New April purchase – a car!

2016 Cadillac ELR

Last Friday I made a semi-spontaneous decision and traded in my Chevy Volt for a new car! Although I could justify it, this wasn’t an entirely rational decision on a financial basis but sometimes it’s just better to follow your heart more than your mind.

The new car

I decided to lease a 2016 Cadillac ELR. The ELR is an extended-range electric vehicle (EREV) which is based on the 2014 Chevrolet Volt but with improved styling and performance. it is, in my opinion, one of the best looking cars around but it didn’t sell in large quantities because of its high price ($75,000 in 2014) and a drop to $65,000 (*) for 2016 in addition to upgraded specifications didn’t help sales either. And so production of the car has now stopped.

(*) There is a $7,500 tax credit for buying the car which can be claimed back on next year’s taxes so the quoted price usually includes this credit.

The decision

I’ve owned my Volt for nearly 3 years now, and it’s a great car. In fact, I’ve been so impressed with driving an electric vehicle that I won’t go back to a pure gasoline car now if given the choice. This isn’t even from an environmental point of view – I just really like the quiet and smooth ride that an electric vehicle has.

Now the ELR, as a two-door coupe, isn’t as practical as the Volt which is a 4-door hatchback with more cargo room. Its range (40 miles electric, 300 miles gasoline) is also not as good as the new 2016 Volt (53 miles electric, 367 gasoline). But it has some active safety features that I value such as adaptive cruise, automatic braking and side blind-zone alerts, and it’s much easier on the eyes. My drive to work is only 10 miles each so I rarely use gasoline – I’ve driven about 17,000 miles on 16 gallons of gas in the last 2.5 years.

Up until last week, my original plan was to continue to pay off the interest-free loan I financed the Volt with and keep the Volt for another year before buying, most likely, the new Chevrolet Bolt (a 100% Electric Vehicle) in 2018/9 or so.

But after realizing that the leasing terms for the ELR are quite reasonable, I decided to go for a 3-year lease and will look at buying / leasing a new electric vehicle near the lease end in 2019. I’ve always admired the design of the ELR so I saw this as an opportunity to drive one while they are still available.

Buy vs Lease

I’m sure that leasing a car vs purchasing it is akin to the “buy house vs rent” discussions. In either case, the cheapest way to own a car to buy a used one, and hold onto it until it falls apart. That’s because the value of a new car drops significantly the day that it is purchased and continues to fall steeply for the next few years. The disadvantage of this approach is that you don’t gain access to the latest safety advances made in newer cars which I value as a kind of insurance premium.

In the normal case when you buy a car, you pay (say) $20,000 for the car and sell it a period of time later for (say) $10,000. So although you are initially out of pocket by $20,000 eventually you should get $10,000 back. If you don’t pay in cash then you end up financing the whole $20,000 however which can mean high monthly payments for a new car.

Leasing is simply the same thing but heavily weighted towards the leasing company & banks. The lease terms define a residual value for the car (in this case, say) $8,000 and you essentially finance the $12,000 difference (with some interest charges baked in) along with an option to buy the car at its residual value when the lease expires. So the monthly payments are much less than financing the car but you never actually own the car, the leasing company does. There are other restrictions too with leasing e.g. restricted miles per year, keeping good care of the car etc since the leasing company wants to make sure it can get the residual value of the car at the end of the leasing term.

The numbers

The monthly payments for my Volt were $547 per month and I had 17 months left on my original interest-free loan for a total remaining debt of $9,303. The new monthly lease payment for my ELR is $388 (this is reduced by incentives and the equity from my trade-in but I also added some additional protection for tires / windshield) or $159 per month less.

One of the reasons that the lease is relatively low for the price of the car is because the residual value is relatively high at $48,000. Based on the re-sale value of electric vehicles due to battery concerns and competition against newer / longer range vehicles in the future, I think there’s no way this price would ever be reached. For comparison a 2014 ELR values at around $28,000 for trade-in at kbb.com. Buying an ELR is out of the question for this reason alone; ignoring that the monthly payments would be nearly three-times the lease payment.

But I realize that a three year lease payment, even if less than my current payments, is going to cost more because it’s over three years and not the 17 months duration of my loan payments. I’m also giving up the equity from the Volt that I owned. So how much more expensive is it?

