Model Y lease vs buy evaluation

[JHCCAZ]

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Putting money down -- known as a Capital Cost Reduction -- on any lease is generally NEVER a good financial decision. NEVER. ...

I understand this is the pre-offered conclusion. But I'll play along:

So you are basically prepaying your monthly payment.

As an example, take a base Model Y with no upgrades at all. On a 36-month, 10K per year lease, the Tesla site provides a monthly lease payment of $505 (before tax). Now, simply change the $4,500 to $0 on their calculator. Your payment will increase by $133/month to $638. Nice, right? Wait, let's think about this. What is $4,500 / 36? It's $125. So, your big "down payment" saved you a whopping $8/month in finance charges or $288 over the life of the lease. If I told you I'd sell you the car for $288 less if you gave me $4,500 up front, you'd look at my like I'm an idiot, right?

OK, well understood example. Now let's simply turn this around. Suppose I consider my $4500 and I say "No way do I want to let those Tesla (or bank) thieves have my money ahead of time. (Leveraging off your cartoon theme, Daffy Duck would say "thothe Tethla crumm-bummth!"
So, I'll just keep my $4500 and dole it out to them month by month. Ha!

Except that now, as you noted, my payment went up by the basic $4500/36 = $125, plus the $8/month they charge monthly for the increased financed amount. Using a simple loan calculator, this corresponds to a finance interest rate of 4.07% (a handy number to note for other discussion, but possibly it's just from a 4% rate, with the payment rounded off to even dollars).

"But now I get to keep the interest myself! Ha!" Except, where can I invest my $4500 and get 4% these days? Not in a bank account. Not in a typical bank CD or an annuity with monthly distributions. Sure I could buy Tesla stock or Bitcoin or play Las Vegas slots or whatever, and those are all wonderful but they have no place in a brass-tacks lesson about Lease vs. Loan vs. Cash purchase. We could start arguing about inflation of future earnings over the 36 months but I hope not, and generally it won't be 4% anyway. --- Please correct me if you differ, but in my view it's always financially smarter to pay off or pay down debts that have higher interest charges than what one can make by guaranteed investments of the payoff balance.

Question: do you also tell people how foolish it is to pay cash for a car (or for any other depreciating asset).

I fully admit that I'm not a CFO. However, in my experience the most basic advice is that it can* make sense to lease depreciating asset (cars or equipment) but purchase appreciating assets (real estate in traditional scenarios).
*Though there are always bad deals on offer.

Another reason why it's not a good idea to put money down on a lease is it is equity you cannot get back. Prime example is you are leaving the store and car gets totaled. Thankfully, nobody is hurt. You're out $4,500. Yes, some leasing companies will offer you gap insurance to protect against this (not sure if Tesla does or not), but now they are just making money off you for making a bad financial decision, because you should not have put money down to begin with.

from the Tesla Lease Information Page: "Note: Your lease comes with gap insurance."
And, if it did not and I had to pay for it separately (which I would) I completely do not understand the argument that it is a special lease-induced loss pf ,u money if my car is totaled:

• If I originally had paid cash, the car is totaled and hopefully I got full-value insurance to protect my purchase. If not I lost considerable money.
• If I originally financed the car with or without a down payment, the car is now a total loss and again, hopefully I bought gap insurance to pay off the lender.
• If I leased the car, with or without a down payment, the car is now totaled and my Lease includes gap insurance. If Tesla didn't include it which they do, I would buy it and be glad I did. Either way, there is no specific connection to me giving them extra money for

In these comparative total-loss scenarios, I see no connection to me being a bigger sucker because I leased, even if they charged for the gap insurance which BTW they apparently don't. We already covered the extra-helpful comment about "bad financial decision" as the main topic above.

Really to me, the whole issue of calculating a few dollars per month delta (even though I think it works out positively) is not the main point. I try to live off my monthly income, and I'd rather pay my saved cash up front to keep my cash-flow budget in order and not feel that my car payment is weighing on that, or that it might encourage me put any monthly spending on a 20% credit card . I suspect that many others might share this psychology. If I knew it was costing me heavily, I'd try to change, but that's not how I read it.

