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10 years paying for a car? Absolutely about as horrible as it gets.
Thank you for posting this.
It never ceases to amaze me how much money people spend on new vehicles. Gotta Gotta have an new car.
Do you have a retirement fund already set up?
Do you have a fund set up for the kids college education?
Do you own or rent a home? What are those payments?
I paid $3,500 for a used station wagon that seats 7 or 8. One owner car with 54,000 miles little old lady owner who purchased new. No rust. No accidents. All service records.
I've driven this car from Cape Ann to San Diego two times. With zero issues. Other then a pot hole in Tennessee that caused a flat tire.
New. New. New. Gotta have new. Not sure if this is for prestige or to impress the neighbors. Granted a new vehicle has a factory warranty.
And that Corolla with 260,000 miles ain't gonna last forever. What is the plan for replacing that? Two loans? Two leases? All of this money going out puts a lot of pressure on a marriage.
I paid $3,500 for a used station wagon that seats 7 or 8.
I don't know about going THAT low, but there are certainly far more affordable options than the awful one the OP is proposing.
He's committing financial suicide with that deal.
Without going into your math, leasing with the plan of buying at the end is rarely a good idea. If it just so happens to work out well financially to buy at the end, great, but that is definitely not the typical outcome due to how leases are structured to get to the low payment.
We have two kids, 2 and 5, and one on the way, so we figure that for the next 10-12 years we are going to be in the thick of really needing one (basically until my oldest gets her license). We're pretty set on the Toyota Sienna AWD. MSRP on the 2017s with all of the options are about $42K, so I did the math:
36 Month Lease
5,000 down
300/month for 36 months (12,000 mile per year lease) - 10,800 in lease payments
----------------
15,800
84 Month Loan - 22,000 @ 4.5%
5,000 down
236.30/month for 84 months - 19,849.43 total loan cost
----------------
24,849.43
15,800 Lease cost
24,849.43 Finance cost
1,540 Sales tax
----------------
42,189.43 - Total cost of vehicle over 10 years
I should also add that my wife is a teacher and that this will be her daily driver in addition to our vehicle for family trips, etc...she only commutes 12 miles a day one way 180 days per year. After 10 years I figure we'll have just over 100K miles on it, which, judging by all of the past Toyotas we've owned, isn't much. I still commute trouble free in my 2001 Corolla with 260K miles that we've owned since new. Anything I'm missing here? Essentially this looks to me like getting an interest free loan for 10 years on a 40K vehicle.
Um, no. Your numbers look made up or approximate to me. How much of a discount from MSRP do you even assume - this is left out of your number list above.
Paying on a vehicle for 10 years is absolutely ludicrous. Your job could change, or you might move, or the kids could need more transportation for extracurriculars, or someone in your family could have medical issues in the next 10 years necessitating lots of medical trips.....any of these could increase your annual mileage quite a lot. Look at it this way: How much has your life changed in the last 10 years? How much of this could you have predicted 10 years ago? Do you really think nothing will change in 10 years that might make you put more miles on the van?
We have two kids, 2 and 5, and one on the way, so we figure that for the next 10-12 years we are going to be in the thick of really needing one (basically until my oldest gets her license). We're pretty set on the Toyota Sienna AWD. MSRP on the 2017s with all of the options are about $42K, so I did the math:
36 Month Lease
5,000 down
300/month for 36 months (12,000 mile per year lease) - 10,800 in lease payments
----------------
15,800
84 Month Loan - 22,000 @ 4.5%
5,000 down
236.30/month for 84 months - 19,849.43 total loan cost
----------------
24,849.43
15,800 Lease cost
24,849.43 Finance cost
1,540 Sales tax
----------------
42,189.43 - Total cost of vehicle over 10 years
I should also add that my wife is a teacher and that this will be her daily driver in addition to our vehicle for family trips, etc...she only commutes 12 miles a day one way 180 days per year. After 10 years I figure we'll have just over 100K miles on it, which, judging by all of the past Toyotas we've owned, isn't much. I still commute trouble free in my 2001 Corolla with 260K miles that we've owned since new. Anything I'm missing here? Essentially this looks to me like getting an interest free loan for 10 years on a 40K vehicle.
