Financial Considerations -- An Important Decision

[tps5352]

...I am thinking of leasing a Model X...

...new Model X....which is the best option - buy or lease....

...would like to know if it makes sense to buy or lease a MX...

...buy or lease a new model X Raven...?

Just some of the recent OPs on what is clearly an important topic. So let’s run some (back-of-the-envelope) numbers (using the Tesla.com website payment calculator). As a working example, assume:

• 2020 extended range Model X (acquired in the USA)
  • w/standard options:..................................$84,990
  • full self-driving option:..................................$7,000
    • Subtotal:.........................................$91,990
  • Dest. & doc. fees:.........................................$1,200
    • Subtotal:.........................................$93,190
  • (Cal state) Sales Tax (@7.5%):.....................$6,900
    • Total:.............................................$100,090

AFAIK, there are three normal acquisition options (in the U.S.):

1. Outright purchase (w/$100 order fee):..............$100,190
   
   
2. Auto loan. Assume:
   • Loan by Tesla
   • Down payment (DP):.................................$23,000
   • Financed amount (FA):..............................$70,190
   • APR:...............................................................3.5%
   • Term (minimum):.........................................5 years
   • Destination & doc. fees (DF):........................$1,200
   • Order fee (OF):...............................................$100
   • (Calif. 7.5%) State sales tax (TX):..................$6,900
     
     
   • Monthly loan payment (P+I):........................$1,277
   • Total (60 payments+DP+DF+OF+TX):.......$107,819
   • Cost per year (for 5 years):.........................$21,564
     
3. Auto lease. Assume:
   • Maximum down payment (DP)....................$23,471
   • Maximum annual miles:.................................15,000
   • Acquisition fee (AF):.........................................$695
   • Due at signing (DP+1st pay.+AF):................$24,942
   • Maximum term:............................................3 years
     
     
   • Monthly lease payment (LP):...........................$776
   • Total (36 payments+DP+AF):......................$52,102
   • Cost per year (for 3 years):..........................$17,367

So at the end of 3 years (Note: a loan would normally be for at least 5 years) what might we have?

(Note: The loan values were determined using amortization calculations for the first three, out of five, years of the hypothetical loan.)

According to these figures, after recouping some money by selling their used car, people who purchase outright may ultimately expend about $35,000 for the privilege of owning a Model X for three years. (Of course this does not include electricity for charging, maintenance, repairs, insurance, accessories, and other expenses.) Those who finance their purchase may spend a little more: about $42,000 for that same period of ownership. In comparison, people who lease spend the most--around $50,000--for approximately the same experience, but without financial obligations after three years.

OK, assuming these numbers hold what do people think of the conclusions?* (I myself need some time to mull this over.)

Its a sizeable jump from $35,000 to $52,000. But many people probably finance their purchase, and the increase from $42,000 to $52,000 (over three years) does not seem quite so off-putting.

As others point out, what makes the Tesla as a consumer retail product so fascinating (but also confounding), is fairly continuous, unanticipated upgrades (via software) and improvements (to future cars). That's fun, but it makes acquisition planning all the more difficult (like buying an expensive, feature-packed smartphone on wheels).
___________
* Now before you barrage me with indignant, corrective postings that rail against perceived erroneous values and omissions, I freely acknowledge that I probably included:

• numerical errors,
• gross approximations and estimates (like the value of 3-year-old Model X),
• critical assumptions (e.g., that a used car will sell for that amount), and
• numbers that will in fact vary significantly case by case (e.g., by state, nation, and individual customer)

or failed to account for certain important financial considerations (What are they?). For example, I did not check to see if there is a significant penalty for ending a Tesla loan two years early. (I need to ask about that.) Also, what about income tax considerations if people withdraw the entire purchase price from a previously tax-exempt (e.g., retirement) account?

Also I did not include non-financial pros and cons like the ability to customize a purchased car. I think I am hearing that there are certain features that you can not have on a leased car?

Regardless, to determine the usefulness of these figures consider the (a) accuracy of the orders of magnitude (Are the figures in the ballpark?) and (b) conformity, consistency, and comparability among the three option calculations. (Also, it may be worthwhile to alert new buyers and leasees to "hidden" amounts that can be revealed at signing time.)

