Articles, Blog

Why Do Rich People Lease Their Cars? Paying Cash V.S. Leasing V.S. Getting A Loan

Why Do Rich People Lease Their Cars? Paying Cash V.S. Leasing V.S. Getting A Loan


– What’s going on guys? So today I have a pretty
cool video for you. I’m gonna be breaking down the difference of buying a car in cash, taking a loan out on it, and leasing it. Now you might have heard whatever you’ve already been taught now. I was taught, okay you should take… You can take a loan out on a car, but you should never lease a car. And you were probably
taught one way or the other. A lot of people are taught, oh you can only afford
what you can buy in cash. Now, whatever you think, just please stay and watch this video because by the end, I want to change your mind. Now it’s different situations depending on what you’re buying and a bunch of different factors, which I’ll break down in here. But if you’re wondering why so many people with so much money lease
their cars, I will show you. And it’s probably not
the reason you think. So stay til the end, bear with me here cause this is a pretty cool video. And it took me breaking it down to understand it myself because of what I was previously taught either whether it was my parents or just seeing and not
knowing the full story. Cause I break it down and it looks like one option’s the best, but when you add in a couple other factors, that one’s actually the worst. So let’s just jump right into this. So the first thing, before we start is we’re gonna assume this is one person who has a car fund of $537,500. Which you’ll understand why
it’s that amount in a minute. The cost of the car they’re
looking at is $500,000. They’ll own the car for two years. And they have a credit score of 700. So… I technically did this for myself, but this is what we’re
looking at right now. So assume this is the same
person for all of these. So the first thing is if
they buy the car in cash. Now, why buy a car in cash? Well, you’re not gonna have a car payment and you’re gonna pay no interest. So a lot of people think okay, no interest, it’s gonna cost me less. So if I can buy the car in cash, that’s what I want to do. Now what are the negatives
of buying a car in cash? You will have to pay sales tax on it. And you’ll have 500,
this should be $537,500 because of tax, which you’ll see in a sec. Tied up in the car, which
is an opportunity cost. You could be doing other
things with that money. Such as investing it. Now the car price, so this
is for buying it in cash is $500,000 in California,
again I did this for me and wanted to share this with you. The tax is seven and a half
percent if you’re buying a car. Now I know there’s other loopholes like Montana license plate,
you can register it there and not pay sales tax and
drive it wherever you want. And it’s legal that
way, so there are things like that to take into consideration. We’re gonna pretend we
don’t know that though. Cause that’s, not a lot
of people know that. So 37,500 in tax. So our total out of our pocket is we’re putting $537,500 into this car. Cause we’re not taking any money out. We’re not taking a loan,
we’re not financing anything. And we’re gonna assume we’ll
be able to sell this car for $450,000 in two years. So our total cost over two years, if we’re buying it in case,
we don’t pay any in interest. We lost our money in tax for the car. And then we lost $50,000 in depreciation. So our total cost to own
this car for two years was $87,500. Not another video topic,
but it’s crazy to see that’s how much it costs to drive a
$500,000 car for two years. Which might seem like a lot, but comparing it to a $500,000 car, it’s not too bad. But one thing to understand
here is the opportunity cost. Now I’ll break this down more at the end if you have trouble
understanding opportunity costs. And I’ll make it make more sense at the end, so stick with me. So opportunity cost,
we could have invested I say 10 percent, you can say the average is seven or eight percent. I used 10 because I know I can get that. We could have invested that $500,000. Well, $537,500 at 10% return
on our investment a year. Whether we’re doing it in stocks, if we’re doing it in
real estate, et cetera. So I just put 500 and that means we’re not making 100,000 a year that we could be making if we didn’t have 500,000 in our car. If we had zero in the car, and we’re just making
payments or something, then we would have been able
to make an extra $100,000 which is our opportunity cost. So total cost with
opportunity is $187,500. Now I will break this all
down at the very end for you and make it make sense. So taking out a loan, let’s talk about taking out a loan now. Positives, it’s a lower interest rate. It’s a lower payment and you can leverage some of your money. You have to do a down
payment most of the times. Negatives, you’re still paying sales tax. You’re paying interest on it. And you’re having a decent amount of money you’ve gotta put down tied up in the car. Again, this will vary
depending on the individual. For me, I would have to put
about 40, 50 percent down. So for this example, car
price again, 500,000. Tax we already know,
seven and a half percent. Our down payment, I’m
saying we put 200,000 down. And our loan, I said we
get three percent interest. Now that’s kind of average, you can usually get two percent if you have 750 credit score. Three, four percent’s kind of normal. So I just put three, right in the middle. And that means we’re taking