Sounds like a bad idea to me, but something with your lease numbers seems off. Calculating a lease with these parameters:
$42,000 MSRP
$40,000 Cap Cost (This is the actual selling price - so I'm estimating this at $40K even)
$5000 Cap Cost Reduction (Down Payment)
$22,000 Residual Value
0% Money Factor (Interest Rate)
0% Sales Tax/Other
36 Month Term
That scenario above yields a payment of $361 per month and that's with no interest or tax on it, either. (Note the fine print in the lease which says payments "excludes tax, tag, registration, title and dealer fees" as that can increase your payment by a fair amount depending on your state.) I don't understand how you or the dealer is coming up with a payment of $300/month on that one. You can calculate different scenarios here:
So what is your real Cap Cost/Selling Price?
What is your money factor/Interest rate?
What "extras" like tax, doc fees, etc are going to add to your base lease payment?
You should know these things before signing anything.
Last edited by iamweasel; 12-26-2016 at 09:12 PM..
Reason: typo
"Residual" refers to the residual value of the vehicle, after the lease is through.
Basically, when you lease a car, you're just paying for the depreciation of the vehicle for the years you own it. Dealers like leases. When you lease a car, you are essentially borrowing it from a dealership. Let's say they have a shiny, new minivan that costs $40k. Well, people want to buy minivans, but not many people have $40k to spend on minivans. Most people would rather buy a used minivan for $20k. But, buying used has all sorts of issues -- you have no idea how well it was cared for or if all the maintenance was done. Also, used vehicles can have any number of miles on them. So, this dealer has 20 brand new minivans, all costing $40k. But, they know their average sales, and know they'll only be able to sell 10 of them (because not everybody wants to buy one brand new). So, the remaining 10, the dealer leases out. The dealership ran the numbers, and determined that that make and model of minivan will be worth $20k in 3 years. But, in order to meet that target value, the vans need to be well maintained, with low miles. So, the dealer leases the vans out, with conditions in the lease contract -- you can only drive the van 12k miles per year, and all maintenance needs to be done on time, at the dealership. After 3 years, the dealer gets 10 well-maintained minivans returned, that all have under 36k miles, with full service records. They can then turn around and sell the 10 used minivans for $20k. The lease payments are calculated by determining the depreciation of the van. If it was $40k new, and the dealer can sell it in 3 years for $20k, the value has dropped $20k. The dealer earns this money via the lease payments, which are pretty easy to calculate. They'll basically charge you that $20k (depreciation) over the period of the lease. So, you might put $5,000 down, and get charged the remaining $15k over the next 36 months -- which would work out to about $416 monthly. They still want to make some profit off of you, so they might advertise "$5,000 down and $450 a month".
In the OP's case, the dealer is promising $300 per month for 36 months, and $5,000 down. Doing the math, this means they'll spend $15,800 over the course of 3 years towards the van. What's really going on is, the dealer has a $42k van, and they know that in 3 years, they could sell the van for $26,200. So, they get someone to pay the $15,800 over 3 years on a "lease", then turn around and sell the used van for $26,200 -- making the $42k in the end.
In the OP's case, the dealer calculated the residual at $26,200, in order to get the $300 / month lease payments. The OP is then saying that at the end of the lease, they'll be able to buy the van for $22k, put another $5k down on the financing, and then finance the van for 7 years (84 months) -- giving them a new monthly payment of $236.30 for the 7 years following the lease. After 7 years, they will have spent $24,849.43 financing the van. Including the lease (and sales tax) they'll have spent $42,189.43 over 10 years for the $42k van.
The big question here is, where did OP get the $22k used value for the van? The dealer has already calculated the residual value of the van at $26,200. When the lease is over, the dealer will want to get that amount. But, in the OP's calculation, they're buying the used van for $22k.
