Automobile Lease vs Buy Calculator
Definitions
- Purchase price
- Total purchase price. Price should be after any manufacturer's rebate.
- Down payment
- Amount paid as a down payment, which for leases is often called a capital reduction.
- Sales tax rate
- Percentage sales tax to be charged on this purchase. Sales tax is included in each lease payment. Sales tax for buying is charged on the total sale amount.
- Investment rate of return
- Rate of return on investments. This is the return that you would make if you were to invest your down payment or security deposit instead of using it in your auto purchase or lease.
The actual rate of return is largely dependent on the types of investments you select. The Standard & Poor's 500® (S&P 500®) for the 10 years ending Dec. 31st, 2013, had an annual compounded rate of return of 7.3%, including reinvestment of dividends. From January 1970 through the end of 2013, the average annual compounded rate of return for the S&P 500®, including reinvestment of dividends, was approximately 10.6% (source: www.standardandpoors.com). Since 1970, the highest 12-month return was 61% (June 1982 through June 1983). The lowest 12-month return was -43% (March 2008 to March 2009). Savings accounts at a financial institution may pay as little as 0.25% or less but carry significantly lower risk of loss of principal balances.
It is important to remember that these scenarios are hypothetical and that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that Separate Account investment funds and/or investment companies may charge.
- Loan term in months
- Term in months for your auto loan. Typically this is 36, 48, 60 or 72 months. If your loan term is longer than your lease term, we compare the buy vs lease options to the time the lease expires, and then use your remaining loan term to calculate your outstanding loan balance.
- Loan interest rate
- Annual interest rate for your loan.
- Other fees
- Any fee, other than a capital reduction or down payment, required to be paid at the time of purchase. This may include license, title transfer fees, etc.
- Annual depreciation
- The rate of depreciation gauges how fast your new automobile will lose its market value. A high depreciation rate is about 20% per year, medium is 15% per year and low is 10% per year.
- Market value of vehicle
- Value of your auto after the lease term is over.
- Net cost of buying
- This is the total cost of buying your vehicle. This is calculated as:
- + Total up front costs (down payment + other fees)
- + Lost interest
- + Outstanding loan balance at time lease expires
- - Market value of vehicle at time lease expires
- = Net cost of buying
The lost interest on your purchase includes any interest you would have earned at your investment rate of return on the buy option's down payment and other fees. If the monthly payment for leasing is less than the monthly payment for buying, this also includes any lost interest due to the higher monthly payments. If leasing is more expensive than buying, your interest costs for buying are reduced by the amount of interest you would earn on the difference.
- Lease term in months
- Term in months for your auto lease.
- Lease interest rate
- Annual interest rate for your lease.
- Other fees
- Any fee, other than a capital reduction or down payment, required to be paid at the close of the lease. This may include license, title transfer fees, etc.
- Residual percent
- For leases, this is remaining value after the lease term expires. The higher this amount, the lower your lease payment will be.
- Security deposit
- Refundable security deposit required at time of lease. We assume that the security deposit is fully refunded at the time the lease ends.
- Net cost of lease
- This is the total cost of leasing your vehicle. This is calculated as:
- + Total up front costs (capital reduction + other fees)
- + Total lease payments
- + Lost interest on lease
- = Net cost of lease
The lost interest on your lease includes any interest you would have earned at your investment rate of return on the lease option's down payment, security deposit and other fees. Please see the definition for 'Net cost of buying' for an explanation on how we account for any interest you might earn by having a lower monthly lease payment.
When it comes time to look for a different vehicle, a buyer may wonder if it is better to buy or lease. The answer to this question will depend on individual circumstances. It is important to understand various advantages and disadvantages that come with either decision. Getting a closer look at both choices may help a person along the way.
Major Differences Between Buying And Leasing
Buying a car means that the individual will pay the whole price no matter the amount of miles it is driven or the time that it is kept. Monthly payments on a loan are typically higher. During the buying process, a person will need to make a down payment, cover sales tax, and set monthly payments with a predetermined interest rate based on a credit report.
