Case Study: How To Drive Away From Debt
Let's have a look at the Cartwright and Morrison families - same income, wildly different results. See if you recognize yourself and your family and how different approaches to spending on cars and transportation can improve your family’s financial wellbeing.
Both families live in the same community with similar homes and mortgage amounts. The Cartwrights and Morrisons each have a net annual income of $95,000 and both families have two children; one in middle school and one in fourth grade. The Cartwright family spends significantly more on their cars and transportation compared to the Morrison family. Let’s find out why.
Pimp my ride ... or not
The Cartwright family loves gadgetry and owning the latest thing to hit the market, whether it's cell phones, televisions, or cars. They tend to indulge themselves and have something of an entitlement mentality, fueled by eager marketers who know all about, and prey upon consumer desires. The Morrisons tend to be a bit more conservative and think about their cars and transportation needs more in terms of efficiency and economy. It makes a big difference in the bottom line.
Both Cartwright adults drive vehicles that are leased. The terms are for no more than two or three years at a time, giving them the opportunity to always drive a newer model, and in their estimation, avoid repair and upkeep expenses such as new tires, brakes and other maintenance items.
Both Morrison adults drive vehicles that were purchased and their intent is to pay off each car, and then continue to drive them for several years without monthly payments. They accept and plan for routine, and even unscheduled, maintenance and repair costs. Both families are now entering a new car replacement cycle. Let’s see how it works out.
You choose ... maybe you lose
Mr. Cartwright enjoys the height and physical dominance of driving a large pickup truck, so he leased a 2013 Ford F-250 Super Duty Crew Cab King Ranch model with a fair market price according to Kelley Blue Book, of approximately $47,000. With taxes and fees, minus a 20% down payment ($10,000), the monthly payment to purchase the truck would be about $725 for 60 months. According to Edmunds.com, the lease payment for this vehicle is approximately $515 a month for 36 months.
Mrs. Cartwright is more interested in a small, trendy car and plans to lease the latest Honda Civic EX-L with an Edmunds sticker price of about $21,500 plus taxes and fees. Minus her 20% down payment of $4,500, the monthly lease is about $237, compared to a purchase payment of about $344 a month for 60 months at 4% APR. All together, the Cartwrights will pay $752 for monthly lease payments and feel that they are “saving” well over $300 a month in payment amounts. The Cartwrights of course, had no trade-in value and paid about $14,500 in down payments -- cash out of pocket -- to start the leases.
The Morrisons made their last car payments two years ago and spent about $2,000 dollars on repairs and upkeep for their older cars within the last 24 months and are now in the market to replace them. Mr. Morrison elected to stay loyal with his Toyota Camry model and selected a new 2013 Camry XLE 4-cylinder model with a fair market price of about $22,000. His 2007 XLE in very good condition has a trade-in value of about $9,700 according to Kelley Blue Book. With no down payment necessary, Mr. Cartwright’s financed amount is about $13,300, with a $315 per month payment at 4% APR for 48 months.
Mrs. Morrison drove a 2007 Honda Odyssey EX van but now wants to try a Jeep Grand Cherokee Laredo that, according to Edmunds, has a fair market value of about $28,000. Her Honda trade-in is valued by Kelley Blue Book at $7,600 in very good condition. Choosing a 60 month loan term at 4% APR, the monthly payment is about $390 a month. The total monthly car payments for the Morrison family is about $705, not too much different than the Cartwright’s total payment of $752. That about $564 a year less. So, what’s the big deal? Take a look.
Lease me now ... or love me later
Assuming normal and nearly equal costs for oil changes and minor upkeep, the difference in payment costs over the first three years (remember the lease term for the Cartwrights) is $1,692 in the Morrison’s favor. But here’s where the fun starts.
What would you do with an extra $48,000?
Owing to a certain vanity on the part of the Cartwright family to own the latest vehicles and Mr. Cartwright’s desire to drive a fancy truck, they have outspent the Morrisons by nearly $48,000 in car ownership payment costs for the seven-year comparison. To be accurate, the Cartwrights don’t own their vehicles; they to turn in the keys every three years with “nothing” to show for their payments. In contrast, the Morrisons have about $15,000 or so in projected equity left in their purchased vehicles after seven years. You can do the math ... the Morrisons “win” the car payments “game” ... by many miles.