"Residual" refers to the residual value of the vehicle, after the lease is through.
Basically, when you lease a car, you're just paying for the depreciation of the vehicle for the years you own it. Dealers like leases. When you lease a car, you are essentially borrowing it from a dealership. Let's say they have a shiny, new minivan that costs $40k. Well, people want to buy minivans, but not many people have $40k to spend on minivans. Most people would rather buy a used minivan for $20k. But, buying used has all sorts of issues -- you have no idea how well it was cared for or if all the maintenance was done. Also, used vehicles can have any number of miles on them. So, this dealer has 20 brand new minivans, all costing $40k. But, they know their average sales, and know they'll only be able to sell 10 of them (because not everybody wants to buy one brand new). So, the remaining 10, the dealer leases out. The dealership ran the numbers, and determined that that make and model of minivan will be worth $20k in 3 years. But, in order to meet that target value, the vans need to be well maintained, with low miles. So, the dealer leases the vans out, with conditions in the lease contract -- you can only drive the van 12k miles per year, and all maintenance needs to be done on time, at the dealership. After 3 years, the dealer gets 10 well-maintained minivans returned, that all have under 36k miles, with full service records. They can then turn around and sell the 10 used minivans for $20k. The lease payments are calculated by determining the depreciation of the van. If it was $40k new, and the dealer can sell it in 3 years for $20k, the value has dropped $20k. The dealer earns this money via the lease payments, which are pretty easy to calculate. They'll basically charge you that $20k (depreciation) over the period of the lease. So, you might put $5,000 down, and get charged the remaining $15k over the next 36 months -- which would work out to about $416 monthly. They still want to make some profit off of you, so they might advertise "$5,000 down and $450 a month".
In the OP's case, the dealer is promising $300 per month for 36 months, and $5,000 down. Doing the math, this means they'll spend $15,800 over the course of 3 years towards the van. What's really going on is, the dealer has a $42k van, and they know that in 3 years, they could sell the van for $26,200. So, they get someone to pay the $15,800 over 3 years on a "lease", then turn around and sell the used van for $26,200 -- making the $42k in the end.
In the OP's case, the dealer calculated the residual at $26,200, in order to get the $300 / month lease payments. The OP is then saying that at the end of the lease, they'll be able to buy the van for $22k, put another $5k down on the financing, and then finance the van for 7 years (84 months) -- giving them a new monthly payment of $236.30 for the 7 years following the lease. After 7 years, they will have spent $24,849.43 financing the van. Including the lease (and sales tax) they'll have spent $42,189.43 over 10 years for the $42k van.
The big question here is, where did OP get the $22k used value for the van? The dealer has already calculated the residual value of the van at $26,200. When the lease is over, the dealer will want to get that amount. But, in the OP's calculation, they're buying the used van for $22k.
The dealer does not set the lease parameters nor does the dealer automatically get the lease at the end of the term. The manufacturer's finance company (Ford Credit, Toyota Credit, etc) is in control of the asset and the basic lease terms are determined by the manufacturer. (Certain models and at certain times some vehicles are better off with aggressive lease programs instead of cash back/low APR programs.). The dealer is in charge of none of this....only the capitalized cost (selling price) is controlled by the dealer.
At the end of the lease the customer has the first option to buy, but most leases are set where the residual value of the lease is higher than the actual value of the vehicle at that time. With some manufacturers the dealers have the option to buy the car if the customer doesn't for a price to be agreed-on at that time. Usually that value is somewhere between the residual value set on the lease and the estimated value the car will bring at auction.
If the customer and dealer both pass, the car is auctioned at a "closed" auction only for dealers of that brand, but under certain conditions the manufacturer has the option to decline all bids from the closed auction and send the car to an open auction. (Open auctions are still for dealers only, but not restricted to dealers from that one brand and it could have regular used car dealers there as well.)
Last edited by iamweasel; 12-27-2016 at 05:28 PM..
Reason: Typo
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