Sample Pricing Scenarios

Financing, incentives, leasing, subvented leases — it's a lot to digest. Let's run the numbers for each scenario.

Say you're interested in car with a negotiated price (including the destination fee) of $23,415.

Assuming a down payment of $5,000, an interest rate (or APR) of 6.77 percent and 6 percent state sales tax, a 60-month loan would result in payments of $390.31. At a 3.9 percent discount finance rate, the monthly payments drop to $364.11.

Buying Scenario
  Normal APR Discount APR
Negotiated price $23,415 $23,415
Sales tax 6.0% 6.0%
Interest rate 6.77% 3.9%
Down payment $5,000 $5,000
Loan term 60 months 60 months
Monthly payment $390.31 $364.11
Total spent $28,418 $26,847

Now let's look at leasing scenarios. Let's take the same negotiated price, add on a $595 acquisition fee, use a money factor of .00287 (equivalent to 6.89 percent APR) and assume a 36-month residual value of 56.2 percent, or $13,160.

Under this leasing scenario, your monthly payment would be $432.55. If the dealer is subventing the lease with a money factor of .00089 (equivalent to 2.1 percent APR), that payment drops to $354.53. Remember — leasing saves you $5,000 up front with no down payment.

Leasing Scenario
  Normal Lease Subvented Lease
Capitalized cost $24,010 $24,010
Sales tax 6.0% 6.0%
Money factor .00287 .00089
Down payment $0 $0
Lease term 36 months 36 months
Monthly payment $432.55 $354.53
Residual value* $13,160 $13,160
Total spent $15,572 $12,763
Total cost to own
(Residual + total spent)
$28,732 $25,923

Leasing fees are not included in the residual value calculation.

On the surface, the subvented lease is the best deal — at least in terms of total cost to own and short-term cash flow. But that assumes that you pick up the entire residual value tab after your three-year lease expires; in reality, you'd probably finance that $13,160 at 7 percent or 8 percent if you decided to buy at term end.

Lessees are more likely to begin another lease. This keeps a new car in the driveway and saves any possible repair headaches, which are two of leasing's key advantages.

After three years, the buyers in our examples are just two years away from ownership. But many buyers at this stage are electing to trade in their vehicles, rolling their remaining payments into a second car loan; average debt at trade-in was $3,986, according to Power Information Network, an affiliate of J.D. Power and Associates.

If at three years into a five-year loan you can't resist the temptation of a new model, then you should be leasing. But if you're able to complete the loan term, you now have several options.

One option is to trade it in. Say the car in our example is a midlevel passenger car with a five-year residual value of $8,900; according to CNW, trade-ins of that type average $8,344 toward new-car purchases. Or you may decide you can do better by selling it on your own.

Of course, you can also just keep driving it. Just remember that if you're without an extended or new-car warranty, large repair bills could offset your long-term savings.

In sum, buying is usually the better long-term financial option, assuming you have a good warranty and take reasonable care of the vehicle for an eventual sale or trade-in.

It's fine to lease if the convenience of having a new car is worth a little extra money in the long run, or if lower payments and better cash flow are more important than long-term savings. But make sure you can stay within the mileage limits and avoid excess wear-and-tear charges. And be certain you understand all the terms of the lease.

Conversely, if you just want to put a more expensive car in your driveway for lower payments, or you don't have money to put down, you'd better think again. Leasing will cost you plenty down the road.

© 07/20/2012
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