In today's rapidly evolving automotive landscape, the decision to purchase a car involves more than just picking a model you like. With factors such as fluctuating fuel prices, environmental concerns, and a diverse range of financing options, making the right choice can be daunting. In this post, we share our journey to finding the perfect vehicle, starting with the critical decision of electric vs. gasoline, followed by a detailed examination of whether to buy outright or lease.
The Decision to Go Electric
As of early August 2024, gas prices on the West Coast have been notably high, averaging around $4.21 per gallon. While this is down from $4.73 a year ago, it’s still expensive enough to make a noticeable dent in our budget. The impact of these high fuel costs was one of the primary reasons we began considering an electric vehicle (EV) over a traditional gasoline-powered car.
In addition to the financial strain of high fuel prices, there’s also the environmental impact to consider. Gasoline-powered vehicles emit significant amounts of carbon dioxide and other greenhouse gases, contributing to climate change. Transitioning to an EV was a choice that aligned with our desire to reduce our carbon footprint and contribute to a cleaner environment.
Why Electric Vehicles Make Sense
Electric vehicles have grown in popularity for several reasons. Firstly, they offer lower operating costs compared to gasoline vehicles. With electricity prices being generally lower and more stable than gasoline, the cost per mile for an EV is significantly less. Additionally, EVs require less maintenance, as they have fewer moving parts and do not require oil changes, reducing long-term ownership costs.
Moreover, the range of EVs has improved significantly, with many models now offering over 300 miles on a single charge, making them a practical choice for daily commutes and even longer trips. The increasing availability of charging stations has also alleviated concerns about range anxiety.
Exploring the Market: Tesla and Other Electric Vehicles
Once we decided to go electric, the next step was to explore the available options. Tesla was a brand that naturally caught our attention. Known for its innovative technology, sleek design, and strong brand presence, Tesla positions itself not just as a car manufacturer but as a leader in automotive technology.
Tesla's Appeal and Financing Options
Tesla had some attractive financing options at the time, making it even more enticing. For example, the Tesla Model Y was available with a 0.99% APR for a 5-year loan, which was a very tempting offer. We took the Model Y for a test drive, and the experience was everything we hoped for—smooth, responsive, and packed with advanced features like autopilot and regenerative braking.
However, despite the allure, Tesla is a premium brand, and the Model Y, in particular, was at the higher end of our budget. This led us to explore other options that might offer a more financially prudent choice.
Expanding Our Search: Toyota bZ4X and Hyundai IONIQ 6
Given our budget constraints, we decided to explore other electric vehicles. Two models that stood out were the Toyota bZ4X and the Hyundai IONIQ 6. Both vehicles had their merits, but they didn’t quite match the Tesla experience.
For instance, while both the bZ4X and the IONIQ 6 offered decent performance and range, they lacked some of the advanced features that Tesla provides. The regenerative braking on these models wasn’t as refined as Tesla’s, and the overall driving experience felt less sophisticated. Additionally, during our test drive of the Hyundai IONIQ 6, the salesperson kept emphasizing the "eco mode," which seemed redundant since the car is electric by nature.
Despite these differences, we seriously considered these alternatives due to their affordability. The Toyota bZ4X, in particular, had an excellent leasing offer—$239 per month for 36 months after a $16,200 discount. This seemed like an unbeatable deal, so we decided to pursue it further.
The Frustration with Dealerships: A Cautionary Tale
What looked like a promising deal with the Toyota bZ4X quickly turned into a frustrating experience. When we visited various dealerships, we were met with inconsistencies in the advertised offer. Despite finding the deal online specifically for our zip code, the dealerships claimed it was a national deal and not available locally.
Moreover, after factoring in additional features and fees, the monthly payment was quoted at $605—far from the advertised $239 per month. The dealerships then tried to negotiate by breaking the cost down into daily increments, asking if we could manage just a dollar more per day. While this might not sound like much, it adds up to an additional $30 per month. This tactic felt misleading, and at that point, we decided to walk away from the deal.
Returning to Tesla: Making It Affordable
The Tesla Model Y Long Range Rear-Wheel Drive was priced around $41,380. With a $5,000 down payment and the 0.99% APR, the monthly payments would be approximately $621.71, which was still higher than we were comfortable with. We also explored extending the loan term to 6 or 7 years with higher APRs of 1.99% and 2.99%, respectively. While these options lowered the monthly payments, they significantly increased the total interest paid over the loan period.