 

[HankLloydRight]

Most people who lease a car also have a business where they can deduct the lease payments for % of business use, greatly reducing the cost of ownership.

And with the Section 179 100% deduction for Model X (Hummer loophole), it makes it even more affordable. See:
Model X IRS 100% Deduction “Hummer Loophole” - 2018 Edition

 

[Doc Brown]

I think the delta between outright purchase and loan is a bit closer. I’m considering an outright purchase and, if I do, I have the opportunity cost associated with giving up the cash for the 3-year period. Thank cannot invest or earn interest on that $100K. If I put down, say $30K, I can invest the $70K and at least offset the loan interest.

 

[tps5352]

So at the end of 3 years...what might we have?

Clarification: Somewhat contrary to the “$0” amount for “Est. Car Value” I placed under the “Lease” column in my initial table, the car of course will have “residual value” (RV) following the 3-year lease period. As you know, RV is pre-determined by the car company (Tesla) and used in establishing the monthly lease payment and total lease amount. It is usually a percentage of the original MSRP. In addition, a car at the end of its lease period also has inherent “resale value”—a specific market value after depreciation, mileage, and any wear and tear. Various services (e.g., Kelley Blue Book) and regional market activity, among other things, help determine resale value. (The RV and actual resale value may be in agreement or at odds, I suppose.)

For the sake of my numerical example comparing the finances of purchasing, financing, and leasing, I was just simplistically assuming that the leasee did not want to buy the car back, and hence it held no inherent value to to the customer, since they did not own it and could not sell it to recoup any of their original expenditure (spent leasing the car for 3 years).

So Line "B" values in the original comparison table could more accurately refer to "Estimated Car Value to the Customer" (the owner or leasee).

 

[jboy210]

Most people who lease a car also have a business where they can deduct the lease payments for % of business use, greatly reducing the cost of ownership.

And with the Section 179 100% deduction for Model X (Hummer loophole), it makes it even more affordable. See:
Model X IRS 100% Deduction “Hummer Loophole” - 2018 Edition

Yep! You only pay for personal use percentage.

 

[OrbiterTI4]

Two questions on assumptions:

Why a 60 month loan? If you are going to do the comparison to a 36 month lease, why not use a 36 month loan?

Why the large down payment for the lease? One benefit of a lease is requiring little money down (essentially the acquisition fee and the first months payment).

Not a question but a comment related to an assumption you covered in your fine print: you note the residual value is just a guess, but I would imagine it would be closer to $60k, if not a bit lower (I think I've seen 62% residual as a "middle ground" lease number, but I won't fight for that number).

 

[tps5352]

Why a 60 month loan? If you are going to do the comparison to a 36 month lease, why not use a 36 month loan?

Because the Tesla website (Design Your Model X | Tesla) calculator offers only 60-month (5-yr) and 72-month (6-yr) loan options and 24-month (2-yr) and 36-month (3-yr) lease options. A 5-year loan and a 3-year lease were the closest I could get if I stuck with Tesla financing (which for this example I choose to do).

So in my example the hypothetical loan person would have to end their 5-year loan early (is there a penalty?) and sell off the (3-yr-old used) car in order to recoup part of the expenditure (in order to prepare for buying a new, more up-to-date Tesla, I assume).

Why the large down payment for the lease? One benefit of a lease is requiring little money down (essentially the acquisition fee and the first months payment).

True. Just arbitrary, personal preference, I guess. The Tesla lease option allows a maximum downpayment of $23,471. When I buy/lease my vehicle, I will probably try to put down a large DP (to keep monthly payments lower). So I chose a $23,471 DP for the lease option and a $ 23,000 DP for the loan option to make them comparable. I haven't tried it, but I am thinking that consistently adjusting the DPs (in the lease and loan options) will not change the final comparative conclusions between those two financing options.

As I said, these calculations included a lot of assumptions and (personal) choices for variables (like the DP). An interested reader can run the numbers using whatever numerical values are allowed by the Tesla online calculator and that suit their personal needs (like a small lease DP). (You just need the Tesla website and a handy loan amortization program. A spreadsheet program, like Excel, makes calculating things a little easier.)

