Most of my life I’ve been a relatively conservative car shopper albeit with a preference for owning a new car. For the longest time, my MO was simple. I would buy a nice yet practical new car and finance. I would pay off the loan and drive it into the ground after 10 years and repeat the purchase cycle.
My first girl was so petered out at the end that in the summer time I’d have to kill the A/C just to get up this one hill on the highway on the way home from my daily commute. I think she was worth about $500 on my trade in. Then one year for my birthday I got a shiny new 2014 Mercedes Benz SLK 350 Convertible. It was white with a beige interior. It was a beautiful car! It made me fall in love with owning a nice car. It also happened to be a lease.
The time has come to turn in the lease
When time came to turn my lease, I was in family planning mode so a two-seater wasn’t going to cut it. I had a dilemma. I had been spoiled with the features and the overall feel of the car. My pragmatic side said to go back to something more practical but my car loving side talked me out of that after the first test drive.
I compromised. I bought an entry level luxury compact SUV. It wasn’t crazy expensive but nice enough to make me feel good. It was still practical enough for my imaginary children. Yeah, that’s right. I didn’t actually have kids yet but I wanted them in short order. Knowing we don’t always get what we want, I didn’t want to commit to long-term ownership of a family car. I decided I would lease. I put no money down and the payment was reasonable. Once I left the dealership, I just paid my monthly payment each month and didn’t think much of it.
Fast forward three years later, I have a 1-year old boy and 3-year old SUV in great condition with less than 15,000 miles. As much as I wanted another shiny new car, anyone with a toddler knows that’s a pipe dream. Leasing another brand new car didn’t make sense right now so I decided to buy out my lease. There in entered the second guessing on a decision I made three years ago.
There are lots of reasons people lease: freedom to drive a new car every few years or maybe a lower monthly payment that gets you into something a little nicer than what you would otherwise drive if you had to finance. Saving money though, that’s not one of them. Everyone knows dollar for dollar, it’s less economical to lease than to buy but the question is exactly by how much.
When I found myself looking to buy my lease, I started to have remorse for not having purchased my car from the onset. That remorse first reared its head when I started digging into the taxes.
You see in some states such as Texas a leased vehicle is subject to the full sales tax. While the lessee is typically the one who ends up paying it upfront, it’s the lessor who owes and remits to the tax office when the lease agreement is formed. The finance company is the owner of the vehicle so no tax credit for the lessee. When time comes to do a buyout, the de facto position of the tax county office is that it’s another sale and subject to sales tax on the buyout amount. That hit me with some sticker shock. Now I couldn’t help myself. Now I was on a mission.
Digging into the details
I started digging. I wanted to know what the total damages were on my decision to lease instead of buy three years ago. I busted out Excel and started to go to work. I went back and looked at what terms I probably would have bought under. I decided that I would probably have taken out a 5-year loan with 10% down and then looked to pay it off early.
After running the numbers, I estimated I would have paid $4200 upfront along with an additional $126/month more in payments.
In an attempt at being thorough, I backed out the lease acquisition fee and also estimated to calculated the lost interest income on the addition expense. Here’s the kicker. At the end of three years, my loan payoff amount would have been $16,464 compared to my residual of $25,537. That’s a $9,073 difference. If I back out the loss in interest income, it still came to $6,478.
Add in the additional taxes on the buyout price which is 6.25% in Texas, I figured it cost me $8,074 more to lease than buy.
Wow! That wasn’t a comforting math exercise but time to sally forth.
Do I regret buying out my lease? No. Compared to the alternatives, buying out my lease was the best decision for me. Will I lease again? Probably not. Even if I had decided to sell my car three years later and I was the worst negotiator ever, I would probably still have fared better. I think I’ll stick with my original MO.
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