Everyone is aware and we make the point repeatedly on our site that cars are poor investments; nevertheless they are central to modern life, so we continue to buy them. Due to their high costs most of the time we need some form of financing. It’s common knowledge that leasing is cheaper than financing, but did you know that used leasing can be very similar in monthly cost to paying cash for a used car? The cost comparison we have prepared below may surprise you.
Let’s do the math. We chose a 2010 Ford Focus Trend for our comparison because it is a popular model here in Israel and it’s very dependable. Listed in the table below are the annual and monthly cost of cash, conventional 60-month finance, and a lease. Yes, there is monthly cost even when you pay cash.
|Down Payment||Annual cost||Annual Earned Interest Loss||Total Annual Cost||Total cost per month|
Cash Purchase costs explained:
While it’s true when you pay cash there are no “monthly payments”, you do have real costs. First there is depreciation. The value of this 2010 Focus in January of 2012 was 86,000 NIS, according to the Levi Yitzak Catalog (mechiron). January 2013 the same car is now valued at 75,000. The depreciation cost for one year: 11,000 NIS. We can expect similar results this year as well.
That’s the first and major cost of using cash, but there is another cost: earned-interest loss. Since cash was used, 86,000 NIS is no longer at your disposal, nor can it continue to work for you earning interest. Using a conservative bank rate of 1% annual return on deposits, 860 NIS of earned-interest income will be lost. Combine the annual depreciation of 11,000 and interest-income loss of 860, and the car actually cost you 11,860 to own for one year or 988 per month.
8500 NIS down and payments of 1489 per month for 12 months equal 17,868. As with the cash purchase, there is a cost of loss-of-income, based on the 8,500 down payment that is no longer at your disposal, nor earning interest. It’s not much, but for a fair comparison we must include it: 85 NIS per year. Annual payments of 17,868 plus 85 loss-of-interest income, the car actually cost you 17,953 to own for one year or 1496 per month.
8500 NIS down and payments of 1100 per month for 12 months equal 13,200. As with the cash purchase and conventional finance, there is a cost of loss-of-income based on the 8,500 that is no longer at your disposal nor earning interest: 85 NIS per year. With annual payments of 13,200 plus 85 loss-of-interest income, the car actually costs you 13,285 to lease for one year or 1107 per month.
The bottom line is it will only cost you 119 NIS more per month to lease than pay cash, and the lease program protects your cash reserves. You will save 389 NIS per month leasing a used car over financing.
Used leasing will keep you in newer models, which generally translates into less repair costs, better km/l ratings, and ever improving safety features. With leasing the depreciation costs are a thing of the past for you, it is now the leasing companies problem. And if you are concerned about not building equity read this please we call it The Elephant in the Room and Nobody is Talking About It.
If you normally keep an automobile for 6 years or more, leasing may not be right for you, you will be better served to pay cash, or obtain conventional financing. If you generally keep a car for less than 6 years you owe it to yourself and your family to investigate our new used-lease program.