In any case, I'm happily having this discussion with you in good faith, I have no doubt that you must have greater financial experience and savvy as a CFO, so I'd love to have your response. I simply explained, in the context of your advice, why it still makes sense to me. Thanks.

 

[carguyeddie]

I'd rather pay my saved cash up front to keep my cash-flow budget in order and not feel that my car payment is weighing on that, or that it might encourage me put any monthly spending on a 20% credit card

If you carry balances on credit cards or you likely carry balances, you'd be better off using the $4,500 to pay them down/off or having the cash on hand to avoid using them. And if somebody has 20% rate cards, my frank suggestion to them would be if they are buying/leasing a Tesla they should re-think their financial priorities until they have improved the financial situation. But, hey, we are human and we don't always do what makes financial sense.

Question: do you also tell people how foolish it is to pay cash for a car (or for any other depreciating asset).

Of course not. And I never said one shouldn't pay cash for a car. Often, one should. It depends on the interest rate, liquidity, etc. I said it doesn't make good financial sense to put money down on a lease.

in my experience the most basic advice is that it can* make sense to lease depreciating asset

I never said it never makes sense to lease. I said it does not make sense to put money down on a lease b/c of the way the math works you are simply prepaying a portion of your monthly payments.

Generally, however, a lease will result in a higher TCO than a purchase. There are still reasons to consider leasing. I sometimes lease. To wit, my current DD is a 2019 Alfa Romeo Stelvio Ti Sport. I was concerned about reliability and the lease was "subvented" by Alfa with a MF that equated to lease than 1%, so it was a silly good ideal. The interest portion of the lease payment worked out to be $27/month. I leased it with $0 down (of course). It's been my favorite car I've driven. I'm 10 months from the end of the lease and I am selling the car vs. buying it. I'm making almost $5K above what I owe on the lease (not to mention that I am avoiding paying the remaining 10 payments, plus the lease disposition fee), which means I significantly lowered my TCO for the time I've driven it. It worked out very well for me b/c the market value of the car is well above the residual value in the lease. But this is only good for me because I have the ability to buy the car, sell it at its true market value and pocket the delta. If I did not, then this would mean I paid more than I should have for depreciation. Remember, the depreciation charge is the biggest part of a lease payment.

Currently, Tesla does not provide a direct buyout option for Model 3 or Model Y lessors. That alone may dissuade me from leasing because the depreciation built into the lease is WAY above what the market is demonstrating. It that continues to hold, then leasing is way more costly than buying when factoring in TCO. The risk, of course, is that the future re-sale changes drastically for the worse as more and more used Tesla's are available and other similarly capable BEV's start to hit the market.

In these comparative total-loss scenarios, I see no connection to me being a bigger sucker because I leased

It's good that Tesla Leasing includes it. Many leases do these days. However, it only covers your remaining lease obligation. It does not protect your "down payment" or any payments you've already made, which are lost entirely. This is more of an issue if the total loss happens earlier in the lease. Again, leaving the Tesla store and you get whacked. You've lost your $4,500 entirely. Since you convinced yourself putting money down is smart, say you put down $9K instead of $4,500. The entire $9K is gone.

It is true that in a financed purchase you potentially have some of the same issues and so this is not solely a lease concern. When a vehicle is owned or financed, the insurance company will pay the market value of the car at the time of the total loss. Based on used Tesla values, one would probably be safe in this case. Further, certain insurance companies replace a purchased car if it happens in the first six months, so in this case it would not be an issue. So there are more variables to consider when the car is owned/financed than leased. And while it is possible one may be not much better off than in a lease situation, there are plenty of cases when you would be better off.

 

[GeekyDoc]

I did this comparison since prior to this, I would always lease. Mind you I was looking at 36mo/15K miles per year. The MF they quoted was 0.001771 and the lease interest rate was 4.25%. For me to finance, I was able to get 2.13% for 72 months. I would have to put $4500 down in either scenario.

 

[JHCCAZ]

Thanks for all your comments - indeed I think I understand the total-loss scenario better with regards to down payment. I still want to use my cash-on-hand to minimize the monthly outlay from my paycheck - but with your advice I can do the equivalent by holding the cash in in my own bank account and paying from there, supplementing the dwindling cash with a smallish monthly transfer from my income. I think we both agree that this will cost a little extra but that it eliminates the loss-of-down-payment scenario if I were to lose the car. So this is good.

