Saturday, July 29, 2017

Missing Car Talk (because Tom and Ray spoke not of what they did not know)

Saturday morning errands were more attractive when, while driving, one could listen the Tappet Brothers give sound advice on auto repair and safety.  Something they did not do, however, is give advice on the financial implications of leasing/owning  (even though I suspect that their MIT educations would have allowed them to figure out how to make good financial choices).

This morning, I thought I found a substitute for the Magliozzi boys--a car-advice program on KNX, a local newsradio station.  But within ten minutes, I heard the host give terrible advice.  When his sidekick asked him if buyers should make an upfront payment on a lease in order to buy down their monthly payments, the host said no, that such an upfront payment was a waste of money, because of the absence of equity value at the end of the lease term.  But the buydown can, in fact, be a very sensible thing to do, depending on the nature of the deal.

To give one example, consider this lease calculator for a Honda Accord.  With a $3000 downpayment, the monthly payments for the car are $186 per month for 36 months.  At zero down, the payments are $266 per month.  So by investing $3000 more up front, you are reducing your payments by $80 per month.  Now lets consider the implicit rate at which you are borrowing the $3000, by using the excel function RATE.

RATE(36,266-186,-3000) =  .0022.

So the cost of borrowing here is 22 basis points per month, or, on an annualized, compounded, basis, 3 percent.  This is not a great return on investment, so the lower down payment may make sense.  But to give general advice without doing the math first is to give bad advice.


No comments: