Wednesday, July 2, 2014

Company Car Leases

Last week, I published an accidental exposé about hybrid cars. Since then, I received many accidental questions relating to company car leases. I paraphrase:

“Should I work in hi-tech and take a company leased car?”

These are really two separate questions. Regarding the first, you should work in hi-tech if all of the following apply to you:

1. You like money.

2. You enjoy creating things that will benefit a large number of people.

3. You like helping friends and family by purchasing popular productivity software using your employee discount.

You may want to work in hi-tech, but may not have what it takes. An easy way to test whether you will succeed is simply to watch several episodes of the Big Bang Theory. If you don’t know why people think it is funny, send me your resume right away.

Once you’re hired, you’ll have the option of taking the company leased car. You can then decide whether this makes financial sense. You can do this either the hard way, or the easy way. I assume that you like to do things the hard way because why else do you order meat by number from a Russian speaking butcher?

On the off-chance that you generally prefer to do things the easy way and you happen to buy meat only by accident, feel free to use Investing by Accident’s not-quite-patentable skipping tags.

Lemons to Lemons

To understand if a company lease is a good deal, you must be careful to compare lemons to lemons. A company lease of a new car is an alternative to purchasing the same new car.

I often see people compare the company lease to purchasing a used car, and then decide that the lease is too expensive. This may be the case, but no one accidentally asked me about used cars. The question here is whether it is cheaper to lease a new car with your company or buy the same car?

The simple answer is that the lease will tend to be financial reasonable if all of these things are true:

1. The lease includes everything (the car, insurance, maintenance, gasoline) and has unlimited mileage (or at least, a very generous mileage allowance)

2. You drive a lot

3. You think it is reasonable to pay a small premium to never have to worry about anything relating to your car

If all of these apply to you, it is likely worthwhile to lease rather than buy. Enjoy your barbeque!

[Begin Skipping]

Alert readers may have noticed that a key component to determining whether leasing is financially worthwhile is whether or not you drive “a lot.” To determine how much of “a lot” is a lot, you would simply need to do the following:

1. Identify the net effect to your salary with the car and without the car. Multiply this number by 36 to arrive at the total cost of leasing the car.

2. Calculate the cost of buying and owning the same car for the same period of time.

3. Compare the results of #1 and #2 to determine the premium (or savings) of leasing versus buying.

I assume that since you did not skip, you are interested in a sample illustration of these steps.

Step #1: The Cost of the Lease

The easiest way to compute the net effect to your salary with or without the car is to ask your payroll controller for the number. He or she can simply put this into the payroll system and tell you. However, that would be like buying meat from the frozen section. It may work just as well, but it is nowhere near as fun.

To compute the net effect to your salary, you can start with what would happen if you did not take the car. In many cases, your hi-tech employer will give you a car allowance instead. In that case, take the allowance and deduct the taxes you will need to pay.

You can find the incremental tax rate here, or you can use this table which I have conveniently copied and pasted for you:

Monthly Income
Tax Rate
0-5,280
10%
5,281-9,010
14%
9,011-14,000
21%
14,001-20,000
31%
21,001-41,830
34%
41,831 and up
48%

For example, since you are working in hi-tech, your calculation may look like this:

Payment in Lieu of Car
3,500
Tax Rate
34%
Tax Payment
1,190
Net Income
2,310

In this calculation, I assume that if you take the car allowance, your employer treats it as a reimbursement only and does not also pay benefits or bonuses on top of this amount. If your employer considers it as income and does pay bonuses and benefits on top of this amount, you’ll need to adjust accordingly. I would show you how, but I don’t have enough skipping tags for that.

Next, compute how much money it will cost you to take the car. In this case, you will need to pay tax on the tax value (שווי מס) of the car. You can find the exact value by using this website, or you can just use 2.48% of the list price of the car.

For example, assuming you are considering leasing a car like the Toyota Corolla, your calculation would look like this:

List Price of Car
130,000
Tax Value (2.48%)
3,224
Tax Rate
34%
Tax Payment
1,096

The net monthly cost in this example is difference between receiving 2,310 shekel or paying 1,096 shekel; or 3,406 shekel. Multiply by 36 to arrive at the full cost of the lease: 122,616 shekel.