If you carry balances on credit cards or you likely carry balances, you'd be better off using the $4,500 to pay them down/off or having the cash on hand to avoid using them. And if somebody has 20% rate cards, my frank suggestion to them would be if they are buying/leasing a Tesla they should re-think their financial priorities until they have improved the financial situation. But, hey, we are human and we don't always do what makes financial sense.

Yes I think we both agree on that. In case it wasn't clear, I was explaining that I don't want to have any temptation t do so, part of the planning for a minimal monthly car payment being sourced from the paycheck.

Of course not. And I never said one shouldn't pay cash for a car. Often, one should. It depends on the interest rate, liquidity, etc. I said it doesn't make good financial sense to put money down on a lease.

Here I'll admit that I'm a little confused, given the total-loss risk being discussed - doesn't a cash purchase "100% down" incur maximal such risk, which is the key reason for advising against down payments? There is no financing entity to assign a gap-insurance rider, so the purchaser carries all of the total-loss gap risk. Perhaps (only guessing) your advice might be:

If you are quite well off and the cash price is no big deal, then the gap risk is also unimportant. But if you had to struggle to put together this cash and/or you can't easily raise more, consider a loan with no or low down-payment to keep your cash around and fold gap coverage into the the deal.​

I never said it never makes sense to lease. I said it does not make sense to put money down on a lease b/c of the way the math works you are simply prepaying a portion of your monthly payments.

Generally, however, a lease will result in a higher TCO than a purchase. There are still reasons to consider leasing. I sometimes lease. To wit, my current DD is a 2019 Alfa Romeo Stelvio Ti Sport. I was concerned about reliability and the lease was "subvented" by Alfa with a MF that equated to lease than 1%, so it was a silly good ideal. The interest portion of the lease payment worked out to be $27/month. I leased it with $0 down (of course). It's been my favorite car I've driven. I'm 10 months from the end of the lease and I am selling the car vs. buying it. I'm making almost $5K above what I owe on the lease (not to mention that I am avoiding paying the remaining 10 payments, plus the lease disposition fee), which means I significantly lowered my TCO for the time I've driven it. It worked out very well for me b/c the market value of the car is well above the residual value in the lease. But this is only good for me because I have the ability to buy the car, sell it at its true market value and pocket the delta. If I did not, then this would mean I paid more than I should have for depreciation. Remember, the depreciation charge is the biggest part of a lease payment.

Makes sense, and that kind of car is one you'd rather not have to support as it approaches middle age, unless you're a die-hard enthusiast. If someone is anxious to help you get out of it with extra profit, it's an easy decision.

Currently, Tesla does not provide a direct buyout option for Model 3 or Model Y lessors. That alone may dissuade me from leasing because the depreciation built into the lease is WAY above what the market is demonstrating. It that continues to hold, then leasing is way more costly than buying when factoring in TCO. The risk, of course, is that the future re-sale changes drastically for the worse as more and more used Tesla's are available and other similarly capable BEV's start to hit the market.

I understand this very well. I'd prefer to have the buyout option as I said. But I also said that I'm on the skeptical side of the theory that the amazingly high resale values will persist for another three years, or that all current Teslas will become worth $100k as RoboTaxis. Ostensibly this is why Tesla wants dibs on the cars at lease end. But per your last sentence above, I think there's a ">0% chance" (quoting Elon) that this saga won't unfold quite that way, and that I'll get an email in a couple of years with a buyout option offer. If not that's perfectly fine.

It's good that Tesla Leasing includes it. Many leases do these days. However, it only covers your remaining lease obligation. It does not protect your "down payment" or any payments you've already made, which are lost entirely. This is more of an issue if the total loss happens earlier in the lease. Again, leaving the Tesla store and you get whacked. You've lost your $4,500 entirely. Since you convinced yourself putting money down is smart, say you put down $9K instead of $4,500. The entire $9K is gone.

