Leasing vs. Financing: The Total Cost Breakdown When Buying Out Your Lease

If you’re considering leasing a car with the intention to buy it out at the end of the lease term, or if you’re weighing the decision between leasing and financing right from the start, it’s important to know how these options stack up in terms of total costs. In this post, we’ll break down both scenarios, showing you the numbers to help you make an informed decision.

Scenario Details:

• Car Price: $30,000

• Sales Tax: 13%

• Lease Term: 5 years (60 months)

• Finance Term for Buyout: 4 years (48 months)

• Residual Value (Buyout Price): $12,000

• Lease Interest Rate: 1.99%

• Buyout Financing Interest Rate: 4.99%

Step 1: Leasing with Buyout Financing

Leasing Costs Breakdown:

1. Depreciation:

The car’s value depreciates over the term of the lease. Since you’re leasing 60% of the car’s value, the depreciation cost is calculated as: $18,000 plus tax plus interest

2. Finance Charges:

The finance charges are calculated based on the depreciation amount at an interest rate of 1.99% over 5 years:

3. Total Lease Cost (before buyout): $22,701

4. Monthly payment: $378.35

Adding the depreciation and finance charges together, the total cost for the lease term is:

Step 2: Financing the Buyout

At the end of the lease, if you want to buy the car out, you’ll need to pay the residual value, which is $12,000. However, you’ll be required to pay sales tax on the buyout price, making it:

You now need to finance this amount over 4 years (48 months) with an interest rate of 4.99%. Let’s calculate the monthly payment and total cost for this financing.

Monthly Payment Calculation:

We use the standard loan payment formula:

Where:

• Loan Amount = $13,560 (buyout price including tax)

• Monthly Interest Rate = 4.99% / 12 = 0.004158

• Number of Payments = 48 months

So, the monthly payment for the buyout financing is $276.30

Total Buyout Financing Payments: $14,822

Step 3: Total Cost of Leasing with Buyout Financing

Now, let’s calculate the total cost of leasing with buyout financing. This includes the lease payments for 5 years and the buyout financing for the following 4 years.

1. Total Lease Cost (before buyout): $22,701

2. Total Buyout Financing Payments: $14,822

3. Total Cost from Both: $22,701 + $14,822 = $37,523

Step 4: Financing the Car from the Start

If you decided to finance the car from the beginning, the financing breakdown would look a bit different. For simplicity, let’s assume you’re financing the entire car price of $30,000, plus 13% tax, with an interest rate of 3.99% over 9 years (108 months).

The monthly payment for financing the entire car price is $331.09

Total Finance Payments for 9 Years: $39,657

Step 5: Total Cost Comparison

Leasing with Buyout Financing

• Total Lease Cost (before buyout): $22,701

• Total Buyout Financing Payments: $14,822

• Total Cost from Both: $22,701 + $14,822 = $37,523

Financing the Car from the Start

• Total Finance Payments for 9 Years: $39,657

Conclusion: Which Option is Better?

Leasing with Buyout Financing results in a lower overall cost than financing the car from the start. Here’s the comparison:

• Leasing with Buyout Financing: $37,523

• Financing the Car from the Start: $39,657

Leasing with the intention to buy out the car at the end of the lease term will save you $2,134 compared to financing the car over 9 years.

Additional Tip: Leasing Offers Flexibility, Especially After Fender Benders

Leasing can also offer peace of mind if you ever get into a minor accident, like a fender bender. Since you’re not responsible for the full depreciation of the car, you can simply return it at the end of the lease term, and the damage doesn’t have to impact you financially. You avoid the risk of taking ownership of a car that’s worth much less due to an accident.

On the other hand, with financing, any depreciation and damage from accidents are your responsibility. If the car’s value drops significantly because of an accident, you’ll bear that financial burden.

Important Tip: Not All Car Makers Offer a Buyout Option

Before committing to a lease, make sure to check whether the manufacturer offers a lease-end buyout option. Some car makers, like #Tesla, do not offer the option to buy out the car at the end of the lease term. Always confirm this detail before you sign the lease agreement, as it can affect your future plans.

By understanding the total costs of both leasing with buyout financing and financing a car from the start, you can choose the option that best suits your financial situation. Whether you prefer the flexibility of leasing or the long-term investment of ownership, knowing the costs can help guide your decision.

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