My auto loan balance was $9,303. The lease term is 3 years long so I’m essentially increasing my car debt from $9,303 to $13,604 or an increase of $4,300. I’m also giving up the equity I would have had in my Volt which would be the projected trade-in price in 2019.

 Expense  Original Plan  ELR
 Amount owned – $9,303 -$13,604
 Car Equity $10,000 (estimated in 2019) $0
Maintenance -$2,000 (estimated) $0
Total -$1,303 -$13,604

My Volt was out of warranty so I’ve added costs for maintenance and tire replacement which are all covered by the ELR lease. My estimate of the 2014 Volt’s value in 2019 is very inaccurate too – maybe if the Tesla Model S is a success there will be no market for used Volts or ELRs!

So although I’ve reduced my cash-flow over the next year and a half by $158 per month, this decision is probably costing about $12,000 more than staying with the Volt over the next three years. My insurance premium is going up too because of the new car; I won’t know the final premium until I renew my policy in June but it’s likely to be $50 a month more from the estimates I’ve seen, so the net gain is about $100 per month.

I’m not particularly worried about the numbers though. I’ve started to review my budget which will be updated again for July and although it’s likely to increase slightly for several reasons, I should be able to accommodate the extra insurance amounts. At the moment I’m not anticipating a large increase to my budget. I’m also very comfortable with paying $388 per month going as it’s been no trouble to pay $547 per month over the last two and a half years and I have enough savings to easily cover the total lease amount if I wanted to pay the lease off.

Summary

It’s been an exciting couple of days. I’m actually looking forward to the drive to work Monday for once! Ms DL (a manual-shift die-hard) also likes driving the car too since it’s more sporty than the Volt. It’s not the most frugal decision I could have made but I’m living well below my means and will be driving this every day.

2016-cadillac-elr2

Electric Vehicle terms

Electric vehicle terminology is very vague and can be confusing – here’s an overview of the three main types in the EV world.

Battery Electric Vehicle (BEV)

A purely electric, 100% battery car. Creator of the term “range anxiety“. Think Tesla cars, Nissan Leaf, Chevrolet Bolt.

Extended Range Electric Vehicle (EREV)

This type has a gasoline engine (generator) which charges the battery which drives the car and this category includes the Chevrolet Volt and Cadillac ELR. The car can drive top speed with pure electric power. If the battery is low, the generator will start but it usually runs at a fixed rpm irrespective of vehicle speed to maintain the charge level.

Plug-In Hybrid (PHEV)

PHEV vehicles typically are driven by a gasoline engine but have a smaller battery pack that can power the vehicle for short distances to improve the overall fuel economy. The Toyota Prius is an example. At top speed, the gasoline engine is powering the car and the battery is doing little except being recharged by regenerative braking.

Pure Hybrid vehicles have a smaller battery pack that doesn’t need charging from a wall-socket (so no plug-in) and the battery is charged from normal driving / braking.

16 thoughts on “New April purchase – a car!”

  1. Wow! That car looks fantastic. I am waiting for my 2008 Galant to die so I can lease. I am 34 and have only had 2 cars my entire life! I took a look at the 2016 Volt to lease and it was nice but didn’t have that premium feel I’d like in my first new car since 2008.

    Someone is going to take a BATH on that residual. There is literally no chance that in 3 years with the battery technology moving where it has been that the car will be worth anywhere near that. Not at all your problem though.

    1. Hi Evan,

      I’ve not driven the ’16 Volt but I guess the battery pack overhead is always going to make for a worse comparison against a similarly priced regular car. Do you have a car that you’re leaning towards?

      I leased my first car before buying it out then the next two cars were purchased. This is my fourth car and I think I’d consider leasing again when this one ends.

      The residual value is crazy – I guess it’s part of the game played to make the lease more attractive but I’m not complaining!

      Best wishes,
      -DL

    1. Hi AB,
      Yes there’s a certain amount of indulgence / mid-life crisis coming into play I’m sure!
      It’s so much nicer to drive than the Volt though so I’m really pleased with it right now 🙂
      Best wishes,
      -DL

    1. Hi ABT

      Electric vehicles are always a hard sell right now I think; you add (say) $5,000 extra to the cost of the car for the battery; yet for $5,000 you can buy an awful lot of gasoline. And you really need a high-voltage charger at home for it to work; I have a HV charger at home and I can also charge my car at my workplace so that works out well.