out a loan on $337,500. Our monthly payment will be $7,500 about. And again, we’re pretending we don’t care about the monthly payment at all. We’re gonna do whatever’s
gonna cost us the least over the two years. And we’re gonna sell the car in two years, again for $450,000. Because either way we own the car, it’s gonna be worth the same amount. So that means for owning
the car for two years, we paid $14,671.11. If you wondered how I got this, I looked at an amortization table which just shows you
how much you’re paying towards interest at the beginning, which obviously it’s front loaded. And how much you’re
paying through two years. So this is the total cost
in interest over two years. If we sell the car, obviously
with front loaded interest. Which is normal. Tax, 37,500, we know that. And 50,000 in depreciation. So our total costs, taking out the loan. Is gonna be $102,171.11. Now our opportunity cost for this one. We had 300, oh I’m sorry
that should be $200,000 at 10 percent a year, which
we have tied up in the car. Which would make this 40,000. So our opportunity cost is 40,000. Let me change this, because
I can’t do math apparently. So our opportunity cost is 40,000 overall that we could have
invested that $200,000 instead of putting it in the car. And made 40,000 if we
can get 10 percent ROI. So our total cost here is 142,000. Now, what if we do a lease? Now with leases, there’s
so many different kinds. You have to know what you’re doing with leases to not get screwed over. So some of the things to watch out for is they’ll make the price of
the car cost way, way more over the life of the lease than
if you just took a loan out. Because it looks better up front, but you have to really look into it. You can get… So for this example, the only
lease I would ever really do is an open ended lease so I can get out pretty much whenever I want. With a buyout option. So they’ll say, okay
first year, this month, let’s say after 18 months
you want to get out. The car is now worth x amount. After two years, it’s now worth x amount. Now, these, for the loan and for this, it’s based off of a four year term. Now with the lease, it is positive. So positives, you don’t
put any money down. There are some leases you will
put some down for this one. I’m saying no money down because I was talking to people and
this is what I was offered. So, no money down. With leases, you don’t pay sales tax. And you can leverage your money. Now one thing with leases and loans. A little different, now if this is gonna be a business vehicle, obviously there’s restrictions when
it comes to luxury car tax. How much you can actually have, how much your car can be worth. That’s a business vehicle, and a couple other things like that. But with a lease, if it’s
100 percent business car, this isn’t advice, this is what I do. I don’t do this with my Lamborghini. You take out a lease, you
can write off 100 percent of a lease for a business,
but you can’t do that with a loan, however with a loan you can give yourself a car budget. It gets complicated. I’m not gonna go into the
tax side of it in this video. So, positives, no money down, no sales tax, you can
leverage your money more. Negatives. You’re paying a higher interest rate. For this one, I said
it’s about five percent. Could be a little more. Five, seven’s pretty normal on these. Four to seven. Lower value of the car at the end. So with the buy out option, technically with a lease
you don’t own the vehicle. With the other two you do. Now, one thing to watch out
for is getting screwed over. Is the buyout option they give you. Okay, I’m buying the car at $500,000. But they could be like, alright your buyout option is $400,000 at the end instead of 450 which it would
be if I own the car outright. Because they’re obviously gonna want to make money somewhere. So higher interest rate, they’ll give you a lower
value of the car at the end, again because they’ve gotta
be safe and resell it. So they need their margin in there. And you’ve just got to make sure you’re getting the right type of lease. Like I said this one would be an open ended lease with a buyout. So if you want to look into that go ahead, I’m not gonna explain it in this video. And it’s easy to get
screwed over if you’re uneducated about leases. So do your research. So for this, the car price, again 500,000. Tax, we are paying none with a lease. Our down payment is zero. Now sometimes this can be a little bit. It’s usually not much. On this kind of car it
would maybe be 40, 50 grand. But again, there’s ones with zero. Now, our lease, we’re taking out a lease for 537, oh, sorry $500,000 in general. I can’t do math. And our monthly payment is $11,500 about. And we’re gonna sell the car
in two years for 425,000. Now if you noticed, I put 425,000 here, I put 450 on the others
because with a lease, they’re probably gonna low ball you more on the buyout option throughout
the term of the lease, the value of the car will obviously depreciate as you drive it. Now this is with a zero… With no max mileage per month. Cause a lot of them, if you’re looking at high end cars like this car, you can drive 2,000 miles a year. That’s not what I’m looking for. This does not have a cap on this one. Now obviously some open ended ones will. So we’re looking at 425,000. So an extra 25,000 we lose in depreciation from doing the lease. Now our total costs over two years will be $38,815.12 in interest. So obviously about two