It is true that in a financed purchase you potentially have some of the same issues and so this is not solely a lease concern. When a vehicle is owned or financed, the insurance company will pay the market value of the car at the time of the total loss. Based on used Tesla values, one would probably be safe in this case. Further, certain insurance companies replace a purchased car if it happens in the first six months, so in this case it would not be an issue. So there are more variables to consider when the car is owned/financed than leased. And while it is possible one may be not much better off than in a lease situation, there are plenty of cases when you would be better off.

I checked with my insurer (State Farm) about this. They told me there are presently no full-value-replacement programs such as others are advertising. On the other hand, they do a good job of paying actual market value based on comps research at the time of a claim (not some book value or standard depreciation formula). So to the extent that Tesla used values do in fact hold up very high, their payout, after an early and unfortunate event, should be close to a new-car value. But still, I will take your advice to eliminate or minimize the down-payment and manage that myself to avoid the gap risk.

 

[madan005]

I was debating this and decided to go with purchase simply because of sales tax exemption on EV vehicle in my state(WA). It wasn't very clear on how this exemption works for lease. SA doesn't give a straight answer on this.
In such an unfortunate event like 'Total loss' Do we really worry about Gap loss? wouldn't we/opposite party be claiming for lot other things from insurer?

 

[JHCCAZ]

In such an unfortunate event like 'Total loss' Do we really worry about Gap loss? wouldn't we/opposite party be claiming for lot other things from insurer?

Maybe carguyeddie or someone else can give you a more authoritative answer. But basically I think the answer is yes, this Gap issue could be the biggest cost, and I would offer these comments:

• A Total Loss does not necessarily mean you were involved in a collision that results in a valid claim against you and your insurance policy. If a collision, it could be entirely the other party's fault. Or you are in a No-Fault state. Or there was no other party, you drove into the water or into a concrete barrier. It could be not a collision, maybe your car was stolen or your garage burned down.
• Your insurance policy has several types of coverage.
  • The Total Loss discussion applies to your Collision or Comprehensive coverage depending on the circumstances as mentioned above, and I think this us where you incur the risk of Gap loss if you paid some cash up front and the market-value reimbursement doesnt pay that back to you.
  • Validared claims against you, that you are asking about, would come under Property Damage (the other car, building or whatever other property was damaged) and/or Bodily Injury (occupants of other car other injured third parties).
  • Medical costs to you and/or passengers in your car. These would be from your or the other party's coverages depending on the assignment of fault or No-Fault rules, and I think your non-automotive medical insurance may be your primary source of coverage if not claimed against another party.
  • Coverage for Uninsured/Underinsured (that should be collected from the other party but can't be)
• Of these coverages/cost types, I think the only ones likely to create out-of-pocket costs to you are the Collision and Comprehensive deductibles and (on the present topic) Gap failure to recover your sunk costs. Comprehensive and your personal medical may also have deductibles.

So I do think that in most accidents, even serious ones, the highest out-of-pocket cost to you could well be exactly what we're discussing: loss of up-front down-payment or purchase cash thar carguyeddie is warning about. This is assuming that you have normally-adequate insurance coverages but not the unusual New-Car-Replacement coverage.

 

[_ayn]

I just placed my order and went with the lease, looks like MF is 0.0017125, and residual is 50.5% for 3 years, did $0 down of course.

 

[BreatheEasier]

Does Tesla have a clear policy and pre-set charges for wear and tear charges at lease end? I was very used to BMW's $400 max per panel for damage over 2", and any dents within the 2" circle template they gave you were not charged. Even at the end of leases where I covered 45k miles, I've never had to pay for tires, either, and I've had small curb-rash on rims that they didn't charge for, even when I didn't rollover into a new lease (although I had to pay the standard $350 lease disposition fee). It was never a guessing game when turning in a BMW lease, and was very pain-free, at least for me. I've heard nightmares about lease turn in charges for other brands, which is why I ask. But honestly, the biggest reason I moved from purchase to lease with BMW was the crater left from their resale value when I was at 45-50K miles, which was well under their residual value for leases, so it just made more economic sense to me, especially since I was always zero-down on my leases.

 

[eghead]

I just placed my order and went with the lease, looks like MF is 0.0017125, and residual is 50.5% for 3 years, did $0 down of course.

Which sub-model was this for?

 

[_ayn]

Which sub-model was this for?

