You are interested in getting a Honda Element. You have decided to look into leasing, to see how it compares with buying. In recent years, you have noticed that advertised lease payments are considerably lower than those advertised for financing a purchase. It always seemed as if you would be getting “more car for the money!”
In your research, you have found that a closed-end vehicle lease is an agreement in which you make equal monthly payments based on your estimated usage for a set period of time. Then you turn the vehicle back in to the leasing dealer. No equity, no ownership, no asset at the end! You also have the option of purchasing the vehicle at an agreed-on price.
Leasing terminology is different from purchasing, but they are related. The capitalized cost is the purchase price; the capitalized cost reduction is the down payment; the money factor is the interest rate; the residual value is the expected market price of the vehicle at the end of the lease. Use the advertisement below and the purchase vs. lease worksheet on page 488 to compare the total cost of each option. The residual value of the car is estimated to be $13,650. The lease has no termination fees or charges. If you decide to purchase, your bank requires a down payment of $3,800 and will finance the balance with a 10.25% APR loan for 36 months. The sales tax in your state is 6.5%, and the tag and title charges are $75. The opportunity cost is the interest your down payment could have earned if you didn’t purchase the vehicle. Currently, your money earns 4.5% in a savings account.
a. What is the total purchase price of the vehicle, including tax, tag, and title?
b. How much are the monthly payments on the loan?
c. What is the total cost of purchasing?
d. What is the total cost of leasing?
e. In your own words, explain which of these financing choices is a better deal and why.
f. (Optional) Choose an ad from your local newspaper for a lease offer on a vehicle you would like to have. Gather the necessary information needed to complete a purchase vs. lease worksheet. Use local dealers and banks to find the information you need, or do some research on the Internet. Report your findings and conclusions to the class.