and half, three times the amount of interest
as taking out a loan. Cause, again, five
percent instead of three and against more money. (Clears throat) Sorry hitting puberty apparently. Depreciation, $75,000 gone. So our total cost to own, or I’m sorry to lease the car is $114,000 about. Now, opportunity cost is zero because we’re gonna go invest that money. So that brings our total to $113,815.22. Now, let’s compare them all and see. So if you want to understand opportunity cost real quick, read this. Basically says the money
you have in the car, you can invest at a higher
interest rate than… A higher ROI than your interest rate then you would be making
money technically. So our total cost over two
years for A, for buying cash. We already saw, our total cost was 87,500, however so we’re starting 537,500. Each person with the car is. Now, our ending total, since our only cost is 87,500 is 450 and we
didn’t make any money over those two years from our car money. Which you can see right here. Because it was all tied up in the car, we weren’t leveraging it. So keep this number in mind. We’re left with $450,000
at the end of this. And they all started with the same amount. If we took out a loan, so our total cost over two years for taking out the loan, we started with 537,500. Our costs were 102,000 about. And we took out a loan
at three percent interest for $337,000. Therefore we’re able
to keep that much money that we would have otherwise put down if we bought the car in cash. Because we are leveraging
the bank’s money. And we invest that money
at 10 percent ROI a year. So for two years, we made $67,500. So we’re gonna add that
back into our total. So if you take this right
here, what we started with, subtract the cost right here, and then add in the money
we made from investing our “car budget”, we are
ending with $502,800 about. So you can see how big of a difference this is when you factor
in the opportunity cost. And you put it in the way of, okay, I made money here instead of just saying oh here’s the opportunity
cost I’m gonna subtract it. So you can see, starting total is the same for both of these, and what they ended with
is $53,000 different. Even though you’re paying
three percent interest here. So let’s see what it
looks like with a lease. Now with a lease over two years, again starting with the same amount. Total cost is $102,171.11. We put zero dollars down
and we’re able to keep all our money and invest at 10 percent. So we made $107,500 over the two years. So our ending total is about $5,000 higher than what we started with. So our ending total, $542,828.89. Starting with 537. Now you can see, that’s a big difference when you take the paying cash, you end with 450, same starting amount. Or do you end with 542? That’s almost $100,000 different. Even though you’re paying more interest. You don’t technically own the car, and you’re paying more for the car over the life of owning it. Now, our totals here, so for cash, after two years of owning that car, we’re negative 87,500. Loan, we’re about negative $35,000. And for the lease, we’re positive 5,000. So you can see how big of
a difference this is here. Between all three, there’s about 50 grand in between each, so it’s
a big, big difference. Now one thing to keep in mind. This is gonna be different for everyone. The example I gave here, there’s a lot of money
on the tax of the car. It does depreciate a lot. And it’s different factor
for different people. For me, I don’t care
about the monthly payment. I care about how much it costs me over the life I own the car. So things will vary on this completely. I’m not saying leasing is
the way to go for everyone. For most people, they won’t
invest that money anyway so paying cash or just taking out a loan would be better than leasing for a normal, average person. Now if they’re gonna invest
that money, it varies. So things to keep in mind. How much money does the
person have to put down? Price of the car and sales tax. Do you have sales tax? Your credit score, aka what
interest rate you can get. The type of leases or the type of loans. Sales tax of the car again. Will you invest your extra car money if you finance the car or are you not actually gonna invest it. If you invest it, what kind
of ROI can you get per year? How long will you keep the car? That depends also if you look
at the amortization table. And if you’re trying to buy a house, can you increase your debt? So the difference between buying in cash and leasing it, you
can see with the lease, my debt is about $11,500 a month. My debt with buying it cash is zero. So will that effect me if I’m trying to take out money somewhere else, aka buying a house or something like that? So just some things to keep in mind. Now, again, I thought you
should never lease a car, I didn’t understand why people did until I actually broke
it down and looked at it. And this is what you guys
have to do with anything. Whether people are
talking about buying cars, buying houses, or just anything like that. Because you hear so many things. Oh you shouldn’t rent houses, oh you shouldn’t take out leases on cars, they’re high interest rates. You have to actually
break the numbers down and look at it, which
I really enjoy doing. So it’s not too bad. I hope you guys got some
good value out of that and I’ll see you guys
tomorrow in the next video.