Leasing means that one must only cover a portion of the car's full price. Even though many people believe that it is like renting a vehicle, this is not the case. During the leasing process, one does not always have to make a down payment, will only pay sales tax on monthly payments, and must pay a money factor. This rate is close to the interest payment for a loan. Many people who lease may also be charged other fees that are not applicable during the buying process. After the terms have expired, a driver may opt to buy the automobile for its depreciated, residual value or return it back to the dealer. With a closed lease, there is no chance to keep the automobile. With an open contract, a consumer can negotiate a purchase price after the agreement ends.
Advantages of Leasing
By far, the best advantage of leasing is flexibility. There are no long term commitments, so drivers can upgrade to a new model every few years. A typical agreement only lasts for two or three years. During this time, it will be covered under full warranty.
A typical lease does not require high initial out-of-pocket expenses. Monthly payments are usually lower than loan payments as well, which means extra money leftover each month. On the other hand, a consumer can afford a better model because payments will be lower. A final advantage of leasing comes for a business that can write the monthly expenses off. It may be necessary to consult a tax professional for additional regulations.
Advantages of Buying
There are also advantages associated with buying a vehicle. To begin, the car is owned, so modifications and accessories can be added to the vehicle. There are also no worries when it becomes nicked or dinged during everyday use.
The biggest advantage of owning is the financial benefit. Owning an automobile makes it an asset. This means that it can be liquidated at anytime. If a someone falls on hard times and cannot afford a loan payment, the car can be sold without much loss. With a lease, a person may face numerous penalties. In the end, buying an automobile is less expensive than leasing one. A consumer will spend less throughout the life of a loan.
Disadvantages of Buying
When a someone buys a car and owns it for many years, the warranty is bound to expire. When problems begin to occur, the owner will be responsible for repairs. If an individual is not capable of properly maintaining it, this can get very expensive.
Depreciation is another negative aspect associated with buying. Usually, property tends to appreciate with time. This is not the case with an automobile. A automobile will depreciate in value as the years go by, which can deplete the money that was invested.
Disadvantages of Leasing
Since most agreements only last a few years, this is the time when it will experience the most depreciation. Those who change cars every two or three years pay a high rate of depreciation. After the contract is over, he or she is without a vehicle. Many times, it does not make sense to spend nearly the cost of a purchase without having anything to show for it.
One of the biggest disadvantages is the mileage limitations. Most contracts will allow lessees to drive a specified number of miles each year without facing a penalty. Besides this fee, there may be other hidden costs.
Hidden Costs
There are often certain costs that sneak up on lessee.
- Fees: To begin, sales tax is added to the monthly charges. There are also termination fees that will be faced when the agreement cannot be completed. In a worst case scenario, a lending company may sell the vehicle at an auction and charge the amount left on the agreement minus the amount received from the sale.
- Insurance: One of the worst hidden costs comes from insurance. For example, if a shopper upgrades to a better model, an insurance premium may also increase substantially. Most agreements make an individual get additional coverage to account for losses in case of damage. Besides collision and comprehensive coverage, an individual will usually be required to get GAP insurance when leasing a vehicle. This will provide coverage for the amount owed to the lending company along with what the insurance company will compensate in time of an accident.
- Maintenance: A final hidden cost will be maintaining it against excessive wear and tear. When the term is over and it is time to return the vehicle, the dealer will expect it to be in near perfect condition. During the contract period, a driver is expected to conduct regular oil changes and tire rotations. Most times, the dealer will be exceptionally picky and make up reasons not to refund a security deposit. Every little scratch will be charged to the maximum degree. If a driver does not return the vehicle with four matching tires, the buyer will be charged for a whole new set.
How To Choose The Best Lease
It is essential to compare rates before making a final decision. Dealers are in a competitive market, so it may work out well for a consumer. It is vital to compare costs. For instance, an agreement that offers low fees each month, but requires a large down payment, may end up costing more instead of one that requires no down payment with a higher monthly fee. Some contracts might have a low rate with a large balloon payment at the end. Dealerships are the first place to discuss contract options. There are other places to consider as well. Multiple brokers exist along with banks or credit unions.