MY LR white, white/black, 19”.

 

[GeekyDoc]

MY LR white, white/black, 19”.

With $0 down would you mind sharing what your monthly payments came out to? I’m assuming 3yr/12K miles? TIA.

 

[_ayn]

With $0 down would you mind sharing what your monthly payments came out to? I’m assuming 3yr/12K miles? TIA.

3yr/10k miles, $690/mo

 

[hopmix]

Numbers I pulled.
Model Y $39,990.00
20’’ Induction Wheels -$2,000.00
Long Range All-Wheel Drive $10,000.00
Destination Fee - $1,125.00
Documentation Fee - $75.00
Order Fee - $100.00


Car Price - $53,290.00


Est. Financing Details Est. Monthly Payment $756.80
Term 36 months
Annual Mileage 15,000
Monthly Sales Tax - $60.89
Money Factor - 0.0017710
Cost Over 36 Months - $29,046.69
Disposition Fees - $395.00
Additional Charges
Est. Down Payment $0.00
Est. First Monthly Payment $756.80
Tire Fee - $7.00
Acquisition Fee -$695.00
License Fee - $346.00
Electronic Filing Fee - $30.00
Registration Amount - $268.00
Sales Tax - $60.81

 

[ScoobyDoo82]

Highest option I saw was 15K miles/yr. Is there a 25K option?

There is not. Not directly anyway... this is to encourage higher mileage customers to buy rather then lease and then turn in a vehicle with 50,000 miles after only 36 months. I inquired about this because of the same reasons. Was told that if I plan on driving more than 15,000 miles/year then a higher mileage lease would not be cost effective compared to buying.

 

[gigawatt1010]

I think if you come anywhere close to the mileage cap with your current non-ev car, leasing is not a good option. If this is your first EV, I can tell with first hand experience that you will be driving more and the overage cost can quickly turn this into a dumb financial decision.

Someone commented that there are tons of EVs coming out over the next few years so they don't want to commit to financing - while that may be true, judging by the recent new comers in the EV space, I'm not holding my breath. My 2016 Model S still looks the same as the new one and with a few minor cosmetic changes it can look the same(save for the interior and obviously - range).

There are some use cases where leasing may be a better option, but it's not for everyone,

 

[SoCalEric]

There’s not a world where I see the resale value for the Tesla Model 3/Y being only 50% (residual value) after 36 months.

Back in 2016 when a loaded Model S was 150K and then in 2019 Elon offered the same car for 99K, yes. These days as prices are increasing vs decreasing at the 3/Y price point, nope.

I would think unless running the lease through your company, the smartest play is to finance/purchase.

 

[Jaywalker36]

Can I purchase my Tesla using credit card.. down payment and all

 

[gigawatt1010]

Can I purchase my Tesla using credit card.. down payment and all

When we bought our Model X, I used Apple Pay to put the down payment. It was an existing inventory and I found it using the browser from our Model S

 

[ss81]

I was pro purchasing this car but then I sat down and crunched some crazy numbers and realized leasing is far better for me and the differential is low vs the risk. I've seen so many people ask the question so I did an analysis and posted on medium if anybody is interested

Should You Lease or Buy a Tesla — Results are In

Here is a Data Driven Approach

medium.com

TLDR;
The difference after 4 years of leasing vs financing and selling in 4 yrs is about $4700 CDN but there is a risk with new EVs flooding the market, battery efficiency, new hardware tech in cars, accidents on the car that the resale value if your buy/finance will be far than expected making it almost a wash or more lucrative to lease. The $4700 is really me hedging my risk, something I'm ok to do. I actually thikn the cyber truck, model 2 (future) will dilute the value of the model Y in the future let alone other EVs

 

[Liebo11]

Now that we are in December and the price has went up probably over 10k, does it still make sense to buy over lease? Questioning this from the perspective of "will the Model Y stay at 62k (that I am getting mine for, ordered last week)" and hold it's value to resell in 2-3 years? Or will it "normalize" and dip back down to 47-53k and then the 62k car I bought 3 years ago is way overvalued and a bad deal at the time? Part of me feels like this will be the new normal price BUT with production ramping up so much especially with Texas coming, I'm not so sure. Thoughts?