Lending Club Blog

Financial Transaction Post Mortem

People say that hindsight is 20/20, meaning that looking back we see things most clearly. Reviewing our financial transactions after they are complete can be a valuable learning experience that will help prevent you from repeating prior mistakes.

Performing a financial transaction post mortem, as I like to call it, is most useful for financed purchases that we pay off over a long period of time. The true cost of these transactions is most complex, and thus most insightful when analyzed. A typical example might be to review the cost of a car when you finally sell, donate, or have it hauled away.

The standard argument as to why buying a car is better than leasing one is that at the end of the payments, you’ll have an asset if you buy and nothing if you lease. The fact that monthly payments are higher, the asset in question is worth significantly less than when you bought it, and it continues to depreciate, makes the comparison difficult. Once you finally get rid of the car, then the true costs can be compared.

Crunching the numbers on the first car I bought went something like this: I put $2,500 down, paid a total of $19,630 in payments and ultimately traded the car in for $4,500. I owned the car for 67 months, which means that it cost $17,630 / 67 months or $263.13 per month. Had I leased the car, I would have put $2,000 down and paid $149 a month over 36 months. This route would have cost $205 per month (monthly cost plus the down payment amortized across the 36 months) and I would have to find a similar deal on another car after the lease ended.

What this analysis shows is that it would have been better for me to lease the car than to buy it. Of course, there are other factors that make the lease seem even better (maintenance I paid for that would have been included had I leased, giving me a more reliable car all the time) and some that make the lease seem worse (mileage restrictions).

I’m not saying that leasing a car is less expensive than buying one. In fact, I’ve seen cases where either option could be less expensive. The point of reviewing prior transactions is to learn from the experience. If you find yourself in a similar situation to the last purchase of a given item, you may reconsider how to approach it. Even if your situation is significantly different, as mine was when I was ready for another car, reviewing your prior transactions will make you better informed and help you make smarter decisions going forward.

Thursday, July 24th, 2008 at 9:10 am

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