Thursday, June 19, 2014

Apples and Oranges

"Here tonight, we have, ah, apple and orange. We all different, but in the end, we all fruit."
     - Gus Portokalos, from My Big Fat Greek Wedding, 2002

In a post titled "Apples to Apples", I proposed an easy way to compare the costs of leases of identical duration... for each offer being compared, simply total up the drive-off and all the payments over the lease term. Just like in golf, the lowest total wins.

But what if you're mulling over whether to lease or buy a particular vehicle, with the end goal of owning it free and clear? Well, back in the old days when I used to lease ICE vehicles, circa 2013, I found it was pretty much a wash dollar-wise between leasing and buying, assuming that a leased vehicle would be bought for its residual amount at the end of the lease term. Lease charges over the three years seemed to be within spitting distance of finance charges on the first three years of a six-year loan, and the loan balance after three years was about the same as the residual on a lease. So typically I chose to lease because it resulted in lower payments, tax on only part of the negotiated sales price, and an easy out at lease termination.

With electric vehicles, the decision is sometimes a bit more complicated. Sometimes choosing a lease over a purchase with the intent to own isn't only about minimizing up-front cost, lowering monthly payments, and enjoying the convenience of haggle-free disposal at termination if you change your mind about keeping it. Total cost might be a major factor, because the cost comparison is muddied by the federal tax incentive for EVs. Top that with the fact that some manufacturers offer different rebates on the same vehicle that hinge on whether you buy or lease, and the least expensive path to ownership becomes even less clear.

Let's cut to the chase... Below is a comparison between leasing and purchasing for the Toyota RAV4 EV, Chevrolet Volt, and Ford Focus Electric. With the current offers available, it's significantly cheaper to buy the Volt and FFE rather than lease, so long as the plan is to keep the car for longer than 3 years.  As for the RAV4 EV, it's much cheaper to lease first, and then take ownership by paying the residual at lease termination. The Grand Total line in the table below sums it all up for each of the three vehicles.

For the RAV4 EV, I used the Carson Toyota offer posted in June 2014 on by Dianne Whitmire, which included both lease and purchase offers. The lease offer I used was for 12K miles/year. Clearly, the huge $16.5K rebate on a lease far outweighs the $10K total incentive (rebate plus federal tax credit) on a purchase, making the lease a much more desirable option. $38K with sales tax included and before any state incentive is a heck of a deal on a $50K vehicle. 

For the Volt, I took Rydell Chevrolet's offer from their June 16, 2014 print ad, which gave folks a choice between a $246/month + tax, 10K miles/year lease, or $4500 off of a purchase on top of a $1000 rebate, on base models with an MSRP of $34,995. What makes this lease offer unattractive for those wishing to keep the Volt longer than three years is the inflated residual value, a whopping 61% of the purchase price (aka capitalized cost in lease lingo). Most vehicles have a 50% or less residual for a 3-year lease; for example, the RAV4 EV deal shown above is at 41%, and the FFE deal is at 48%. I've heard FFE lease deals go as low as 41% to 43% on higher-mileage leases.  Where Toyota and Ford properly channel the federal tax benefit back to the consumer in the form of an immediate rebate, US Bank and Ally apparently decided to pocket the tax credit and then set the residual artificially high on their Volt leases to synthesize an attractive monthly payment. Bottom line... if you want to keep a Volt for the long haul, don't even consider leasing it. Buy it instead... $25K with tax included is a great deal for a shining example of what corporate America is capable of producing when they decide to do the right thing. And that's not even including any state incentives.

As for the Focus Electric, I didn't use an offer published by a dealership because, well, I just couldn't find any. So I took an recent killer lease deal posted on by a forum member for an FFE with leather and premium paint, 10.5K miles/year. The deal was based on an offer that was initiated through the Costco Auto Program, which at the time was good for $1000 under invoice. In this case, the lease deal is incredible, but the deal on a purchase is epic. How many other new cars can be had for under $23000, tax included? Okay, so there's lots of them. But of those, how many have leather? And a rear camera? Navigation? Seating for five? More cargo space than a 3-series or C-class? Oh yeah, how about a fully electric drivetrain and a state rebate that would, at least in California, whittle down the cost to something pretty darn close to $20,000? All things considered, it seems that the FFE is currently the best $20K car that money can buy, electric or otherwise. One might argue that the killer deal I used as an example is unachievable for most folk since inventory is pretty slim in most areas. Unfortunately that's probably true for those outside of The Golden State, but it does serve as a well-documented benchmark. In my opinion, even if  you can only negotiate $1000 off of MSRP rather than $1000 under invoice, the FFE rebates still make for one of the best new car values on the planet.

The RAV4 EV, Volt, and Focus Electric probably represent three of the most extreme examples where the total dollars shelled out toward ownership are drastically affected by a choice between leasing and buying. There are others... for example, the BMW i3 currently has a $4875 lease incentive, but no purchase incentive. In this case it should be cheaper to buy the i3 rather than lease and then pay the residual. Why? Well, If the lease incentive is not more than $7500 over the purchase incentive, chances are that the lease will be a more expensive path to ownership.This comparison of the manufacturer incentives offered for leasing versus buying is probably the best indicator of which one is the cheaper path to ownership.

Another factor to consider, which you are probably already aware of but might be worth mentioning for others that are new to this, is whether or not your total federal tax liability next year will be large enough to take full advantage of that $7500 federal tax credit. If not, you should seriously consider using a lease as an instrument to finance your quest for ownership. Look at it as a loan with a low monthly installment for 3 years, and then one huge balloon payment in the end that can be financed with a used car loan.

One more thought... most folks don't pay cash when buying a new car. More likely than not, they will finance it. So for the case where a purchase looks better than a lease (i.e. FFE and Volt),  how should the interest on a loan be factored into the decision? My advice is to plug some numbers into an auto loan calculator, like this one on Model a 7-year loan for the full purchase amount with tax, minus the fed rebate and any manufacturer rebates. Interest rate for such a loan looks to be about 2.5% to 3%. Then look at the total interest paid after 36 months into the loan. For the FFE and Volt examples above the total interest paid after 3 years will only be about $1400 to $1500, which is much less than the $4000 (FFE) to $8000 (Volt) benefit of buying over leasing. In other words, for the Volt and FFE, a financed purchase is still much cheaper than a lease if your intent is to keep the car for over three years.

Still clear as mud on which way to go? Just do the math both ways based on your situation, and let the numbers guide you. Need help? Post your numbers below, and I'd be happy to take a crack at it, see what we see...