Financial Learning Center
In order to make your lease versus buy comparison valid, the lease term and the loan term (if you are borrowing), must be equal.
Let's look at an example. A number in brackets indicates an income and a number without brackets indicates expense. The assumptions used are the same for both buy and lease. This may not be the case when you make your lease deal.
|Security Deposit||$350||Down Payment (10%)||$1,700|
|Sales Tax**||N/A||Sales Tax (paid up front)||$1,020|
|Gap Insurance||$400||Gap Insurance||N/A|
|Interest Lost on Deposit & Gap Ins.||$150||Interest Lost (down payment & sales tax)||$544|
|Monthly Payments*** ($331/month)||$15,888||Monthly Payment ($374/month)||$17,952|
|Interest Lost on Monthly Payment||$1,271||Interest Lost on Monthly Payment||$1,436|
|Refund of Security Deposit||($350)||Refund of Security Deposit||N/A|
|Disposition Fee||$275||Resale/Trade-in Value*||($5,650)|
|Net Cost||$17,984||Net Cost||$17,002|
The example takes into account the following assumptions:
- The price of the car is $17,000.
- The down payment required is 10%.
- The sales tax rate is 6%.
- Interest lost or foregone is computed using a 5% after tax rate of return.
- The interest rate on the lease and loan is 8%.
- The lease and loan terms are both 48 months.
* Be aware that this is an estimate of the value of the car at the end of four years. If the car is kept longer, the resale value will likely decline. It also depends on the condition of the car; some people treat their cars with care, while others are more careless. What is your tendency? Take it into consideration here. Also factor in mileage and extra options; these will affect the value of the car as well.
** Sales tax is included in the monthly lease payment.
*** A residual value of $5,650 was used to compute the monthly lease payment.
Sales tax is treated differently depending on which state the lease is in. Find out from a dealer how sales tax, if any, is computed on a lease in your state.
Here is a blank worksheet for you to fill in. Before you begin, get the following information from a dealer. Remember, in order to do a valid comparison, your lease term and loan term (if you are borrowing) must be equal.
- The required down payment and security deposit amounts.
- The cost of gap insurance and any other fees.
- The sales tax amount on both the lease and purchase.
- An estimate of the resale value (residual) of the car at the end of the lease term.
- The cost of the car.
- The term of the lease.
|1. Security Deposit||$ _____||1. Down Payment ( ____%)||$ _____|
|2. Sales Tax||N/A||2. Sales Tax||$ _____|
|3. Gap Insurance and fees||$ _____||3. Gap Insurance and fees||N/A|
4. Interest Lost on Deposit & Gap Insurance
4. Interest Lost on Down Payment and Sales Tax
|5. Total of All Monthly Payments
($ ____ /month x number of months)
|$ _____||5. Total of All Monthly Payments
($ ____ /month x number of months)
|6. Interest Lost on Mo. Payment (Line 5 x 8%)||$ _____||6. Interest Lost on Mo. Payment
(Line 5 times 8%)
|7. Refund of Security Deposit||$ _____||7. Refund of Security Deposit||N/A|
|8. Disposition Fee||$ _____||8. Resale/Trade-in Value||$ _____|
|9. Net Cost||$ _____||9. Net Cost||$ _____|
Use this worksheet to give you a rough idea of how the cost of leasing compares to buying a car. The comparison is only one component of your decision. Factor in your objectives.
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