For example, the extra interest paid on a 7-year loan would amount to about $3,062.19. While this might seem manageable spread over 84 months, it’s still a significant additional cost.
Considering Used Tesla Models
Given the high cost of a new Tesla, we started exploring used Tesla options. Used Teslas are appealing, especially given their lower upfront cost. However, there’s an added layer of uncertainty with used EVs—specifically, the condition of the battery. How much range would a 100% charge provide after several years of use?
Tesla allows you to buy used cars online, but they can sell out quickly, making it challenging to get a full picture before making a purchase. We also considered downgrading to a Tesla Model 3, which was priced closer to $26,200. However, the interest rates on used vehicles were no longer as enticing, ranging from 8.79% for a 5-year loan to 9.79% for a 7-year loan.
Here’s a breakdown of the interest and monthly payments for a used Tesla Model 3:
As you can see, the 7-year loan option was more enticing with a lower monthly payment of $432.11. However, the total interest paid was around $3,800 more than the 5-year option.
A Strategy to Reduce Interest Costs
An interesting strategy we considered was taking the 7-year loan but making an additional one-time bulk payment towards the loan principal. This would reduce the overall interest paid, bringing it closer to what we would have paid with a 5-year loan. Here’s how this strategy plays out:
Let’s say you take the 7-year loan with monthly payments of $432.11. By making an additional one-time payment of $5,000, the overall interest paid would be reduced as follows:
As you can see, making the additional payment significantly reduces the interest paid, bringing it below the 5-year loan’s total interest. Moreover, the monthly payment is reduced to $349.65, making it more affordable. Contributing the additional payment to a 5-year loan would reduce the interest further, but the monthly payment would still stay high at $437.92.
Considering Leasing: A Balanced Approach
After evaluating the options for purchasing a Tesla, we decided to explore leasing as a more affordable alternative. Leasing offers the advantage of lower monthly payments and the ability to drive a brand-new vehicle without committing to long-term ownership.
Leasing a Tesla Model 3
To lease a Tesla Model 3 Rear-Wheel Drive with $0 down for 3 years, the cost came out to $390 per month, or $429 per month including fees and taxes. Since taxes and fees would need to be paid regardless, we focused on the base lease cost of $390 per month.
Over 3 years, this amounts to $14,040. Considering the cost of a new Tesla Model 3 is around $38,990, the residual value of the car after 3 years would need to be around $24,950 to break even.
On Tesla’s website, a 2021 used Model 3 sells for anywhere between $24,300 to $26,200, indicating that the car would likely retain much of its value over the lease term. Therefore, our maximum potential loss would be around $1,000, but for that amount, we would get to drive a brand-new Model 3 without worrying about long-term depreciation.
The Benefits of Leasing in a Volatile Market
One of the most significant advantages of leasing, particularly in the current market, is the ability to hedge against price fluctuations. Tesla has been known for making significant price cuts, and there’s a likelihood of further price reductions in the near future. By leasing, we protect ourselves from the risk of owning a depreciating asset in a market where prices are likely to drop.
Additionally, leasing provides the flexibility to reassess our options in three years, allowing us to take advantage of any new developments in EV technology or market conditions. This approach not only aligns with our budget but also mitigates the financial risks associated with purchasing a vehicle outright in a volatile market.
Why Leasing Was the Right Choice for Us
After carefully considering all the factors—rising gas prices, environmental impact, financial implications, and the current state of the EV market—we concluded that leasing a Tesla Model 3 was the most financially prudent choice.
While the allure of owning a Tesla was strong, the high upfront costs and interest rates on used vehicles made leasing a more attractive option. Leasing allows us to enjoy the benefits of a brand-new Tesla Model 3 with lower monthly payments, minimal risk of depreciation, and the flexibility to reassess our options in three years. By taking this approach, we ensure that we stay within our budget while still making an environmentally responsible choice.
If you’re in the market for a new car and find yourself grappling with similar decisions, I hope this post provides valuable insights into the thought process and financial considerations involved. Remember, when it comes to major purchases, the numbers often tell the real story.
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