This weekend we were with some friends and the topic for buying cars came up. One couple we were talking to was discussing either buying a used truck that they would pay for in cash or leasing a newer car. Additionally, if they were to pay for the truck with cash, they would work on paying down the car loan on a different car they have. Let’s examine a lease versus financing versus buying a vehicle with cash.

First, a little background on myself and then I will get into the breakdown of leasing versus financing. When I got my first engineering job out of college, I thought to myself – I am making a good salary; therefore, I should go out and buy a nice BMW. I always wanted a BMW 550i, which is a $67,000 brand new. That was more than my salary for one year. Luckily, I made the correct decision and I did NOT buy a BMW. How much was my decision worth? Well, if I were to invest the monthly payment ($1,128) over 5 years with a 5% return, I would have saved $68k and made an additional $7,400 by investing – totaling $76,085!

Invest vs. Finance or Lease
 Total Sum $76,084.49
Rate (annual rate of return) 5.00%
nPer (number of payment) 5
PMT (total payments made each year) -13,538.40
PV (initial value – in this case a 1,000 down payment) -1,000
Money made $7,392.49

Many of the successful bloggers I follow discuss buying an older, used car for cash. The main reason is that their target audience is most likely people that are working to get out of debt. It doesn’t make sense to add more debt, e.g. buying a new car, when you are trying to get out of debt. There are many reliable, used cars out there that you can get for less than $10,000.

Here is a link to a simple calculator I built in Google Sheets (downloadable in excel) that shows you your monthly payment, how much of your payment is going to interest and principal, and finally it shows a month to month breakdown until your car is paid off. Additionally, I put in a future value (FV) calculator so you can evaluate how much money you could make if you instead invested the difference (nPer is the number of years, PMT is your monthly payment * 12, and PV (present value) is the down payment).

https://docs.google.com/spreadsheets/d/1-NYI5yojVDkO0FmPaaECqLzlis5-iFtsZ2xWNeUGbao/pub?output=xlsx

I will use two car examples. First, a 2017 Hyundai Elantra, which is around $16,000 for a base model. Second, I will use a 2017 Ford F150, which is around $40,000 for a base model brand new.

Leasing

Elantra lease details:

Down Payment:  $1,500

Monthly Payment: $125

Length of lease: 3 years (36 months)

To break this down, you are paying a total of $6,000 (down payment plus 36 monthly payments) to drive a car for three years. After those three years, you have no vehicle. Some dealers may offer some sort of lease buyback, but the deal will likely not favor you. If instead, you had purchased a car with cash for $6,000 you would still have a vehicle and you could be putting the extra money toward debt ($125/month).

Ford F150 lease details:

Down Payment:  $3,858

Monthly Payment: $259

Length of lease: 2 years (24 months)

Breaking down the F150 lease, you are paying a total of $10,074 over two years (24 months) to drive this vehicle. Then you have to return it… It is like being back at square one 🙂 I completed the same calculation below, showing how much money you would make if you invested the money instead. Now this isn’t substantial, but consider that 1) the time period is only three years for the Elantra and two years for the F150; therefore, you are not giving your money time to work, and 2) you do NOT have a car after this time period and you will need to continue paying money for a car!!

Invest vs. lease Elantra Invest vs. Lease F150
$6,465.19 $10,624.85
Rate 5.00% Rate 5.00%
nPer 3 nPer 2
PMT -1,500 PMT -3,108
PV -1,500 PV -3,858
Money made $465.19 Money made $550.85

Financing

Elantra financing details:

Hyundai is offering 0% financing if you finance at 36 months, 48 months, or 60 months with a $1,000 down payment. Here is the breakdown in monthly costs for the different time periods and comparing 0% versus 5% interest:

Length of Payment 0% 5% Interest paid @ 5%
36 month: $416 $450 $1,224
48 month: $312 $345 $1,584
60 month: $250 $283 $1,980

Ford F150 financing details:

Ford is similar: they are offering 0% financing if you finance at 36 months, 48 months, or 60 months with a $1,000 down payment. Here is the breakdown of monthly costs for the different time periods. The F150 is an expensive vehicle, and these monthly payments are a significant debt to have to worry about each month.

Length of Payment 0% 5% Interest paid @ 5%
36 month: $1,083 $1,169 $3,096
48 month: $812 $898 $4,128
60 month: $650 $736 $5,160

What if you were to invest the down payment and monthly payments over the course of 60 months with a 5% return? 

Invest vs. buy Elantra Invest vs. buy F150
$17,853.18 $44,376.21
Rate 5.00% Rate 5.00%
nPer 5 nPer 5
PMT -3,000 PMT -7,800
PV -1,000 PV -1,000
Money made $1,853.18 Money made $4,376.21

Buying a car with cash

Many people discuss the negative implications of buying an older car, with maintenance costs being one of the most significant reasons not to buy an older car. Here are two bloggers I follow that have interesting articles regarding this topic. First is Millennial Money Man, and he broke down his costs for maintenance on his 2004 Yukon that he purchased with cash ($6k) after he graduated from college. Check out his post here. Scott Alan Turner has a few blog posts that discuss the differences between buying a car, leasing, or purchasing an affordable car that you pay for in cash (which is what he recommends).

Now, if you are in a situation where you are completely debt free, and you are saving 20% or more of your income – then yes, go ahead and do whatever floats your boat. However, if you are in that type of situation you are in the minority compared to the rest of us.

Other factors to consider

  • Monthly debt obligation – once you lock in a lease or finance a car you have to pay that amount each month.
  • Maintenance on new cars can be expensive too, especially if you purchase a car made outside of the U.S.
  • If you are you in debt, how much more quickly could you pay off debts if you didn’t have a car payment? My wife and I got rid of our car payments, which totaled $749/month. We put roughly $7,500 toward debt over the last 10 months by not having a car payment!

What are you thoughts on this topic? Have you recently leased, financed, or purchased a car with cash? How has your experience gone?