PDF Lesson 2: Leasing a new Vehicle - Ms. Turnbull's Math Website

Lesson 2: Leasing a new Vehicle

You may have already noticed that leasing a vehicle is not the same as purchasing a vehicle. When you purchase a vehicle, you own the vehicle once you are done paying back your vehicle loan. When you lease a vehicle, you do not own the vehicle at the end of the lease. Instead, you have just paid for the use of the vehicle. This is why you have a lower monthly payment when you lease a vehicle.

Conditions of a Lease

Different car dealerships offer different leases that have different conditions. These conditions may include the number of kilometers you may drive each year and the term (number of years) of the lease. If you decide to lease a vehicle, it is important that you understand the conditions of your lease. If you violate the terms of your lease, you may be responsible for paying extra fees for things like:

? Extra kilometres driven ? Excessive wear and tear on the vehicle ? Ending your lease early

At the end of the lease, you can return the vehicle or you can purchase the vehicle for its guaranteed residual value. The guaranteed residual value is an estimate of how much the vehicle will be worth after being used for the length of your lease. This value is given to you when you lease the vehicle.

Making the Decision to Lease a Vehicle

The following are some factors you should consider when trying to decide whether or not it is best to lease a vehicle:

1. Repair costs to the vehicle. a) In the lease option, repairs are usually covered by a warranty offered by the manufacturer. If, at the end of the lease, the vehicle appears to require a number of major repairs, you should probably not purchase the vehicle. Instead, you return the vehicle to the dealer and then buy or lease the next vehicle. b) If you have purchased the vehicle, repairs will be covered by warranty for a similar period of time. However, when the warranty has expired, you are responsible for any repair bills, and you may decide to trade the vehicle or sell it.

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2. How much do you drive the vehicle? a) If you drive the vehicle more than the amount specified in your lease agreement, you will likely have to pay for the extra kilometres at the end of the lease. These costs can be high. Therefore, if you lease, you must be relatively sure of your driving habits and negotiate a price for the lease that will reflect these habits. b) If you own the vehicle, the number of kilometres you drive does not affect the amount you pay for the vehicle. It may, however, reduce the trade-in value of the vehicle.

3. What are the monthly payments for the vehicle? a) Generally, leasing is more attractive because the down payment and regular monthly payments are less than if you buy the vehicle and have to finance it. However, at the end of the lease, you must return the car to the dealer, which usually means that you now have to buy the car you leased, buy another car, or lease another car. b) If you purchased a vehicle, you must pay for the entire vehicle, but after it is paid you own the vehicle, and can continue to use it as long as you want without making any monthly payments.

4. How often do you change vehicles? a) If you plan to drive a new vehicle every two or three years, leasing is an attractive option. b) If you buy a new car, take proper care of it, and keep it for a number of years or until it is worn out, you will spend a lot less money than if you leased new cars for the same period of time.

Leasing a New Vehicle versus Purchasing a New Vehicle

Leasing and purchasing loans are two different methods of automobile financing. When you lease a vehicle, you pay a portion of the vehicle's cost. When you purchase a vehicle, you pay the whole price of the vehicle, regardless of how much you use it. Both leasing and purchasing have their own benefits and drawbacks. In order to decide which option is best for you, you need to look at your own personal priorities and financial situation.

Generally, buying a vehicle and driving it until it is worn out is the best option from a personal finance point of view. If you can purchase the vehicle without financing, you will save a lot of money on interest. If you are financing the vehicle, then the best option is to be as well informed as you can be about your financing options. For example, it may be to your advantage to make a bank loan rather than to finance the vehicle at the dealership.

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Overall, a new vehicle is a major purchase. If you wish to purchase a new vehicle, you must research all of your options carefully. The following examples compare the costs of leasing to the costs of purchasing one particular minivan over a five-year period. The first two examples involve leasing the minivan before purchasing it and the last two involve only purchasing it. In order to make the examples less confusing, fees such as the destination charge, documentation fee, the tire tax, and the security deposit are not included.

USE THE INFORMATION ON THE 4 EXAMPLES (beginning on the next page)

The costs of the minivan from Example 1 through 4 are the following:

Example 1

$ Leasing and purchasing outright at

the end of the lease

Example 2

Leasing and purchasing through financing at the end of the lease

$

Example 3 Purchasing outright

$

Example 4 Purchasing it through financing

$

Based on the information in the table from the minivan examples, organize the purchasing options in order from LEAST expensive to MOST expensive:

1. ______________________________________________ (least expensive) 2. ______________________________________________ 3. ______________________________________________ 4. ______________________________________________ (most expensive)

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Example 1: LEASING AND PURCHASING OUTRIGHT AT THE END OF THE LEASE

A minivan sells for $28 500 and can be leased for 24 months at $479 per month plus taxes. A down payment of $3 275 is required. The guaranteed residual value of the vehicle is 65% of the sales price.

a) Calculate the total monthly leasing payment. b) Calculate the total amount paid by the end of the lease. c) Calculate the total residual value of the minivan, including tax. d) Calculate the total cost of the vehicle if it is purchased outright at the end of

the lease.

Solution a) Monthly leasing payment = $479 x 1.13 = $541.27 (including taxes).

b) The total amount paid by the end of the lease = down payment + monthly leasing payments = $3 275 + ($541.27 x 24) = $3 275 + $12 990.48 = $16 265.48

c) The guaranteed residual value = 6.5% x $28 500 = 0.65 x $28 500 = $18 525 The total guaranteed residual value with taxes = $18 525 x 1.13 = $20 933.25

d) The total cost of the vehicle if it is purchased outright at the end of the lease = down payment + total of all the monthly leasing payments + total guaranteed residual value = $16 265.48 + $20 933.25 = $37 198.73

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Example 2: LEASING AND PURCHASING THROUGH FINANCING AT THE END OF THE LEASE The total guaranteed residual value of the minivan in Example 1 is financed at the end of the lease by a three-year car loan at a fixed interest rate of 6%.

a) Calculate the monthly payment on the guaranteed residual value. b) Calculate the total of the monthly payments on the guaranteed residual value. c) Calculate the total amount paid for the minivan if the guaranteed residual value

is paid through financing.

Solution a) The loan required is equal to the guaranteed residual value which from Example 1 is equal to $20 933.25. Using the amortization table, along with the interest rate of 6% and the loan period of 3 years, we find the rate of $30.43 per $1000 of loan.

$20 933.25/ 1000 x 30.43 = $637 is the monthly payment

b) Since the loan is for three years and there are 12 months in a year, there are a total of 12 x 3 = 36 payments. The total of the monthly payments at the end of three years = $637.00 x 36 = $22 932

c) The total cost of the minivan if it is financed at the end of the lease = down payment + total of all the monthly leasing payments + total guaranteed residual value = $3 275 + $12 990.48 + $22 932 = $39 197.48

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