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Why Do Rich People Lease Their Cars? Paying Cash V.S. Leasing V.S. Getting A Loan - YouTube
Channel: Tanner J Fox
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what's going on guys so today I have a
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pretty cool video for you I'm gonna be
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breaking down the difference of buying a
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car in cash taking a loan out on it and
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leasing it now you might have heard
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whatever you've already been taught now
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I was taught okay you should take you
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can take a loan out on a car but you
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should never lease a car and you're
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probably taught one way or the other a
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lot of people are taught oh you can only
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afford what you can buy in cash now
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whatever you think just please stay
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watch this video by the end I want to
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change your mind now it's different
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situations depending on what you're
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buying and a bunch of different factors
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which I'll break down in here but if
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you're wondering why so many people with
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so much money lease their cars I will
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show you and it's probably not the
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reason you think so stay to the end bear
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with me here this is a pretty cool video
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and it took me breaking it down to
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understand it myself because of what I
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was previously taught either whether
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it's by parents or just seeing and not
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knowing the full story cuz I break it
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down and it looks like one options the
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best but when you add in a couple other
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factors that one's actually the worst so
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let's just jump right into this so the
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first thing before we start is we're
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gonna assume this is one person who has
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a car fund of five hundred thirty seven
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thousand five hundred dollars which you
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understand why it's that amount in a
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minute the cost of the car they're
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looking at is five hundred thousand
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they'll own the car for two years and
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they have a credit score of seven
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hundred so I technically did this for
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myself
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but this is what we're looking at right
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now so assume this is the same person
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for all of these so the first thing is
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if they buy the car in cash now what's
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the best why why buy a car in cash well
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you're not gonna have a car payment and
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you're gonna pay no interest so a lot of
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people think okay no interest it's gonna
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cost me less so if I can buy the car in
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cash that's what I want to do now what
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are the negatives of buying a car in
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cash you will have to pay sales tax on
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it and you'll have five hundred this
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should be five hundred thirty seven
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thousand five hundred dollars because of
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tax which you'll see SEC tied up in the
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car which is an opportunity cost you
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could be doing other things with that
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money such as investing it now the car
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price this is for buying it in cash is
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five hundred thousand dollars in
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California again I did this for me and
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wonder
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with you the tax is seven and a half
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percent if you're buying a car now I
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know there's other loopholes like
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Montana license plate you can register
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it there and not pay sales tax and drive
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it wherever you want and it's legal that
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way so there are things like that taking
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consideration we're gonna pretend we
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don't know that though that's not a lot
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of people know that
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so 37,500 impacts so our total out of
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our pocket is we're putting five hundred
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thirty seven thousand five hundred
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dollars into this car because we're not
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taking any money out we're not taking a
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loan not financing anything and we're
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gonna assume we'll be able to sell this
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car for four hundred fifty thousand
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dollars in two years so our total cost
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over two years if we're buying it in
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cash we don't pay any an interest we
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lost our money in tax for the car and
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then we lost fifty thousand depreciation
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so our total cost to own this car for
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two years was eighty seven thousand five
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hundred not another video topic but it's
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crazy to see that's how much it cost to
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drive a five hundred thousand dollar car
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for two years which might seem like a
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lot but comparing it to a five hundred
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thousand dollar car it's not too bad but
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one thing to understand here is the
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opportunity cost now I'll break this
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down more at the end if you have trouble
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understanding opportunity costs and I'll
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make it make more sense than so stick
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with me so opportunity cost we could
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have invested I say 10% you can save
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average in seven or eight percent I use
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ten because I know I can get that we
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could have invested that five hundred
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thousand dollars five hundred thirty
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seven thousand five hundred dollars at
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10% return on our investment a year
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whether we're doing in stocks if we're
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doing real estate etc so I just put five
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hundred and that means we're not making
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a hundred thousand a year that we could
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be making if we didn't have five hundred
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thousand in our car if we had zero in
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the car and we're just making payments
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or something then we would have been
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able to make an extra hundred thousand
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dollars which is our opportunity cost so
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total cost with opportunity is a hundred
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and eighty seven thousand five hundred
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now I will break this all down at the
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very end for you and make it make sense
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so taking out a loan let's talk about
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taking out a loan now positives to lower
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interest rate it's a lower payment and
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you can leverage some of your money
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you have to do a down payment most of
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the times negatives you're still paying
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sales tax you're paying interest on it
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and you're having a decent amount of
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money you got to put down tied up in the
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car again this will vary depending on
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the individual for me I would have to
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put about 40 50 percent down so for this
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example car price again five hundred
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thousand tax we already know seven and a
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half percent our down payment I'm saying
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we put two hundred thousand down and our
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loan I said we get three percent
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Interest now it's kind of average you
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can usually get two percent if you have
