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
|
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?
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