In this example, I have assumed that you mostly do not understand the Big Bang Theory. If you don’t understand it at all, you may find yourself in the 48% tax bracket. That case, the total cost of the lease will actually go down slightly to 116,172. (Isn’t cool how the lease becomes cheaper as you make more money?)

I also assumed that your alternatives are either to take the money or the car. In practice, you may have an option to take some of the money and a less expensive car; or, you may be able to pay extra to get a more expensive car. If that is your case, you will need to adjust accordingly.

You also may have the option to take the company lease car and pay for it entirely yourself. In that case, the calculation is somewhat different.

For example, let’s say you have an option to lease the Toyota Corolla, but you will need to pay 4,500 shekel for it. This means that instead of keeping 4,500 shekel, you will give it up (pre-tax) and instead pay the tax on the vehicle. In this example, the cost of the lease is calculated as follows:

Income You Forfeit
4,500
Tax Rate
34%
Net Income Forfeited
3,107
List Price of Car
130,000
Tax Value (2.48%)
3,224
Tax Rate
34%
Tax Payment
1,096

In this case, the cost of the lease is the difference between keeping 3,107 shekel versus paying 1,096; or, 4,066 shekel. Over 36 months, the cost of this lease is 146,376.

Even the lowest calculation in our example – 116,172 shekel – is a very large number of shekels. Could it be that buying the car would be even more expensive?

Maybe. If you drive a lot.

Step #2: The Cost of the New Car

To compute the cost of the new car during the same period you need to add up all of the costs, including: 
  • Depreciation
  • Maintenance
  • Registration & Tests
  • Insurance
  • Financing Costs
  • Gasoline
This could be quite daunting, but since you made it this far, I’ll give you some easy estimates to use:

Item
Cost For 3 Years
Depreciation
About 35%
Maintenance
About 3,000
Registration & Tests
About 3,000
Insurance
About 15,000

For financing costs, it depends whether you have the money to buy the car or intend to borrow money for it. If you are borrowing, the dealership will be more than happy to tell you what the total interest payments are. For the purposes of this blog, I will choose to be American and assume that you will buy the car on 0% financing.

If so, the cost for the Corolla so far is:

Item
Cost
Depreciation
45,500
Maintenance
3,000
Registration & Tests
3,000
Insurance
15,000
Total
66,500

For gasoline, you need to compute the cost based on the number of kilometers that you drive. Let’s watch what happens to the cost of the Corolla based on the amount that you drive. As you recall from last week’s exposé, the Corolla gets about 17 km/liter. At 8 shekel per liter, here are your costs:

Km/Year
10,000
20,000
30,000
Base Cost
66,500
66,500
66,500
Gas Cost
14,117
28,235
42,353
Total
80,617
94,735
108,853

As you should expect because I told you so, the more you drive (and the more gas inefficient your car), the more economical sense it will be to lease.

Still, leasing will require a premium over buying. It seems to me that you will in general need to drive 25,000 km/year or more in order to make the premium “reasonable.” In the case of the Corolla for someone in the 48% tax bracket, it is very reasonable at 30,000 km:

Cost To Lease
116,172
Cost to Buy
108,853
Difference
7,319

Considering that at this rate of driving, the additional mileage will further depreciate the value of the car, this premium is quite reasonable.

[End Skipping]

Lease or Buy?

If you strictly compare company leasing to buying a new car, leasing will tend to be economically reasonable if you drive a lot (25,000 km/year or more), and will become increasingly reasonable the more gas inefficient the car and the higher your tax bracket. There can be exceptions and you can read the section that you skipped as a guide to computing the costs for your particular situation.

Of course, the general rule that leasing can be “economically reasonable” also means that buying is actually cheaper in most cases. This begs the question that no one has yet accidentally asked: would it be even cheaper to buy a used car?

6 comments:

  1. what I don't understand is why anyone should be paid more than 40,000 NIS every month. that is meshugah!

    ReplyDelete
    Replies
    1. This is the beauty of the free market.

      Delete
  2. Would it be even cheaper to buy a used car?

    ReplyDelete
  3. http://thesquirrel.typepad.com/

    ReplyDelete
  4. you can get some decent used cars in the west bank right now. http://www.jpost.com/National-News/Palestinians-attempt-to-vandalize-Jerusalem-light-rail-during-fresh-riots-361560

    ReplyDelete
  5. Tweet me if you find a Ferrari! @BillyO_254's

    ReplyDelete