Not a question but a comment related to an assumption you covered in your fine print: you note the residual value is just a guess, but I would imagine it would be closer to $60k, if not a bit lower (I think I've seen 62% residual as a "middle ground" lease number, but I won't fight for that number).

I believe you and am totally willing to defer judgement to other, more knowledgeable readers. Both residual value and resale value (which I discuss in Post #4 of this thread), are unknowns to me. And I was not thinking about residual value when I wrote the OP (original post). Come to think of it, I did not even discuss "residual value" in the OP. Instead, in Line B of the table I guess I was thinking about what's called "resale value," which is of course different than "residual value."

As we all know, resale value (what you can get in the open used-car market) is variable and future values are highly unpredictable--more so, perhaps, with a high-tech product like from Tesla which is constantly upgrading their new vehicles and therefore affecting the value of older, now out-of-date cars. And in my mind I just unconciousley assumed that the owner could get more selling the car on the open market than any credit offered by Tesla for its return. (Also, I did not think about services to purchase or trade auto loans. Those options may add more complexity to the discussion.)

So anyway, I took a quick look at the Kelley Blue Book numbers. But the $65,000 value is TOTALLY a very gross approximation. Who know what a 2020 extended-range Model X is going to be worth in 2023 (what with tech-updates to newer Teslas and newer competing automobiles)?

Thanks for the questions.

 

[Cheburashka]

Putting a large downpayment on a lease is one of the worst things you can do.

Let's say you ride off the lot and a bus crashes into you, totaling your new car.

You just essentially flushed your downpayment down the toilet.

 

[tps5352]

Let's say you ride off the lot and a bus crashes into you, totaling your new car.

You just essentially flushed your downpayment down the toilet.

But it is not your car. It is Tesla's.

However, let's assume that the accident is not your fault (and because you are driving a Tesla you survive). What you are saying is that the DP would be completely lost? And after insurance finished kicking in and Tesla recovered its money, Tesla would not supply you with a replacement car and continue the lease (with the original DP)? Ouch! Come to think of it, even if it is your fault your insurance should pay for the damages (of course your premiums might go way up) and Tesla should still get their money. So why would the DP ultimately be lost?

That does not sound right, but if true it is alarming and I need to understand leasing better, I guess.

 

[Cheburashka]

Tesla will get their money, it's their car, but you won't get anything. Insurance will pay the market value of a used car, plus GAP insurance in case it doesn't cover all the money you owe in the lease.

Tesla will get their money regardless, but you won't get anything.

This is rule #1 of leasing - never put money down unless it's for a security payment that lowers your points (I don't believe Tesla offers this).

 

[tps5352]

This is rule #1 of leasing - never put money down unless it's for a security payment that lowers your points (I don't believe Tesla offers this).

OK, wow! Important safety tip (along with not crossing the streams--from "Ghostbusters").

Thanks!

Well, this is why I belong and contribute to this Forum. The information returned is invaluable.

For my own purposes I'll have to (privately) run the numbers with a $0 lease DP and a (reasonable) loan DP and see how things stand at the end of 3 years.

But right now I am beginning to think that loan financing is making more and more sense for me. Nonetheless, it's a somewhat complex decision.

Really, thanks.

 

[Watts_Up]

(Cal state) Sales Tax (@7.5%)​

Sales Taxes in Davis, CA: 8.5%

Note: In San Francisco, in October 2018 I paid 9.25% Sales taxes and $700 DMV registration. (And DMV $600 renew this year)

full self-driving option:..................................$7,000​

In your example, leasing has an advantage because you don't pay up front the full Sales Taxes and FSD option cost.

If I pay cash and keep my car only for 3 years, I would not get the FSD option. ​

About Sales Taxes, in San Francisco, in October 2018 I paid 9.25% Sales taxes and $700 DMV registration. (And $600 renew this year)

Because of the additional taxes, if I pay cash I would keep my car as long as possible,
depending of my mileage, depreciation rate, and obsolescence factor.​

 

[tps5352]

...Sales Taxes...[and other factors]

Thanks for this additional information. I will modify my own personal decision-making calculations.

 

[tps5352]

...three normal acquisition options (in the U.S.)

