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.
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 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.
|Amount owned||– $9,303||-$13,604|
|Car Equity||$10,000 (estimated in 2019)||$0|
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.
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.
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)
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.