It is important to negotiate. To keep costs to a minimum, it is best to select a model with a high resale value. Before signing any paperwork, it is essential to read and understand every word.
True Cost Of Leasing Or Owning A Vehicle
When someone needs a vehicle, it is possible to lease a new model, buy a new vehicle, or buy a used one. Taking a look at the true cost of each transaction may shed some light on what will be better. Here are expenses as seen in the state of California for an automobile with a price of $29,500.
Most people prefer to buy a new automobile. Due to the increase in prices and decrease in wages, the average auto loan is seeing longer terms. On average, a loan will go for five years. After adding down payment, monthly payments, insurance, taxes, and maintenance, the total after a five year period is $52,361. The first year has the highest cost of ownership, but after the loan is paid off, expenses have decreased and the automobile is still considered new. In the future, expenses will be very low. This means that the longer the it is owned and in good condition, the owner will have little expenses to worry about.
Leasing a new car may seem attractive because someone can get a nice vehicle with less money per month than a loan. Most contract terms usually end after three years. After the first year, expenses are more than $4000 less with a lease over a loan. However, on a five year basis, they would need to enter into a new contract. Due to the fees, the overall five year savings is still only approximately $4000. This may seem like a good deal, but it is important to remember that these expenses continue to add up. When a buyer keeps a car for years after a loan is paid off, there is a substantial decrease in expenses as compared to always having a monthly payment.
The last example to examine is what occurs when a shopper buys a used car. Over a five year loan, a consumer will have spent approximately $44,000. This is $4000 less than leasing. In the end, they can save quite a bit more, especially if the car is kept until it dies.
In total, buying a used car appears the best decision ahead of leasing. Buying a new one seems to bring the highest expenses. However, the two buying experiences actually end with a consumer owning the vehicle. This allows for the benefits of earning equity in the purchase. Selling or driving it for years after the loan is over will help to overcome the savings of the lease. This makes it clear that leasing is actually the most expensive proposition.
Who Should Lease Instead Of Buy?
Leasing is an economical way to provide transportation for a business. It is also useful for regular people to drive something better than budget allows. However, since they cannot deduct a lease payment from taxes, it may be better to rethink a loan.
Leasing appeals to someone who wants to constantly drive a new vehicle. It also is good for an individual who wants to spend less each month on payments. It can be a wise choice for someone who values reliability and does not rack up high milage.
Who Should Buy Instead Of Lease?
People who keep a vehicle for many years should buy. Owning one for this amount of time will bring the biggest financial benefits. With a lease, there is never an end to monthly payments. Buying is also wise for people who drive far distances and collect high mileage. Even though initial costs are higher, value is held over time. Finally, buying may be smart for people who are not financially secure. Ending a lease can be very costly. Ending a loan is as simple as selling the vehicle.
Final Thoughts To Consider When Buying Or Leasing
The decision to buy or lease a vehicle will rest on certain considerations. Monthly budget will be a big factor to think about. A lease will offer a lower charges each month because one is only covering depreciation. Down payment and other fees are also considerations. Most agreements come with little down payments, but fees can be high.
The mileage that a driver will put on a car is also vital to consider. People who drive far distances should buy. Contract agreement terms often place a strict limit on allowed mileage. If a person has children or is hard on a car, it is best to buy. Leases will charge for excessive wear and tear.
Businesses often lease vehicles because part of the expense can be deducted, lowering their profits & thus taxes. When a car is being used for personal use, this is not the case. Therefore, it makes more sense for companies to participate in these agreements.
Finally, flexibility must be considered. When someone wants to drive a new model every few years, a lease will be extremely convenient. Penalties can be quite costly if a lessee tries to exit a contract before terms are over.
The decision to buy or lease a vehicle will depend on individual circumstances. The selection will depend on the car that a person drives, their driving habits, and the amount of money that they are willing to spend each month. Buying is recommended for people who drive many miles and enjoy not having a constant fee every month. Leasing is best for someone who wants to save on automobile expenses, takes excellent care of vehicles, and has a stable lifestyle.