Apples and Apples
This has been not only a lease to loan comparison, but a lifestyle and choices comparison. To show the real difference if both families drove the same exact vehicles with the only difference being the lease versus the loan, here are the numbers, based on Edmunds calculations.
Camry monthly lease with $4,400 down: $257 (Cartwright) Camry monthly payment with trade-in: $315 (Morrison) Jeep monthly lease with $5,600 down: $284 (Cartwright) Jeep monthly payment with trade-in: $390 (Morrison)
So now, the Cartwright’s monthly outlay is $541 compared to the Morrisons' $705. Tables turned, right? Let’s see, using another yearly summary again focused on the Morrisons' spending/saving.
The apples-to-apples savings is less than half the $48,000 in our original lifestyle-influenced comparison, but with the same cars, the Morrisons still win the payment game by a long shot. The Cartwrights, even with lower monthly payments, manage to spend more than $3,000 a year on average than the Morrisons for the same cars when leasing, largely because they earn no equity and have to provide new down payments each lease cycle.
Gas, driving styles and insurance
What we haven’t yet explored are the ancillary transportation costs that are a bit behind the scenes, including gas and insurance. Assuming both families drive each vehicle about 15,000 miles a year, and assuming an average gas price of $3.60 per gallon, here’s what we know.
Insurance costs are typically higher for a leased car than a purchased one. Edmunds estimates the increase to amount to about $150 a year more for a typical car, or in our case, $2,100 over seven years, for two cars. You can expect an even higher insurance premium for the more expensive truck used in our first comparison.
Gas prices for the apples-to-apples comparison will be the same but for the lifestyle comparison, the Ford F250 Super Duty will average about 14.7 miles per gallon according to Fuelly.com. Filling up that 35-gallon tank at $3.60 a gallon will cost a cool $126 and will yield a range of about 515 miles.
The Cartwrights' Honda Civic EX-L, on the other hand, gets about 35 MPG. The Morrisons' Toyota Camry will get about 30 MPG and their Jeep Cherokee will get about 18 MPG, according to Fuelly. Further assuming 15,000 miles a year of driving with each car, gas costs should be:
Ford F250 - $3,673 Honda Civic - $1,530
Total gas for Cartwrights: $5,203
Toyota - $1,788 Jeep - $3,000
Total gas for Morrisons: $4,788
Multiply that by the seven-year period and the Morrisons will spend $2,905 less than the Cartwrights under our example.
All together now
As you can see, the lifestyle choice of the Cartwrights coupled with leasing instead of purchasing adds up to a significant financial difference compared to the Morrisons. When we take out the lifestyle choice difference and just compare same car leasing to purchasing, the difference is still large.
In our worst case scenario, over seven years, with the Cartwrights leasing their lifestyle choice cars and the Morrisons purchasing their vehicles, considering payments, insurance and gas, we get the following:
- Payments: Cartwrights spend $47,484 more than the Morrisons. Insurance: Cartwrights spend $2,100 more than the Morrisons. Gas: Cartwrights spend $2,905 more than the Morrisons.
TOTAL: $52, 489
When both families drive the same cars, but the only difference is in leasing compared to buying we get:
- Payments: Cartwrights spend $21,324 more than the Morrisons. Insurance: Cartwrights spend $2,100 more than the Morrisons. Gas: No difference.
In summary, when it comes to driving, are you a Cartwright or a Morrison? When you yield to the desire to drive a more expensive, less efficient vehicle such as the F250 Super Duty or other large SUV or truck, the impact of the expense is deep ... in payments, insurance and fuel.
Even when leasing more efficient cars, the insurance costs can be significantly higher due to higher leasing coverage requirements, and you have no equity in the vehicle when the lease expires, requiring you to come up with a hefty down payment each time, or to pay a much higher lease payment. Remember, it’s not about the monthly payment; it’s about the total driving cost.