Which Is Better: To Lease or To Buy? A car buyer has two financing alternatives: to lease or to purchase. It is important to evaluate all the options and analyze the consequences of lease versus purchase decision. The understanding of a comparative worksheet that analyzes the automobile lease versus purchase decision will help in making an informed choice. How should a lease-versus-purchase analysis be conducted? How can this worksheet be applied to help you or someone else make their financing decision? Consider the following scenario: Should Noah Lease or Purchase? Noah is considering the purchase of a Toyota Camry and has negotiated a final price of $17,950. He's trying to decide whether to lease or purchase the vehicle. If he leases, he'll have to pay a $500 security deposit, a capital cost reduction (down payment) equal to 10 % of the vehicle's cost, and monthly payments of $243 over the four-year term of the closed-end lease. The Camry will have a residual value of $7,180. On the other hand, if he buys the Camry, he'll have to make a 10% down payment, pay sales tax equal to 8% of the vehicle's price, and make monthly payments of $365 on a four-year loan that charges 4%% interest. Be aware that funds used as down payments and security deposits incur an opportunity cost of 5%, as they could have earned interest for Noah over the period of the lease or loan. Use the automobile lease-versus-purchase analysis worksheet that follows to determine the total cost of both the lease and the purchase and then recommend the best strategy for Noah. To complete the worksheet. enter the appropriate values in their corresponding blanks. (Note: Round each value to the nearest whole dollar.) AUTOMOBILE LEASE-VERSUS PURCHASE-ANALYSIS Amount 7 Initial Payment 1a. Capital Cost Reduction 1b. Security Deposit 1c. Total Initial Payment 2. Number of Months in Lease 3. Monthly Lease Payment 4. Total Payments over Lease Term 5. Opportunity Cost of Initial Payment 6. Estimated End-of-Term Charges 0.00 7. Total Cost of Leasing PURCHASE 8. Purchase Price 9. Down Payment 10. Sales Tax on Purchase 11. Monthly Loan Payment 12. Total Payments over Term of Loan 13. Opportunity Cost of Down Payment 14. Estimated Vehicle Value at End of Loan 15. Total Cost of Purchase Based on this analysis, Noah should: Use the loan to purchase the Camry, because its total cost is less than the total cost of a lease transaction Use the lease to purchase the Camry because its total cost is greater than the total cost of a purchase transaction DUse the lease to purchase the Camry because its total cost is lesS than the total cost of a loan transaction
