One of the many questions Meir Rosenberg faced when joining the workforce after years in Kollel was deciding on a reliable set of wheels. Now that he would be commuting to a job in Brooklyn he could no longer count on his long-suffering jalopy. Because new and lower mileage vehicles carry hefty price tags, the Rosenbergs would have to finance or lease whichever model they chose. The dual question Meir was considering was: from a purely financial perspective should they get a new or a used vehicle and if new, should they buy or lease it?
Everyone Loves The Smell Of New
New cars and vans had become a familiar sight in their development. Many of these were driven by people who were not wealthy. Chany and Meir knew that even people of limited means could get approved for a small monthly loan or lease payments, placing new and even luxury vehicles within reach of anyone with decent credit. The Gemara, however, recommends minimizing expenditures which are consumed (like food) and emphasizing those which have lasting value (such as real estate). A car seemed to be a depreciating asset and not an investment. Meir figured that before deciding on a major financial commitment, he should research this topic more thoroughly.
New vehicles: An Expensive Luxury
Googling car depreciation confirmed that new cars quickly lose much of their value. According to Edmunds, a new car loses approximately 10% of its price the minute it’s driven off the lot. That first ride then costs thousands of dollars, quite an expensive pleasure. The vehicle continues depreciating by 10-15% annually for a total loss of about 45% by the end of year three! Whether purchased or leased, the driver of a new car is paying a lot for that sumptuous fresh smell. Meir was then not surprised when further googling revealed that personal finance gurus like Dave Ramsey say that unless wealthy, people should buy reliable used cars versus new ones, whether financed or leased.
The main thing going for a new car is its assurance of reliability. For people with demanding and high paying occupations, removing the hassle and uncertainty of dealing with the occasional breakdown can be well worth the money. New vehicles also come with latest and greatest technology to enhance safety and comfort during operation. These upgrades are especially valuable to people who spend much of their time on the road. Meir was not going to be doing an excessive amount of travel and didn’t need to pay thousands of dollars just to avoid an occasional inconvenience. He was aware that today’s cars are very well constructed and with basic upkeep can last for many years with minimal repairs.
Leasing: Rich vs. Poor
There is a saying that leasing is attractive to either the rich or the poor. A lease is essentially a long-term rental. It is more expensive to lease a new vehicle than purchasing it outright, and it is much costlier than financing a used car. Unlike leasing, at the end of your loan payments, you own the car. For rich people who can easily afford it, leasing is a highly convenient way to enjoy driving current and beautiful vehicles. Poor people, on the other hand, are attracted to leasing because monthly charges are relatively small and it may not require a down payment. But people who can’t scratch together a down payment, are the least able to afford the thousands of extra dollars which leasing costs over the life of the lease. Car leasing makes poor people even poorer.
Running the Numbers
Nothing drives a point home better than seeing actual numbers. Meir created a spreadsheet and called a few car dealers. A lender was also consulted to get a sense of how auto financing would work. The three options compared assumed a six-year scenario: 1. leasing a new Camry LE for two consecutive 36 month periods, 2. Purchasing a new Camry LE with 20% down, 3. Buying a three year Camry LE with 20% down. The purchase options assumed similar mileage use (12,000 miles) and a sale after the six years of ownership at the relevant market value. All the options require similar routine maintenance (oil changes), but the purchase options would have higher repair bills, especially the used model as it passed through years 6-9 of its life.
As he expected, the lease option was cheap initially but the most expensive over time. Costs included two payments of $1,200 (at the beginning of year 1 and 4) and 72 payments of $210. The monthly lease payments included a damage waiver to cover excess wear, so the total cost to lease over six years was $17,520 averaging $2,920 annually. The financing new purchase option required $4,600 down and 72 payments of $275. After selling the six-year-old car, the total cost was $14,400 averaging $2,400 annually. As a new car, it is likely that unwarrantied repairs will be minimal. Finally, the purchase used with a loan option was much less expensive. After a down payment of $2,800, it required 72 payments of $168. Including the proceeds from the sale of the 9-year-old car, the all-in cost was $8,896 or $1,483 annually. This option costs less than half of leasing, a difference of almost $9,000! Even assuming a few thousand dollars for repairs, buying used is a bargain compared to new.
Bottom Line
While there may be exceptions to the rule, it is tough to overcome the basic fact that the first user of a new automobile bears the brunt of its depreciation. A new car can make a lot of sense from the perspective of the wealthy, or hard charging business or sales persons but for most, it is an extravagance. Meir knew which direction he was headed toward.