[ad#post_ad]I am someone who typically leases my cars. I like the simplicity of monthly payments and the ability to turn in a car after three years so as to be able to go out and get a new one. For the most part the lease allows me to pay the depreciation of the vehicle without having to deal with the hassles of selling it.
It was my original intention to do the same with the Volt, but after reviewing the difference between leasing and buying I decided to buy it in the end.
The main differences for the Volt that led me to this decision was the presence of the $7500 tax credit and the possibility of having a particularly valuable car after two or three years, due to limited supply, an early VIN number (008), and possible underestimation of residual value in the lease.
Before going into this discussion I strongly advise anyone buying a Volt should only be paying MSRP and not a dollar more. If your dealer wishes to charge a surcharge, go elsewhere. Each car has a profit for the dealer baked in. Beware of variably named items such as coating, tinting, prepping and freight and shipping.
Though I have the added option of heated leather seats, for the purpose of this exercise, consider a base model with an MSRP of $41,000 and 15,000 miles per year (higher than the usual 12,000). Also keep in mind my discussion for the sake of discussion is a bit simplified and slightly inaccurate.
When you lease a car, your monthly payment is based on the selling price, the down payment, the residual value, the tax on the car, and the money factor which is the interest rate the bank is charging.
To calculate the lease price you add the cost of the depreciation (MSRP -RV), the financing cost [(MSRP) + RV x MF], and the tax (MSRP*tax). Divide the sum of these three by the number of months of the lease and you have the monthly payment.
The finance plan for the Volt, however, is skewed unfavorably against anyone who might wish to buy the car at lease end. The leasing company, US Bank, gets the $7500 federal tax credit. They could have applied that to reduce the selling price of the car, but instead tacked it on to the residual value, artificially inflating it. In either case, the depreciation paydown would have been the same, but by tacking it on to the residual value you would have to pay back that $7500 if you decided to buy the car at end of lease. I took issue with this.
As it stands, the car costs $41,000 and has a residual value of 43% (at 15,000 miles per year). That means at lease-end it is worth $17,630. The depreciation paydown should be $23,370/36 or $649 per month. The $7500 tax credit is added to the residual value, and there is a $2500 down payment (includes first month payment.) There is also a $695 destination charge and a $2000 cap cost reduction which is a large subsidy apparently paid by GM, and another redeeming value of the lease. Thus the total depreciation paydown is $41,000 – ($17,630 -$695 + $7500 + $4500). That’s $12,065, which divided by 36 is $335 per month.
The finance charge is an extremely low 0.6% APR which converts to a money factor of 0.00025. The finance charge is thus (RV + MSRP * MF), or [($17,630+$41,000)*.00025] which equals $14.65 per month. At this point the lease is thus $350 per month.
The last item to add is the tax. Though the Volt lease deal is $350 per month, taxes on the car have to be added. They amount to ($41,000*.0875). That sum divided by 36 months equal $100 per month. Thus the total monthly payment is $450. I, however drive 22,000 miles per year. Adding 21,000 more miles at 18 cents per mile is $3780. Divided by 36 months and adding to each month results in a grand total of $550 per month.
Thus at the end of three years I would have paid out $21,950. To then buy the car would cost an additional $25,130 for a total cost of $47,800.
I reasoned the best way to buy the car outright would be to put down $7500 in cash and then recover it next April when I receive the tax credit. This would allow me to purchase the car for $33,500. The finance company will float you the $7500 (with interest) that can be paid back in April of 2011. Or they will give a 0 percent loan for the $7500 if you pay for the rest of the car in cash.
Added taxes is $2931, which are unfortunately paid on the pre-tax credit amount. Also I chose to finance the car which is offered at 4.74% adding $5999 in interest when paid over 6 years. In this scenario, the total effective cost is $42,431 which is still significantly less then the $47,800 it would cost to first lease then buy. Also by owning, I could also easily choose to sell the car at year 2 or 3, a much more difficult proposition if I had leased it.
The lease deal is extremely favorable if you are certain you will only want the car for three years and plan to drive less than 15,000 miles per year, or are limited by a monthly budget. If you wish to take full advantage of the tax credit and plan to sell the car, buying is the better option. Purchasing is also a benefit as the future market value of the car may turn out considerably higher than the 43% currently estimated on the lease, depending on battery performance and the future price of gas.
This entry was posted on Tuesday, December 28th, 2010 at 7:19 am and is filed under Financial, Launch. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.