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Consumer Math Name:
Lesson 40: Leasing vs. Buying Hour:
TO LEASE OR TO BUY, THAT IS THE QUESTION!
Buying a car can be overwhelming. In fact, the pleasure of getting a new car can be quickly clouded during the
financing decision-making process and price negotiations. Besides price haggling, many car shoppers are plagued
with the decision to lease or buy. Which financing decision is right and why? This activity will focus on
rationalizing that choice. Let’s assume you are purchasing or leasing a new Honda Accord priced at $26,000. We’ll
compare a 3-year loan and a 3-year lease for this car. After 3 years, the car will be worth 50% of original value
regardless of whether we lease or buy. Our finance rate for both the loan and lease will be a 3.0% APR. We’ll
assume no down payment for either.
1. Lists the pros and cons of leasing and buying.
Leasing Buying
Pros Cons Pros Cons
Answer the following questions. Show all work when necessary.
2. What is the residual value of the car after 3 years regardless of whether you leased or bought it?
3. What is the depreciation?
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COSTS OF BUYING A CAR
For our loan we will assume a 5.0% APR for 36 months with no down payment.
4. Type into google: “Bankrate Auto Loan Calculator” to calculate the cost of financing the car for 3 years at a 5.0%
APR.
Amount
Monthly Payment
Total Amount Repaid
Finance Charge
Total Cost Spent Assuming
sell/trade-in car for $13,000 after
three years
(Depreciation + Finance Charge)
COSTS OF LEASING A CAR
For our lease, the monthly payment is based off the deprecation. We’ll use the same numbers except we’ll add
Honda’s standard acquisition fee, $595, to our cost. We’ll also add a typical $350 disposition fee that is charged
when the vehicle is returned at lease-end. We’ll again assume normal mileage and wear, therefore no other lease-
end charges.
5. Use a Lease Calculator (http://www.leaseguide.com/calc/), to calculate the cost of leasing the car. Use $26,000 for the base cap price. Do not fill-in the extra fees or sales tax. We will factor that in later.
SALES TAX
In Michigan, sales tax is paid on both purchased vehicles and leased vehicles. Let’s assume the normal state tax
rate of 6.0%.
6. When buying a car, the sales tax is applied to the purchase price of the car. What is the sales tax if you purchase the car?
7. For a lease, the tax is applied to each monthly payment. How much would you pay in sales tax over the course of the lease?
Amount
Monthly Payment
*Total Amount Repaid
Finance Charge (Get this from the lease
calculator)
*Standard Acquisition Fee
*Disposition Fee
Total Cost of Leasing the Car (add up the * rows)
RECAP
Use your values you calculated in the above sections to fill-in the table below.
Buying Leasing Difference
Monthly Payment
Finance Charge
Sales Tax
Total Cost After 3 years **Assume you are selling/trading
in the car for $13000 after 3
years
8. Which costs less leasing or buying?
9. Why is the finance charge higher for leasing the car than buying the car?
10. What could change the numbers? What factors did we not consider in our calculations?
11. When would it be advantageous to buy a car instead of leasing a car?
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