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Leasing vs. Buying


Leasing and buying have many similarities as well as many differences. Example 1 illustrates the life cycle of a 36-month lease. The graph shows the typical situation in which the value of the vehicle is less than the residual value at lease-end. Example 2 illustrates the life cycle of a 60-month loan for the same vehicle.

Leasing has a different legal structure and requires different disclosures than a loan or finance agreement to purchase a vehicle. Example 3 shows that when you make monthly payments, the financial aspects of a lease are similar in some ways to those of a loan. In a lease, the adjusted capitalized cost is often amortized (reduced) similarly to the way the amount financed is reduced in a fully amortizing credit sale or loan. Example 3 compares a 60-month loan amortization with a 36-month lease amortization, each using the Constant Yield (Actuarial) method. Although each transaction starts with a balance of $24,000, the lease balance ends at the $12,000 residual value at 36 months, while the loan balance continues to be amortized to zero over 60 months. In effect, the lease ends when the end-of-term lease balance is projected to be close to the residual value. However, in the loan, the market value of the vehicle at 36 months may or may not equal the loan balance. At some point in the loan, you will be building equity in the vehicle.

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Last update: May 5, 2003