Tagged , , , , , , , , , , , , , , , , , , , ,

100 thoughts on “Why Do Rich People Lease Their Cars? Paying Cash V.S. Leasing V.S. Getting A Loan

  1. your depreciation value is way tooooo low. a 500k cars maintenance is $$$$. so, your figures are way off.

  2. $500,000 car!? The aren't usually that stupid. A $500,000 car MIGHT be worth $250,000 in two years. This guy has no concept of reality.

  3. buy a 35k dollar car and invest the 500k for the life you own the car 10/years. the longer you own a car the more it pays off. 10 years/ 100 – 150k are ususally very cheap from a maintenance standpoint.

  4. Nice job! I was genuinely surprised by how little these supercars depreciate in the first two years of ownership.

    For next time there are some details you got a little wrong. No big deal in your case, but people running similar analysis with different amounts/timeframes could get things very wrong with this methodology.

    Planning Error – ROI base-rate neglect. When calculating ROI, in particular for the general public, you shouldn't say: well I know I can make 10% ROI even if the average is only 8%. You should just use the baserate of 8% (this is called baserate neglect it's part of the planning fallacy).
    Math Error – ROI calculation. For interest calculations you an exponential equation, else you are neglecting the compounding part of compounding interest. For the purposes of example lets do $100,000 over 5 years. The way you are calculating you'd get 100,000*0.08*5 = 40K vs the actual value 100,000*1.08^5 – 100,000 = ~47K
    Math Error – Opportunity Cost – Just because you put $0 dollars down on the car, doesn't mean that you actually have $537,500 for investment. You gotta pay the car note/insurance, so the amount you have available for investment decreases with each payment.

    I'd like to see this analysis done monthly, with 1-2 months shown as an example, and then you just let us know what the actual output is. I'd love to see you do this on more commonly leased cars (like a mid-tier Audi). ~Later

  5. You do actually pay sales tax on a lease. In some states that's sales tax on the entire price of the car, and in other states you only pay tax on the difference between the sales price and the calculated residual value.

    Also, only 10% depreciation in 2 years is completely unrealistic. Most cars depreciate 10% driving off the lot. Luxury automobiles typically lose 60% of their value in the first 3 years. Your resale value after 2 years is maybe 300-350k unless you don't drive the car at all.

    The fact is, owning a brand new car for two years then selling it is just a dumb financial move. If you want to burn your money you can do it, but that's what is it: burning your money.

  6. Don't forget total tax deductibility of the lease payments vs only deductible interest and depreciation for loan, and depreciation only for outright purchase. Usage may vary.

  7. DO NOT LEASE! Leasing is a writeoff (business ppl only) and you own nothing at the end of the lease. Be practical and finance something you like, and keep it once paid off. Also your opportunity cost is insane. You are telling me you are returning 37.4% on your investment money? Bullshit. On a good year, short trading I can make 20%… and that is because I have training in it. The average person will maybe get 6%

  8. so by your concept if you can get a loan for 0 down and a rate of 5% that would be even better than a lease.

    I would just buy a 30k car and drive that for 8ish years.

  9. The length that people go to justify one’s own purchase never ceases to amuse. The next thing you’re going to tell me is a fool and their money are not quickly parted….

