I have a somewhat unique situation that I hope you all could give some perspective on. Currently I have two vehicles, a 2022 Rivian R1T and a 2024 BMW i4M50. Bought them both in cash, no payments on them. I make a pretty good living and have excellent credit (780 something).
I’ve been thinking about the time value of money, and about how instead of putting 100K dollars worth of capital into vehicles every 3 years I would be smarter to lease, and put the remainder of the money I would spend into investments. I figure a lease is smarter financially on luxury cars, especially EVs because the depreciation on them is substantial and buying them new every few years is costly. I’ve seen some pretty aggressive lease deals on cars like the iX or Lucid Air.
Anyways that’s what brings me here, I know the very basics about leasing but I’m hoping for some opinions as to what I should do.
The advantage of leasing is you know exactly what you will owe on the vehicle at the end of the term whether you choose to keep it or get rid of it. Leasing is almost always less capital outlay during the 3 year lease term than with financing for a typical 60 month term at the end of 3 years. Inn either case you are paying the depreciation. In leasing you pay rent on only the part of the car you use for the term. With financing you are paying for the whole car, so payment is usually higher.
By paying cash you are ignoring the time value of money and opportunity cost for all that additional cash spent upfront. Paying cash is cheaper if you plan to keep the car for many years, but many people do not. Leasing is better if you know you want a new or different vehicle every 3 years and view car payments as just a cost of living like rent and food. Leasing is not the wisest way to spend money, but neither is gambling and drugs.
I say to always invest in yourself first, then take whatever is left and lease a nice car if it makes you happy. It is a hierarchy of needs type of thing!
Broadly speaking, for the average household, two of the most popular and effective wealth avoidance strategies are having children and getting a new car every few years.
Are you trying to minimize the cost of serially replacing lightly-used luxury cars every 24-36 months, or are you trying to optimize automotive costs over the long term?
Trying to minimize costs of serially replacing lightly-used luxury cars. The money I spend on cars would fall into discretionary spending relative to my income. I know how to optimize costs for vehicles overall. In my younger days I would often buy salvage vehicles and fix them up myself with saved cash and drive them as long as they were reliable which is the most cost effective way to have a vehicle.
At this point in my life I have a little bit of money to throw away, and I enjoy having a new car every couple years. I would like to accomplish the same goal of regular new cars in the most monitarily efficient way possible.
Then the answer to your original question (effectively, “should I lease or buy?”) is: It depends on the vehicle.
Some cars make no sense to lease, some make no sense to buy.
If you buy, you can make payments for as long or short a term as you wish, so the decision to buy can be just as compatible with your desire not to front the entire cost of the vehicle at once.
I will look into the balloon loan. I’ve heard of them for mortgages, but never for cars. Interesting idea and might work for what I’m looking for. How do you know if a vehicle is one of the ones that make sense to lease? What sort of reading should I be doing to determine that?
Also with a balloon loan you’re still going to take the depreciation hit come time to trade in correct? Basically you’re rolling into a situation with negative equity every time?
Short answer is: compare the cost of ownership of both options over the same timeframe. On a purchase you’ll have to estimate what you think the car will be worth at the end.
We just leased a $50k Blazer EV for $220 a month. I didn’t even have to pencil out a purchase, it’s clear that this vehicle will depreciate more then $5,300 over 24 months.
Probably at least $20,000, and at that cost I wouldn’t even want the car.
Depends on how much you finance of course. A balloon loan will generally come with a higher interest rate than a traditional loan, plus you aren’t making payments on the entire principal.
But if you’re upside down at the end but you’ve made more by investing the payment savings, who cares?
A lot of people do balloons to minimize payments for monthly budget reasons, but that can obviously be taken too far.
I could write a check against a HELOC and make minimum payments on the HELOC, which would be very attractive when evaluated strictly within the constraints of a 30-day budgeting cycle… but could be disastrous at a macro level.
“There are no solutions, only tradeoffs.”
-Thomas Sowell
You spent about 150k on 2 cars. At 10% return that’s a g a month you could use towards cars basically free. Unless you’re able to tax deduct your cars for business I don’t see why you would ever want to own either of those vehicle when you can lease them both for around 1500/mo or so.
Theres other vehicles that don’t depreciate like EVs that are smarter to buy. But those aren’t it.