Financial Considerations, Part 2​

Second run of practice calculations. (Modified with information/suggestions from posts on this thread. Compare directly to Post #1.) What do we get with:

• same car (extended range Model X) and initial purchase price,
• same loan (5-yr) and lease (3-yr) periods, but
  
• large loan down payment ($45,000) and hence a smaller loan amount financed ($48,190)?

What results are a:

• smaller monthly loan payment ($877),
• smaller total (5-yr) loan payment ($105,798), and
  
• smaller yearly loan cost ($21,160)

(because less interest is paid, naturally). How about if we modify the lease assumptions with:

• no down payment ($0), and
  
• decreased annual miles cap (12,000)?

Then we get a:

• larger monthly lease payment ($1,460),
• larger total (3-yr) lease payment ($53,255), and
  
• larger yearly lease cost ($17,752).

With these modifications the comparative three-year results would change (somewhat) to:

At the end of three years, the cost of the modified loan would be $1,680 less and the modified lease $1,153 more--not huge differences compared to the original results, but in my mind favoring the loan option all that much more.

Of course this remains an important decision, and customers should weigh all their options carefully before signing. For example, Model X customers should think about accessories they may want to add to their car that are not possible with a leased car. On the other hand, what is the likelihood of getting $65,000 for a 3-year-old vehicle in a market with lots of competition from new Teslas (e.g., the Model Y) and anticipated new electric cars popping up. (That's if they approach getting a Tesla in 2020 with the intention of getting a new one in 2023. That may not make as much sense if one buys. But, it is much more likely if one leases.)

 

[blitzpa]

I purchased my X outright but I was looking at the lease options for a second Tesla, probably a 3 or a Y. In my previous lease ('13 Subaru BRZ) I purchased the car at the end of the lease for the residual value. According to Tesla Leasing there is no purchase option for Model 3. I assume the same will be true for Model Y and all future Tesla vehicles.

It's unfortunate since one of the benefits of leasing, in my opinion, is getting to use a car for the lease period with the option to purchase it if you are happy with it. Until Tesla I never heard of leasing without purchase option. As a result I think the Tesla leasing is targeted at business use.

 

[jboy210]

I purchased my X outright but I was looking at the lease options for a second Tesla, probably a 3 or a Y. In my previous lease ('13 Subaru BRZ) I purchased the car at the end of the lease for the residual value. According to Tesla Leasing there is no purchase option for Model 3. I assume the same will be true for Model Y and all future Tesla vehicles.

It's unfortunate since one of the benefits of leasing, in my opinion, is getting to use a car for the lease period with the option to purchase it if you are happy with it. Until Tesla I never heard of leasing without purchase option. As a result I think the Tesla leasing is targeted at business use.

There was a purchase option on our Model 3 LR we just got. But you needed to select it when you first configure the car or it does not show up on your paperwork.

And leases are usually a financial loss if you plan to purchase at the end of the period. If some other entity, like a company, paid all the origination fees they work out. But if you are paying those, and the lease payments, it is usually better to just buy the car.

 

[TxTortoise]

Useful, if you want to run some scenarios... Lease vs Buy A Car | Bankrate.com

Residual on the base 2020 Tesla Model X they just quoted me was about 54%. ($47K residual on $85K price). When I looked at current asking prices for 2017 models, it somewhat suggested actual residual is greater than that, at the moment, in the 60s. The calculator above reflected a $10K+ benefit to buying vs leasing in Texas. So save $10K by buying, but then deal with all the joys of selling a vehicle. ;-)

 

[euro2012]

How long was the term of the lease that they quoted you on?

 

[TxTortoise]

36 month lease and 72 month buy model. Zero down on the lease. See attached

 

[exxer]

36 month lease and 72 month buy model. Zero down on the lease. See attached

I want to see the final agreement after you submit your application to Finance.

Mine is stuck in Finance hell after they gave me these estimates that are non-binding. I submitted my agreed terms and they came back with changed residual (which they did not show on the lease), which increased the monthly payment and total payment by $10k over the lease period.

Then my lease terms were changed a third time (total payments increased $2k more) and auto-accepted for me, now it’s pending a $22k+ down payment (despite a 830+ Fico and almost $300k stable income) and Tesla tells me im supposed to get a call from the finance director. That was 2 weeks ago; no call.

Looking forward to your update.