IRR for car loan?

[Riptrix]

I’m debating the idea of buying out my lease with a 5,500 down payment to lesson my finance charges, but need a minimum of 7,000 underlying for a car loan.
renewing the lease is about 2,000 down + taxes.
So, my thought was this…
With the money I save, invest it and over time and the compounding could potentially equal out all the monthly payments made on the lease.
I made a few assumptions regarding maintenance and salvage value for a six-year time frame and compared the cash inflow/outflow stream of buying out the car and leasing the car. In excel, I made a third column which is the difference in Cash flow from leasing-buying + estimated monthly return on initial principal saved by not dumping it into the buyout.
I ran an IRR on this six year time frame for this third column to synthetically create a “loan” on the lease and compared it to the interest rate charged as the financing rate. My decision then, was the inverse to our typical curriculum IRR, and take the option with the lowest interest rate charge rather than the highest.
Something just doesn’t seem right here, but the lease seemed like the better option with an estimate of 10% annual return on money saved and not sunk with the buy-out.
I thought this was interesting, and wondered if anyone’s ever used the IRR in the opposite way or if this makes any sense at all.

 

[ccyl]

when lease a car, always pay least amount of down payment

 

[chowder]

send me your email - i will send you a spreadsheet –

 

[CFANOLIFE]

over 6 years lease makes no sense in today’s market.
Forget the IRR and all that for a sec, it’s very simple math.
1) 6*12*lease payment plus any downpayment (usually you don’t have 6 year lease so you can just do 3 and 3, doesn’t really matter)
2) 6*12*loan payment + downpament (i’m assuming loan payment inclueds your taxes fees etc.)
Now subtract 1st from 2nd, if you expect your car to be worth more than this you are making money by buying. You can also keep bought car for longer than 6 years when it’s fully paid off.
Things to keep in mind:
Car prices are ususally bellow MSRP while lease is based on MSRP
Interest cost is lower than imputed rate in leases
If you change cars every 3 years or so then lease might make sense, but that depends on lease vs. buy offers for a particular car.
The interst you earn in the bank is so low that I disregard it for calculations here.
Also you can’t lease a used car (i know there are some exceptions)

 

[RIGWDL3]

By the car on your credit card and drive with no insurance.

 

[philip.platt]

RIGWDL3 Wrote:
——————————————————-
> By the car on your credit card and drive with no
> insurance.
haha

 

[Riptrix]

Chowder, I’d be interested in a spreadsheet to compare what I calculated. My email: [email protected]. Thanks in advance.
I also factor in that I live in chicago where potholes are plenty and salt trucks are very abrasive to paint, so even if I kept the car longer than 6 years, I can’t imagine maintenance not becoming a real burden.
Cash flow will be much more volitle with a 1,500 dollar timing belt replacement than a 200 dollar monthly lease payment known in certainty.

 

[rinald]

I am interested in that spreadsheet either, if not a problem. [email protected] thx.

 

[CFANOLIFE]

Riptrix Wrote:
——————————————————-
> Chowder, I’d be interested in a spreadsheet to
> compare what I calculated. My email:
> [email protected]. Thanks in advance.
>
> I also factor in that I live in chicago where
> potholes are plenty and salt trucks are very
> abrasive to paint, so even if I kept the car
> longer than 6 years, I can’t imagine maintenance
> not becoming a real burden.
>
> Cash flow will be much more volitle with a 1,500
> dollar timing belt replacement than a 200 dollar
> monthly lease payment known in certainty.
The only volatile amount is the trade-in value. Timing belt doesn’t come into play for first 6 years and doesn’t cost 1500 on a car that you lease for 200 bux. Even if you factor in extended warranty to cover additional 2 years (as most new car warranties are 4 years), you are still better off buying.
Can’t believe you guys here need some elaborate spreadsheet to figure out which one is better? And the real answer is neither. The best option is to buy a 3 year old Toyota or Honda and keep it for another 10 years.