I want to share on this article, a greatfeedback about an error on my book, that I got from one of the readers of it: I made a mistake on the calculation of the interest rate example I present on page 17 that also affects the posterior analysis I do at the end of that section regarding the interest costs.
To Michael, my most sincere gratitude. I'm updating the calculation, the section on the book and updating it on the Kindle Publishing Store in the next few hours. Here are the full details of it:
Hi @jorgediazhav, I found what appears to be an error in your book: https://t.co/WGaFQWecMB
— Michael James (@MJonMoney) May 19, 2022
If I'm right then leasing doesn't save you on interest compared to financing a car.
Can you comment?
Both the message from Michael and the blog post, presented the right approach of doing the calculation, and therefore I replied to him on a Twitter thread message that goes as follows:
Hi @MJonMoney, first of all, thank you for buying the book. I have to say I'm not a subject expert, nor an industry insider. All my experience comes from the customer side and the public information provided by manufacturers on their websites.
That said: you are right. The interest calculation on page 17 of my book is wrong. It was my mistake. And yes, it doesn't save you on interest compared to financing over the same term & rate.
The numbers shown in the book, for both pages 16 (Tucson Financing) & 17 (Tucson Leasing), were all taken from the Hyundai Canada Build Tool: MSRP, lease term, PDI, Residual Value & the monthly payment.
Based on the selection I made on the calculator, I multiplied the monthly payment X 48 months and estimated that the remaining, after all other variables, was the total interest to be paid.
I mention this because I did not calculate the interest based on a compound interest rate formula. It was all based on the remaining amount of money on the calculator.
Then I placed all numbers in the “leasing formula” for explanatory purposes. Seems like miscalculating the interest rate broke everything else in my math. My bad.
Sadly, Hyundai seems to have updated the tool over the past few months and removed the Residual value from it (maybe temporarily). It would have been helpful now. Kia, Nissan, VW, and most others do still show it up.
Still, I missed something in my math, as I'm way off of the right number, which is the one you calculated. I wish I could have taken a screenshot back then to double-check my math now and see where precisely was my mistake.
I was also wrong regarding my conception that the interest was only of the loan amount. I agree now with what you mentioned in your post: “(...) lease interest is calculated on the entire vehicle cost as it declines down to the residual value (...)”.
Interest rate on a $20,000 vehicle for an instalment loan of $10,000 down to a residual of $10,000.
Interest rate on a $10,000 vehicle for an instalment loan of $10,000 down to a “residual” of $0.
As in all cases of the book, I grabbed the Residual value from the manufacturer's websites. So I had to go to a different one now to recap what I did book-wide.
But still, now that I check, on page 24, where I refer to the Residual Value of a VW Tiguan, there is also a difference I want to bring up in the residual value at the moment I gathered the data (Sept 2021) and now (May 2022).
After 12 months and 20,000 km/year, a VW Tiguan would still retain 70% of its original MSRP value. Now it is 75% under the same conditions. But if I bring it up to 48 months and the same km/year, back then the estimated residual value was 52% while now it is 48%.
My guess is that the Residual Value estimates (that VW is showing in their calculator) have priced in the current vehicle shortage and used cars bubble that is expected to burst “soon” but not last further than 2-3 more years.
I mention this because while verifying my math after seeing your post, I used the one from Volkswagen to understand what was going on and had to check again some other residual value data I present.
I have verified both the VW calculator and the one you shared from the CAPA. Once again, your calculation is the correct one, and both the VW Canada and the CAPA calculators match with it.
VW Canada Payment Calculator for a 48-month VW Tiguan lease at 5.24% interest rate and a residual value of 48% of MSRP ($16,173)
APA Payment Calculator for a 48-month lease at 5.24% interest rate and a residual value of $16,173.
I was wrong. I will update the numbers, discard the Tucson example (as I can't get the updated RV now) and contrast these with the specific case of VW that still has the estimates included on the website (plus I'll add some screenshots)
That plus the verification of the Canadian Automobile Protection Association tool to provide a more precise context and the clarification of the interest rate analysis compared to financing.
I really appreciate your feedback. With your permission, I would like to add you to the acknowledgement section of the book and a specific reference to the interest rate error you brought up.
Thank you, Jorge
