, I did not know that" revelation.

It is a secret most car dealerships do not want us to know about.

The secret is we should (almost) never turn in a leased car...

Instead, we should sell it back to the dealership (and roll into another new lease for life).

This eliminates any damage fees and over-mileage penalties.

And when we pick the right car with a residual percentage over 55%, we can even make a tiny profit, too. And the good news is all 2016 RAV4s (in all trim levels) exceed a 55% residual percentage.

Anyone up for debunking our findings?

Update on 2/5/2016 @ 10:37 a.m. EST - I created this 6,000+ word post on leasing for life that organizes all of my replies on this post.

 

[Hyperlight]

Something isn't adding up. Just a quick check on the Toyota Canada website,

Lease cost of 2016 XLE - $352 a month * 60month = $21,120
Purchase cost = $31,650.00

I am ignoring taxes, fees ect for simplicity of calculation

$31,650 - $21,120 = $10,530 When you give your vech back at end of lease

Now assuming i bought the vehicle @ 31,650.

$31,650 - sale price @ 5 year later @ 100k KM (20k KM per year) based on 2010 Rav4 of $18k

$31,650 - $18,000 = 13,650

13,650 - 10,530 = 3120 Loss

 

[internalaudit]

I thought the break-even point was holding the car for 8 years (cash or financing) vs. leasing every 3 or 4 years (depending on the original warranty to avoid costly repairs and overages), but it seems for this specific RAV4, keeping it for more than 9.5 years is the only reason to own instead of lease one.

Then again, this is a Toyota (reliability) and we already have the bells and whistles we need on our Limited Hybrid so much so that we expect to drive this RAV4 to the ground. We also went with extended warranty.

=====
So each 3 year lease only costs $11,000? ($30,770/3)? That is remarkable because isn't the depreciation most in the earlier years? So residual value for the RAV4 is $20,513 ($30,770-[$30,770/3] at the end of three years?

Maybe that is underestimating the lease cost for each of the three years.

 

[internalaudit]

Hmmm, you are right if the numbers here are accurate:

Used 2013 Toyota RAV4: True Cost to Own | Edmunds

Over the 3 years, the car only depreciated by 27%. That is incredible but then again by the time the 3rd year is up, there is already the facelifted model or the all new model, at least with Toyota's five year production model cycle.

 

[strippedrav]

This also isn't accounting for the money down require for most lease agreements 1-4000k. Not to mention after the 8 years you still have equity in a vehicle if purchased. As someone who has hoed both roads, my experience tells otherwise.

 

[RAV41996]

Something isn't adding up. Just a quick check on the Toyota Canada website,

Lease cost of 2016 XLE - $352 a month * 60month = $21,120
Purchase cost = $31,650.00

I am ignoring taxes, fees ect for simplicity of calculation

$31,650 - $21,120 = $10,530 When you give your vech back at end of lease

Now assuming i bought the vehicle @ 31,650.

$31,650 - sale price @ 5 year later @ 100k KM (20k KM per year) based on 2010 Rav4 of $18k

$31,650 - $18,000 = 13,650

13,650 - 10,530 = 3120 Loss

I based the spreadsheet on a 36-month lease, not 60 months as it appears you calculated.

In fact, the sweet spot is about 30 months. At that point, the tires might need replacing... same with brakes.

So when we sell the car back to the dealership and roll into a new lease, we skip the need to pay for tires and brakes.

With leasing, the only maintenance cost is roughly $59 a year - for wiper blades and washer fluid.

 

[internalaudit]

Hmmm, you are right if the numbers here are accurate:

Used 2013 Toyota RAV4: True Cost to Own | Edmunds

Over the 3 years, the car only depreciated by 27%. That is incredible but then again by the time the 3rd year is up, there is already the facelifted model or the all new model, at least with Toyota's five year production model cycle.

This also isn't accounting for the money down require for most lease agreements 1-4000k. Not to mention after the 8 years you still have equity in a vehicle if purchased. As someone who has hoed both roads, my experience tells otherwise.

If depreciation is really 27% over three years, then depreciation cost for 3 x 3 year leases on RAV4's will be 81% (27 x 3).

If by the end of 9 years, the residual value of a car is around 20%, then maybe that's a very good point in favor of leasing.

But what cars only depreciate by 27% over its first three years?

 

[RAV41996]

This also isn't accounting for the money down require for most lease agreements 1-4000k. Not to mention after the 8 years you still have equity in a vehicle if purchased. As someone who has hoed both roads, my experience tells otherwise.

In almost all cases, leasing down payments are optional.

We can get into a new lease without any money down.

I do this all the time. Because cars are a depreciating asset - I can use my money elsewhere in investments that grow in value.

The only costs needed upfront with a lease is the first monthly payment and paperwork fees.

 

[internalaudit]

I based the spreadsheet on a 36-month lease, not 60 months as it appears you calculated.

In fact, the sweet spot is about 30 months. At that point, the tires might need replacing... same with brakes.