  10. You ignored the monthly payments on the financing and leasing, and you also can't guarantee 10 percent over the short term

  11. I would like to see a comparison using balloon financing. Similar payment to a lease in the short term, but it would be more costly long term.

  12. I lease because I get to enjoy the cars best condition (first 3 years) and I’m not responsible for anything that breaks. Yeah at the end I don’t own it, but why would I want to own a luxury vehicle? When parts start to go the price you pay to fix it is astronomical. And every 3 years I choose a different new one. THE KEY to this is to not pay for it yourself of course. The key is to pay for the car using your cash flow of your rental properties, investments or you business profits. Not paying for it with half your paycheck if your an employee

  13. This is not fully true. How are you making those payments? That comes out of income. If you were to buy you would invest that money into an investment which you didn't calculate…

  14. Shouldn't you need to include your monthly lease pmt into total costs adding approximately 264,000 over a two year period

  15. Owning an old car, making it a monetized car project on YouTube while learning DIY mechanics, just like an alpha male hobby over the weekends lol

  16. Leasing is great on an expensive car, but a car at 30-40k it is better to buy.
    Rich people have a lot more money to waste on cars.

  17. You dont care about the monthly payment? How many people can say that. Does what you are saying apply to normal people?

  18. $450000 is a very generous resale value on a $500000 vehicle after 2 years. For one thing there’s almost no market for vehicles like that, so finding a buyer will be a challenge. Less demand means lower cost too. Typically, very expensive vehicles depreciate faster than economy cars anywhere.

  19. Thanks for the video. Great stuff. Does this make sense for a 30k car or truck? Same formula, I would think it would

  20. I feel like you are making up half of what you are saying but I don't know if you don't know what you are talking about because I don't know what I'm talking about.

  21. If I had half a million in my pocket, I wouldn't go for a car that's worth so much.
    I'd be happy with a 100k car, in this case Audi RS6. It's a shame that ride isn't available in USA.

    You guys would have a blast in that wagon. 560 hp on it and flies like a goddamn freight train. 😀

  22. Also, I'd like to add that this video has more information than any other I watched when it comes to financing.
    I would definitely look at financing option if I would go for 250k car. I'm so thankful and grateful for the info you're providing. 😀

  23. If u buying a car 500k in cash u will get the car cheaper.the 80k u say it will cost to drive it for two years u can write all that off and the sales tax is a write off. Oh yeah if u have 500k your Credit score will be more than 700 . If u lease a 500k car u will have to put money down

  24. Wow I need to take an accounting class…you taught me so much.. I'm going to Carmax buy a late model used car… Stack some$$$$$ then lease a Lamborghini..😄👍🏽thanks for ur knowledge Sir

  25. Because they can pay good insurances if anything occurs and change cars more often without having to loose money to depreciation, and most of the time they know they won’t be out of cash soon so they don’t need to posess the car in case of need to reselling it to gain back money. Plus it leaves a still nice car to buy to less rich people who want to afford luxury buy buying the car back when it’s returned after the 2 year lease contract👍 they are rich so they don’t bother about insurance raise if they claim for accidents to bring the car back in like new condition

  26. Why did u do a video on a cash amount most of your viewers like me wont be spending. Do you have a simpler video with an amount under $50,000???

  27. If you had a 750 credit score and got the car financed the biggest mistake you could do is put money down

  28. Don't forget cost of insurance. Lease tends to have higher requirements which can be just as expensive as car payment.

  29. Good analysis: if business use of the car, and you alluded to this, but one should not just do a pre-tax analysis, most people are not buying Lambos, but of course the principles should apply no matter the cost, and it is often the case that states do levy sales taxes in leases and so people should look at their state law…you also said that you need to see if you will have sales taxes or not. And MANY people do not invest the cash not deployed in the auto decision, they consume with excess funds. Many people say they will, and earn 10% a year, but their behavior is not so disciplined or they don't earn what they think they will over a 2- or 5-year period.

