Down payment Lease versus Loan Finance. Choosing lease or loan your options Find helpful auto lease / loan information and tips.
finance options pros and cons of car leases and auto loans borrowing choices

Car Lease or Vehicle Loan
Pro's And Con's

You're at the dealership and you've talked with the car sales rep. and he/she now presents 2 payment options: Lease or Loan Finance. You look at both options and clearly the lease has a lower monthly payment and you say... hmmm, well looks like the lease is cheaper. Or is it?

Quite a number of people fall prey to leasing terms because leases look cheaper. They are complex because they don't use straight forward figures and the potential for obscure manipulation of leases can make it seem like a deal when in fact you are being taken advantage of or at the very least (with the more honest dealerships) not getting as good a deal as you think you are getting. Unless you've done careful lengthy homework and know how to calculated the costs, leases can be very foggy.

Estimates as high as 85 percent(1) of all automotive buyers do not have adequate knowledge to negotiate at the dealer table when buying a car. Even fewer people understand how a lease works and dealerships don't seem to help you much to understand how a lease is figured. Even the sales rep. at times does not understand how to explain and calculate lease formulas and that's because a computer program calculates the lease payments for them.

No law requires APR disclosure on a lease. Again, if you don't know what rates you're eligible for on a lease, or how to calculate payments, you're a sitting duck, Eskeldson said. The law requires disclosure of the rates you'll get on an auto loan, but not on a lease.

“It's perfect for tricking someone into a horrible lease,” he said. “Someone might say, we can get you on a lease with a lower APR, but with your credit, you could only get X percent on a loan.” If you don't know any better, you might fall for it. —Quoted from December 12, 2002, CNN(1)

Let's compare each:

Car Down Payment and Fees
May have security deposits and other upfront fees that you cannot avoid. These fees do not contribute to the actual payment on the car.

If fees are quite high, less of your down payment goes to the car should you include extra money for down payment

Example: Security and lease fees are $789 and you put down $2,000. $1,211 is actually put to paying the car lease.

You pay only processing fees which are usually minimal.

More of your down payment goes to the investment of your car if you decide to put more money into the initial payment. You buy more into your car instead of into fees and security deposits.

Example: Loan processing fees are $89 and you put down $2,000. $1,911 is actually put to investing in your car.

Monthly Payment Amounts
(with car price being equal on both finance methods)
Usually lower monthly payments.

Example: Monthly lease payment is $249 for 36 months and you return the car to the dealership with no return on investment.

Monthly payment $229.00
Lease duration (mos.) 36
Total lease payments = $8,244.00
Down payment + $2,000.00
Actual cost of lease = $10,244.00
Divide by 36 mos. 36
Actual monthly pmt. = $284.56

It's true that dealerships do give you the option to buy the car. However, you end up paying more because of the method of calculation used for the lease. The dealership is counting on you repeating another lease term on another car. If you lease several times, you end up paying much more for cars over the long term.

Monthly payments may appear higher, until you divide it out.

Example: Monthly loan payment is $274 over 5 years (60 months) and you sell the car for $4,500 after paying it off.

Monthly payment $274.00
Loan duration (mos.) 60
Total loan payments = $16,440.00
Down payment + $2,000.00
Car resale value $4,500.00
Actual cost of loan = $13,940.00
Divide by 60 mos. 60
Actual monthly pmt. = $232.33

If you buy the right car (reliable and the one you like), your resale value will be higher or you may keep the car longer (Hondas, Toyotas, and some select American makes are known to provide good service for 8+ years).

Ease of Calculation
Leases are much more complex to understand for the average individual and probably for most people. They involve many variables (see below for terminology) which can confuse the cost issue. Top that with unconventional calculations that most people buying cars have no clue about and dealerships have you at their mercy.
Loans are simpler because you just deal with an interest rate and the amount of the loan. It's harder for the dealership to hide costs when figures are more straight forward. That is one reason why dealerships prefer leases over loans despite some dealerships saying that they want you to be informed.
 (1 Some jargon used in leasing:
Cap cost “Capitalized cost” or the total cost of the car agreed upon that you're leasing.
Net cap cost Cap cost minus factory-to-dealer incentives, rebates or trade-in value.
Depreciation The decline in value of the care between the time it's driven off the dealer's lot and the time it's returned at lease end.
Residual value What the car is worth after depreciation
Money factor The interest rate divided by 2,400. A money factor of 0.003 would be 7.2% APR
Since leasing is usually (more like almost always) more expensive, we recommend a car loan as a simpler way to buy a car and to know that you are not being over charged by accepting lease terms that are unclear. Dealers will try to convince you why leasing is desirable especially if they are trying to upsell you. They might say that you're getting more car for the same price with a lease as a lesser car that you get with a loan. It's better to decide what you want, get your loan and stick to your guns when you head to the dealership.

We say “why lease when you can own a car and know what you are saving in terms of car costs.” Loans are cheaper and simpler in the long run when you get loans at good rates.

(1) 12/12/02, CNN

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