So when we sell the car back to the dealership and roll into a new lease, we skip the need to pay for tires and brakes.

With leasing, the only maintenance cost is roughly $59 a year - for wiper blades and washer fluid.

Probably have to purchase lease guard/protection to cover any potential issues that is outside the normal wear and tear (won't the owner have the burden to prove to the manufacturer or dealership everything is a-ok?. If it costs $1k for that protection, then leasing won't be as rosy as purchasing and keeping over the long run.

 

[RAV41996]

If depreciation is really 27% over three years, then depreciation cost for 3 x 3 year leases on RAV4's will be 81% (27 x 3).

If by the end of 9 years, the residual value of a car is around 20%, then maybe that's a very good point in favor of leasing.

But what cars only depreciate by 27% over its first three years?

The depreciation percentage of the 2016 Toyota RAV4 Limited (as per ALG) is 57% at 36 months.

 

[RAV41996]

Probably have to purchase lease guard/protection to cover any potential issues that is outside the normal wear and tear (won't the owner have the burden to prove to the manufacturer or dealership everything is a-ok?. If it costs $1k for that protection, then leasing won't be as rosy as purchasing and keeping over the long run.

With leasing, everything is covered when we drive normally (12,000 to 15,000 miles a year).

Toyota covers everything up to 36,000 miles. They cover expensive drive-train issues up to 60,000 miles.

But again, the sweet spot is to sell back our leased car around 30 months in.

It almost NEVER makes sense to turn in a leased car - this is a dealership trick to maximize profits when they sell our lease-end car as used.

Since the RAV4 Limited has a 57% residual value (which means it holds its value well), we should have enough lease equity to net a nifty profit - cash back from the dealer to use against our next lease.

 

[internalaudit]

So if the depreciation over 3 years is 43%, then the cost for 3 x 3 year leases =

$30,770 x 0.43 (depreciation cost for 3 years) = $13,231
$13,231 x 3 (3 x 3 year leases)
$39,693

Even if you were to make $2-3k on the lease takeover each time, you are back at square one (your original calculation of $30-31k cost). That mark up is on the high side I would suppose.

 

[RAV41996]

So if the depreciation over 3 years is 43%, then the cost for 3 x 3 year leases =

$30,770 x 0.43 (depreciation cost for 3 years) = $13,231
$13,231 x 3 (3 x 3 year leases)
$39,693

Even if you were to make $2-3k on the lease takeover each time, you are back at square one (your original calculation of $30-31k cost).

The formula for calculating the monthly payment of a lease is:

(Cap Cost + Residual) /2 x Money Factor

 

[RAV41996]

So if the depreciation over 3 years is 43%, then the cost for 3 x 3 year leases =

$30,770 x 0.43 (depreciation cost for 3 years) = $13,231
$13,231 x 3 (3 x 3 year leases)
$39,693

Even if you were to make $2-3k on the lease takeover each time, you are back at square one (your original calculation of $30-31k cost). That mark up is on the high side I would suppose.

I am a simple, non-emotional dude.

Logic prevails...

And for me, if it costs EXACTLY the same amount of cash to lease 3 new cars or drive a new car into the ground, I will take 3 new cars any day of the week.

New cars are safer year over year...

They virtually eliminate stress from my life (virtually no breakdowns)...

If I get bored, I can switch into something new (without financial penalty)...

Etc.

The bottom line is we are lied to about throwing money away with leasing...

As I have demonstrated, it is actually a bit cheaper than buying a car when the dust settles.

 

[strippedrav]

Not every Joe's credit allows them to enter a lease with no money down at any given point. Cool that your situation would, but for a young adults looking to get the cheapest per year cost over the span of lets say 10-12 years, purchasing still makes more sense. For example, someone who is retired and not making spills in their vehicle and garaging, driving 8k a year. Leasing sounds great, their credit is probably very good at that age. Now another example, 21 year old Carpenter, drives 22k a year, smoker, has pets and children, thats a totally different scenario.

One could make all the same arguments for renting a house vs. buying with certain contextual data. That doesn't mean that renting would always be cheaper than home ownership. Some new homeowners have to replace an entire HVAC, Roof, etc..among moving in, some others live Scott free for the entirety of the mortgage.

Basically it depends on the consumer's situation. (Income, plans, location, credit score, age, preferences, etc...)

 

[RAV41996]

Not every Joe's credit allows them to enter a lease with no money down at any given point. Cool that your situation would, but for a young adults looking to get the cheapest per year cost over the span of lets say 10-12 years, purchasing still makes more sense. For example, someone who is retired and not making spills in their vehicle and garaging, driving 8k a year. Leasing sounds great, their credit is probably very good at that age. Now another example, 21 year old Carpenter, drives 22k a year, smoker, has pets and children, thats a totally different scenario.

