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.