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750 credit score three four percent
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scanned of normal so I just put three
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right in the middle and that means we're
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taking out a loan on three hundred
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thirty seven thousand five hundred
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dollars our monthly payment will be
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seven thousand five hundred dollars
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about and again we're pretending we
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don't care about the monthly payment at
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all we're gonna do whatever is gonna
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cost us the least over the two years and
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we're gonna sell the car in two years
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again for four hundred fifty thousand
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dollars because either way we own the
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car it's gonna be worth the same amount
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so it means for owning the car for two
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years we paid fourteen thousand six
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hundred seventy one dollars and eleven
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cents if you wondered how I got this I
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looked at an amortization table which
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just shows you how much you're paying
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towards interest at the beginning which
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obviously it's front loaded and how much
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you're paying throughout two years so
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this is the total cost in interest over
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two years if we sell the car obviously
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with front loaded interest which is
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normal tax 37,500 we know that and fifty
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thousand in depreciation so our total
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cost taking out the loan is going to be
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a hundred and two thousand one hundred
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seventy one dollars and eleven cents now
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our opportunity cost for this one we had
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three hundred oh I'm sorry this should
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be two hundred thousand dollars at ten
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percent a year which we have tied up in
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the car which should make this forty
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thousand so our opportunity cost is
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forty thousand change this because I
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can't do math apparently so our
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opportunity cost is forty thousand over
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all that we could have invested that two
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hundred thousand step putting in the car
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and made forty thousand if we can get
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ten percent ROI so our total cost here
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is a hundred and forty two thousand now
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what if we do a lease
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now with leases there's so many
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different kinds you
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have to know what you're doing with
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leases to not get screwed over so some
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of the things watch out for is they'll
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make the price of the car cost way way
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more over the life of the lease than if
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you just took a loan out because it
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looks better up front but you have to
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really look into it you can get so for
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this example
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it only least I would ever really do is
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an open-ended lease so I can get out
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pretty much whenever I want with a
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buyout option so they'll say ok first
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year this month let's say after 18
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months you want to get out the car is
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now worth X amount after 2 years it's
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now worth X amount now these for the
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loan and for this it's based off of a
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four-year term now with the lease it is
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positive so positives you don't put any
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money down there are some leases you
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will put some down for this one I'm
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saying no money down because I was
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talking to people and this is what I was
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offered so no money down with leases you
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don't pay sales tax and you can leverage
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your money now one thing with leases and
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loans a little different now if this is
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gonna be a business vehicle obviously
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there's restrictions when it comes to
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luxury car tax how much you can actually
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have how much your car can be worth
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that's a business vehicle and a couple
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other things like that but with a lease
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if it's a hundred percent business car
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this is an advice this is what I do I
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don't do this with my Lamborghini you
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take out a lease you can write off a
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hundred percent of a lease for a
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business but you can't do that with a
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loan however with a loan you can give
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yourself a car budget it gets
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complicated I'm not gonna go into the
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tax side of it in this video
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so positives no money down no sales tax
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you can leverage your money more
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negatives you're paying a higher
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interest rate for this one I said it's
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about 5% could be a little more five
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seven is pretty normal in these four to
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seven lower value of the car at the end
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so with the buyout option technically
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with a lease you don't own the vehicle
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with the other two you do now one thing
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to watch out for is getting screwed over
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is the buyout option they give you okay
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I'm buying the car at $500,000 but they
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could be like are your buyout option is
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400,000 at the end instead of 450 which
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it would be if I owned the car outright
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because they're obviously going to
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want to make money somewhere so higher
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interest rate they'll give you a lower
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value of the car at the end again
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because they got to be safe and resell
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it so they need their margin in there
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and you just got to make sure you're
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getting the right type of lease like I
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said this one would be an open end at
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least with a buyout so if you want
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looking to that go ahead I'm not gonna
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explain it in this video and it's easy
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to get screwed over if you're on edge
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uneducated about leases so do your
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research so for this the car price again
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five hundred thousand tax we are paying
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none with a lease our downpayment is
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zero now sometimes this can be a little
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bit it's usually not much on this kind
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of car it would maybe be forty fifty
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grand
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but again there's ones with zero now our
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lease we're taking out a lease for five
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hundred thirty seven
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oh sorry five hundred thousand dollars
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in general I can't do math and our
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monthly payment is eleven thousand five
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hundred dollars about and we're gonna
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sell the car in two years for four
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hundred twenty five thousand now if you
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noticed I put four hundred twenty five
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thousand here I put four hundred fifty
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on the others because with the lease
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they're probably gonna lowball you more
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on the buyout option throughout the term
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of the lease the value of the car will
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obviously depreciate as you drive it now