One could make all the same arguments for renting a house vs. buying with certain contextual data. That doesn't mean that renting would always be cheaper than home ownership. Some new homeowners have to replace an entire HVAC, Roof, etc..among moving in, some others live Scott free for the entirety of the mortgage.

Basically it depends on the consumer's situation. (Income, plans, location, credit score, age, preferences, etc...)

As long as you have a FICO credit score of at least 680, anyone - even an 18 year old can lease a car.

And about using the same argument for renting a home vs. buying... you are correct...

In most situations, renting a home for 30 years compared to financing a home for 30 years works out roughly the same.

I never forget that the Great American Dream slogan was allegedly invented by the marketing department of Fannie Mae - the mortgage company.

So when they say, "renting a home is like throwing money down the drain"... they neglect to mention that a $100,000 mortgage carries a $200,000.00 mortgage interest rate.

Talk about throwing money down the drain.

Oh the irony.

 

[RAV41996]

Not every Joe's credit allows them to enter a lease with no money down at any given point. Cool that your situation would, but for a young adults looking to get the cheapest per year cost over the span of lets say 10-12 years, purchasing still makes more sense. For example, someone who is retired and not making spills in their vehicle and garaging, driving 8k a year. Leasing sounds great, their credit is probably very good at that age. Now another example, 21 year old Carpenter, drives 22k a year, smoker, has pets and children, thats a totally different scenario.

I cordially disagree with what you are saying here.

That is why I created the spreadsheet in my initial post...

Because when we choose a new car with at least a 55% residual percentage over 36 months AND we sell back the car to a dealership AND roll into a new lease (for life)...

The math proves we spend less cash than traditional financing.

 

[strippedrav]

Guess you got it all figured out then man, you should be the one making millions off of financial advice.

28 year old house owner- Mortgage will be paid off estimated-2020 Making massive overpayments- (House appraised in Oct at 230k, purchases for 180)

Own one vehicle outright, second one on the same path.

Eliminated all consumer debt and student loans ~25k following Dave Ramsey style teachings.

Sorry, if I come off as skeptical since I am literally still living the plan I have followed to get financially free (biased for sure

I think it is an awesome discussion and glad that you posted this cool find! However, as with anything you will have to understand you are not the first fish to swim against the current. Unless you live in a house as big as Dave's 13,307 sq ft... you will have to pardon my skepticism when it comes to your financial analysis of leasing compared to purchasing. After all, the data you came armed with is a simple numbers spreadsheet from a Macbook. Not saying it isn't legit, just isn't enough support to sway my and countless others ideals about vehicle and house ownership.

 

[nouse4aname]

So, can you find any 2007 owners here who have spent $7,900 in maintenance and $2600 in repairs? I would be surprised. As you said yourself:

I have driven 6 RAV4s since 1995.

Only an oxygen sensor was not covered during all of these years.

Must have been an expensive sensor.

Insurance would not be the same across them as once you own the car you can drop coverage that is mandated in the lease. Gap is provided free through my credit union or through insurance at a minimal cost, nowhere near $800. And not even all that necessary on a car with such high resale.

A 9 year old car is not going to lose 9mpg especially in the combined rating. Difference on 1mpg(say 30 vs 29) per year on a 12,000 mile average is 13.79 gallons or $27.58. Where $5,400 comes from is ludicrous unless you're talking about going to an entirely different drivetrain like a plug in electric starting in the 2nd lease and not counting the increase in your electric bill.

And the kicker it leaves out is the value you have after owning the car 9 years. 2007s are still fetching as much as $15k. They are far from having their value driven into the ground. For a Toyota you're talking more like 60 years and 20 leases comparison. So even changing nothing else I brought up the cost of ownership on the buy is around $46k. Significantly cheaper.

 

[strippedrav]

So, can you find any 2007 owners here who have spent $7,900 in maintenance and $2600 in repairs? I would be surprised.

Insurance would not be the same across them as once you own the car you can drop coverage that is mandated in the lease. Gap is provided free through my credit union or through insurance at a minimal cost, nowhere near $800. And not even all that necessary on a car with such high resale.

A 9 year old car is not going to lose 9mpg especially in the combined rating. Difference on 1mpg(say 30 vs 29) per year on a 12,000 mile average is 13.79 gallons or $27.58. Where $5,400 comes from is ludicrous unless you're talking about going to an entirely different drivetrain like a plug in electric starting in the 2nd lease and not counting the increase in your electric bill.

And the kicker it leaves out is the value you have after owning the car 9 years. 2007s are still fetching as much as $15k. They are far from having their value driven into the ground. For a Toyota you're talking more like 60 years and 20 leases comparison. So even changing nothing else I brought up the cost of ownership on the buy is around $46k. Significantly cheaper.

^this guy gets it

my wifes paid off vehicle btw is a 2010 prius I bought when gas was high. Only maintenance has been oil changes and brake pads. It gets 50 mpg my 2015 rav gets 28. That changes the spreadsheet a lot. That much of a difference is gas is like going from a Bronco to a prius every time.