## Evaluating the Option of Buying or Leasing a Car

This calculator can be used to compare the total cost of ownership for a car lease versus purchasing the vehicle. The calculator needs a total of ten inputs, including:

- The car, SUV, or truck’s MSRP, or manufacturer’s suggested retail price, also known as the sticker price
- The price paid for the vehicle, this applies to both the lease and purchase scenarios
- The sales tax rate, if any applies to the purchase of a vehicle
- The term of the loan or lease, stated in years. This is the duration of the loan or lease

For the car purchase option, the calculator needs:

- Any down payment made on the vehicle; this is money paid upfront to lower the amount of any loan
- The interest rate on the loan, also known as the finance charge

For the car lease option, the calculator needs:

- The vehicle acquisition fee, if any
- The capital cost reduction agreed to as part of the lease, this is like prepaying part of the monthly lease payments
- The residual value of the vehicle; this is a percentage of the car’s value and represents the dealers estimate of its value when the lease terminates
- The money factor for the lease, which has a mathematical relationship to the finance charge

The calculator then provides the user with two sets of outputs, including:

- The net amount financed / capitalized cost of the car, both values are used to determine the finance charges
- The monthly payment for the loan and the lease
- The residual value of the car, which is an estimate of the car’s market price at the end of the loan / lease
- Finally, this calculator provides an estimate of the total cost of ownership for the loan and the lease

### Buying or Leasing a Car – What’s the Best Option?

Leasing a car is a popular way to “own” a vehicle today. A leased car is still owned by the lessor, which is typically a car dealership. The same concept applies to a car purchased with a loan. The ownership of that vehicle is shared between the buyer and the lender. The advantage of a lease is the low monthly payments when compared to a loan of the same duration. Leasing a vehicle also allows the driver to enjoy the benefits of driving a new car every few years. Unfortunately, that’s where the advantages of a lease end.

When buying a car, the monthly payments are much higher when compared to a lease. In fact, leasing a luxury vehicle might even seem like a bargain versus buying a more “pedestrian” car like a Toyota, Subaru, Honda, or Mazda. However, if we look at the economics of buying versus leasing, the case for buying a car is strong. Let’s use the default values in our calculator as an example.

### Leasing a New Car

In the lease scenario, we are buying a vehicle with a MSRP of 28,000 and the dealer agreed the lease price would be 25,000. The term of the lease is three years, or 36 months. We need to pay an acquisition fee of 500 and a capitalized cost reduction fee of 3,200. We are told the residual value of the car is 56%, which means the car is worth 15,680 when the lease terminates. The dealer also tells us the money factor is 0.00250. If we multiply the money factor by 2,400, we can find out the interest rate charged on the loan, which in this case is 6.00%.

The monthly cost of this lease is 296, if we multiply this value by 36 months and add the capitalized cost reduction and acquisition fees (plus tax) we get a total out of pock cost for the lease of 14,562. This is called the total cost of ownership over that three-year timeframe.

### Buying a New Car

In our purchase scenario, we have the same MSRP, price, and term as the lease option. We also agree to put a down payment equivalent to our capitalized cost reduction of 3,200. In doing so, we can make a fair comparison between the lease and buy options. To buy the car, we must take out a loan of 23,300 for three years.

The short duration of the loan makes the monthly payments 709. Multiplying this value by 36 months and adding back the 3,200 down payment (plus tax) we get a total out-of-pocket cost of 28,718, which is nearly double the out-of-pocket cost for the lease. However, unlike the lease the buyer now owns a vehicle worth 15,680; therefore, their total cost of ownership is 13,038 – which is less than the lease scenario of 14.562.

So, what does all this information tell us? That while the upfront cost to lease a car might seem like a bargain when compared to buying a car and taking out a loan. The economics favor buying over leasing in this example.