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this is with a zero with no max mileage
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per month because a lot of them looking
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at high-end cars like this so I got you
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can drive two thousand miles a year
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that's not what I'm looking for this
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does not have a cap on this one
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no obviously some open it or one to will
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so we're looking at four hundred twenty
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five thousand so an extra twenty five
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thousand we lose in depreciation from
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doing the lease now our total cost over
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two years will be thirty eight thousand
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eight hundred fifteen dollars and twelve
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cents in interest
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so obviously about two and a half three
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times the amount of interest as taking
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out a loan because again five percent
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instead of three and against more money
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sorry hitting puberty apparently
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appreciation seventy five thousand
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dollars and gone so our total cost to
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own or I'm sorry to lease the car is a
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hundred and fourteen thousand dollars
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about now our opportunity cost is zero
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because we're gonna go invest that money
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so that brings our total to a hundred
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13800 15 dollars and 22 cents now let's
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compare them all and recei so if you
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want to understand opportunity cost real
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quick read this basically says the money
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you have in the car you can invest at a
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higher interest rate than a higher ROI
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then your interest rate then you'd be
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making money technically so our total
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costs over two years for a for buying
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cash
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we already saw our total cost was eighty
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seven thousand five hundred however so
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we're starting with five hundred thirty
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seven thousand five hundred each person
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with the cars now our ending total since
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our only cost is eighty seven thousand
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five hundred is four hundred fifty and
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we didn't make any money over those two
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years from our car money as you can see
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right here because it was all tied up in
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the car
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we weren't leveraging it so keep this
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number might we're left with four
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hundred fifty thousand dollars at the
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end of this and they all start with same
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amount if we took out a loan so our
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total cost over two years for taking out
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the loan we started with five hundred
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thirty seven thousand five hundred our
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costs were a hundred and two thousand
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about and we took out a loan at three
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percent interest for three hundred
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thirty seven thousand dollars therefore
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we were able to keep that much money
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that we would have otherwise put down if
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we bought the car in cash because we're
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leveraging the bank's money and we
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invest that money at ten percent ROI a
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year so for two years we made sixty
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seven thousand five hundred dollars so
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we're gonna add that back into our total
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so if you take this right here what we
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started with subtract the cost right
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here and then add in the money we made
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from investing our car budget we are
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ending with five hundred and two
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thousand eight hundred dollars about so
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you can see how big of a difference this
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is when you factor in the opportunity
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cost and you put it in the way of okay I
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made money here instead of just saying
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oh here's the opportunity cost I'm going
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to subtract it so you can see starting
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total it's the same for both of these
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and what they ended with is fifty three
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thousand dollars different even though
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you're paying three percent interest
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here so let's see what it looks like
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with Elise
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now with Elise over two years again
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starting with the same amount total cost
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is a hundred and two thousand a hundred
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seventy one dollars and eleven cents
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we put $0 down and we're able to keep
[800]
all our money and invest at ten percent
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so we made a hundred and seven thousand
[805]
five hundred dollars over the two years
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so our ending total is about five
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thousand dollars higher than what we
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started with so our ending total five
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hundred forty two thousand eight hundred
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twenty-eight dollars 99 cents
[817]
starting with five hundred thirty-seven
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now you can see that's a big difference
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when you take the pain cash you end with
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450 same starting amount or do you end
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with five forty two that's almost a
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hundred thousand dollars different even
[832]
though you're paying more interest you
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don't technically own the car and you're
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paying more for the car over the life of
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owning it now our totals here so for
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cash after two years of owning that car
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were negative eighty seven thousand five
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hundred loan were about negative thirty
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five thousand dollars and for the lease
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were positive five thousand so you can
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see how big of a difference this is here
[858]
between all three there's about 50 grand
[861]
in between each so it's a big big
[863]
difference now one thing to keep in mind
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this is gonna be different for everyone
[866]
the example I gave here there's a lot of
[869]
money on the tax of the car it does
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depreciate a lot and it's different
[874]
factor for different people for me I
[875]
don't care about the monthly payment I
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care about how long or how much it cost
[879]
me over the life I own the car so things
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will vary on this completely
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I'm not saying leasing is the way to go
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for everyone for most people they won't
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invest that money anyway so paying cash
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or just taking out a loan would be
[891]
better than leasing for a normal average
[894]
person now if they're gonna invest that
[896]
money it varies so things keep in mind
[898]
how much money does the person have to
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put down price of the car and sales tax
[902]
do you have sales tax your credit score
[905]
okay what interest rates you can get the
[908]
type of leases or the type of loans
[910]
sales tax of the car again will you
[912]
invest your extra car money if you
[914]
finance the car or are you not actually
[915]
going to investment if you invest it
[917]
what kind of ROI can you get per year
[919]
how long will you keep the car that
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depends also if you look at the
[923]
amortization table and if you're trying
[925]
to buy a house can you increase your
[928]
debt so the difference between buying in
[930]
cash
[931]
leasing it you can see with the lease
[933]
I'm my debt is about eleven thousand
[936]
five hundred dollars a month my debt
[939]
with buying a cache is zero so will that
[942]
affect me if I'm trying to take out
[943]
money somewhere else a K buying a house
[945]
or something like that so she have some
[947]
things to keep in mind now again I
[949]
thought you should never lease a car
[950]
didn't understand why people did until I
[952]
actually broke it down and looked at it
[953]
and this is what you guys have to do
[955]
with anything whether people are talking
[957]
about buying cars buying houses or just
[960]
anything like that because you hear so
[962]
many things oh you shouldn't rent houses
[963]
oh you shouldn't take out leases on cars
[965]
they're high interest rates you have to
[967]
actually break the numbers down and look
[968]
at it which I really enjoy doing so it's
[970]
not too bad I hope you guys got some
[972]
good value out of that and I'll see you
[973]
guys tomorrow in the next video
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