  30. same to everything, like iphone, computer, every human made object are implanted with planned obsolescence, you want to own it, it going to rot your money and life

    if you owned a car or house you know it is the life long maintain fee that really make people poor

    clever people only lease or borrow

  31. You forgot to add 24x monthly payments to your lease calculation. So that and interest and depreciation work out way more

  32. Anyone saying that they can guarantee you a 10 percent return a year is lying. You could get lucky and have entered at the right time or you could have entered the wrong time.

  33. Why the hell are you using such large number when cars don't cost 500k? Its silly to use a number that has zero bearing on actual car costs for an example.

  34. Being an investment professional, I can understand why the last 10 years of market run-up makes people think they can assume 10% ROI on investment, but nobody can be sure your investment is even going to be positive let alone 10% in something risky like the stock market. If you would like to have a hard budget, find a fixed income asset that guarantees a (lower) return such as a debt instrument like a bond or even a US Treasury bill and commit funds until expiration. Lets say you buy 100k of 10Yr notes @ 3% — you can they be sure that for the next 10 years, if your interest rate is less than your 3% investment yield, then you will have a positive opportunity cost to factor into your purchase maths.

    You may consider shorter term decent grade corporate notes that have a tenor equal to your loan/lease and possibly higher than a 10yr bond… but regardless of the instrument, someone with 6 figure chunks to put into opportunity cost should give up a bit of upside to have solid calculations with guaranteed Yield to decide. It would be a hard lesson to make your decision and end up with a negative ROI and have made the worst choice in the end.

  35. Because rich people having short attention spans and getting bored easily get tired of having the same car for too long. You could buy a cool luxury car and be amazed with it for about a year and then the excitement wears off and you want something new.

  36. I don't need to watch the video, I can do math. Basically it all depends on how much and what you drive. I found the cheapest and most reliable way for me is to get the most stripped down truck I can get, new, pay cash and keep it for about 10 years. I only drive about 3-5k per year. I keep up on NEEDED maintenance, oil changes, filters etc, brakes and cheap tires. No cabin filters or any of that useless crap. New battery every 3 years. The last truck I got rid of in 2015, bought in Dec of 2006, I paid less than 13k (including all taxes, 4 year registration, 5 year inspection) new, full size 2007 Chevy Silverado. Got rid of it with 33k, I put 2 tires on it and a few batteries over the years and the dealer gave me $4500 in Nov 2015 in trade. Also with a stripped truck that isn't worth much you are not required to keep full coverage so I just kept liability after the first 2 years. Present vehicle I paid around 25K in Nov 2015, a Tacoma 4 x4. Now have less than 8k on it and will probably still have the truck when I croak.

  37. Does this still count if you don't have all the money for the car upfront? Bc then you wouldn't be able to invest it right? Or is it savings per month?

  38. It just seems to me that if a person had $500k to drop on a vehicle, they should have solid investments making them money without worrying about loosing that 10%.

  39. Think outside the box.That's why they are ritch in the first place.l buy cheap cars than l finance other people that don't have good cridet scores which pays off what ever l feel like driving without me paying for my own private car.See simple math.

  40. I got help from lutherangrants; com for my business funding .They sent me over $40,000 from their grant schemes .

  41. No, millionaires don’t lease cars. Car leases are the most expensive way to operate a vehicle. Millionaires (at least the self-made ones) don’t get to where they are by being stupid with their money. In fact, a number of millionaires I know opt for public transportation or Uber, how’s that for “opportunity costs”?

  42. I do it differently. I purchased a couple of flip houses, flipped them, and used the money to purchase a brand new 2010 SRT8 back in 2010. I keep the vehicles for 10 years. I plan on flipping a couple of houses this summer and purchase another Jeep SRT8 in 2020 for around $70,000. I will drive it for 10 years until most of the Deprecation is gone. The resale value of the 2010 is $20,000. Which brings the price down to $50,000 plus 6% sales tax here in Texas for a total of $53,000. This will be equivalent to $442 per month for a $70,000 Vehicle!

  43. I don't know any supercar that loses only 50,000 in two years depreciation. usually more like 100,000 or more. It is very hard to find a buyer on your own and card dealers will pay you only 80% of value

  44. SOMEONE HELP! still so unsure…i drive about 11,000 miles for work a year. im used to leases but never owned a car. i could care less what i drive.

Leave a Reply

Your email address will not be published. Required fields are marked *