      A lot of Hybrids / EVs are being designed & sold simply because of regulatory quotas that force auto companies to meet certain mpg averages. But as battery technology improves / cheapens, I think you’ll see more and more electrification in cars since electric powertrains have great torque, are quieter and simpler than gasoline / diesels.

      Although with the rise of car sharing programs and services like Lyft / Uber, the need to actually own a car which sits unused for 80% of the time is also a valid question.

      Best wishes,
      -DL

      1. Having a charge station at home/at work is indeed a must.
        You are right with the car sharing. We are looking into that as a replacement for our second car. It would be nice to have only one car again.

  2. Nice car…enjoy! I couldn’t get myself to indulge in a car of that price, at least not until our family has cross the finish line of Financial Independence. I know life is a balance but we’ve just been frugal for soo long that I just hope I can snap out of it at some point. haha

    Best wishes and continued success on our journey! AFFJ

    1. Hi AFFJ,

      As long as you don’t snap out of it too suddenly and go on a spending spree! Living below your means is the most important thing as you say.

      I’ll have lower monthly payments for the next 17 months and didn’t need to touch my “new car” savings fund because of the lease so those are pluses. But I do need to start planning for replacing it in 2019.

      Best wishes,
      -DL

    1. Hi DFG,

      Yes it’s not as fast as the Tesla but it’s quiet and smooth! And it doesn’t have the 60Hz whine that I could hear in the 2014 Volt from time to time. I’m enjoying it so much at the moment that I almost wished I had purchased the car outright, but I think leasing it was really the best compromise. Hopefully it’ll handle well in the winter / snow as that’ll be the real test.

      Best wishes,
      -DL

  3. I am a proud owner of a Toyota Auris Hybrid, would never go back to 100% fossil fuels. It’s not just an economic thing (maybe in the end you don’t really save all that much) it’s the pleasure of driving something that doesn’t make any sound, the little games that I play to see if I can have a better efficiency from full tank to full tank (45 liters of gasoline last me 1 month more or less). Lease/long term rent is another factor that I considered, but after a lot of calculations I came to the conclusion that it only works if you really drive a lot (30/40K km x year), if you do less there is no real gain (but you are freed from having to remember to pay road taxes and stuff like that). Great purchase anyway! 🙂
    ciao ciao
    Stal

    1. Hi Stal,

      I can relate to that, I have been known to turn the heat off in winter to increase the electric range (heated seats are more efficient than heating the interior cabin with air).

      My driving game is usually trying to avoid using the regular brakes and use regenerative braking alone. This car has steering wheel paddles which add extra regenerative braking on demand; I thought that a little gimmicky when I first read about them but I’m using them all the time now!

      The Auris looks pretty cool – I’ve not seen that over here in the US. The Prius is fairly common around here.

      Leasing in the US comes with limited mileage with fees for over-mileage. But for the most part you can get out of a lease early since car dealers will buy you out of an old lease to put you into a new one. I’m naturally inclined to buy to own; this is my fourth car and the second car I’ve leased so we’ll see how it goes.

      Best wishes!
      -DL

  4. I have been working to refine my budget and minimize the categories necessary to track and monitor expenses. I have reviewed your most recent budget 4.5 update and do not see where you are tracking the monthly lease charges for your new car. If it is not addressed in your monthly budget, where are you tracking the expenses?
    Thank you in advance!

    1. Hi Barry,
      That’s a good question! I think I’ve mentioned it in some posts in the past but haven’t really called it out.

      I pay the monthly lease amount, $387.96, out of my Savings Account as I consider cars a large infrequent purchase. Each month I put part of my monthly savings towards my ‘next car’ account. Ideally I would buy a car using cash without any financing. In this particular case, I preferred to pay the lease monthly rather than all at once (my ‘next car’ account total is large enough to cover the entire lease payment). So currently my savings account is growing slower since the money I add to it each month is reduced by the lease payment. And when I don’t have a car payment, I continue to pay the same monthly savings amount to build up more money for the next car.

      This is a little mental accounting on my part, but it helps me focus on tracking the fixed / standard monthly expenses and comparing them over time, rather than have periods of time with higher expenses (with car payment) then lower expenses (when car is paid off)

      Congrats on creating and managing your own budget!
      Best wishes,
      -DL

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