The monthly loan payment
will be $906.85, so at the end of 24 months you will have
made $21,7640.40 in loan payments and the loan balance will
be $20,461.03. The residual of this vehicle at the end
of 24 months is 65%, so we assumed that you could sell the
vehicle for $26,590.20. Since the same figure is
plugged into the lease the purchase section, the exact
amount that the vehicle is sold for will not make a
difference in the analysis. The bottom line Total Cost
of Ownership is $16,376.87.
Look at Table 2 for the cost of
leasing the 2004 Lexus RX330. The initial lease fee is
$741.64. You have 23 additional lease payments of
$544.14 each for a total of $12,515.22. Different
financial institutions use different methods to calculate
the payoff on a lease. We have chosen the Constant
Yield Method, which is the most popular one. Under
this method, the lease payoff at the end of two years would
be $29,223.49. Most lessors also charge and early
termination fee on a lease. They will typically charge
extra payments or a percentage of the residual. We
have used a penalty of 2 extra payments in this example.
We then show the same selling price of $26,590.20. The
sum of these numbers is the total cost to lease of
$16,978.34.
So in this example it does
cost $601.47 more to end the lease early than to purchase
and sell the vehicle, but this number is pretty
insignificant compared to the total cost of ownership. However, you may notice that
the monthly cash flows between buying and leasing are not
equal. When you purchase, your monthly cash outflow of
$906.85 is $362.71 higher than the $544.14 lease payment.
The purchaser only catches up at the end of the twoyear
period when the vehicle is sold. In reality, most
people will invest their excess cash, often times in methods
that you may not have thought of. Please see our
article titled, "If I Buy a Vehicle,
at the end of 4 years I have an asset, if I lease I have
nothing", for details of different investment options.
If you could invest your $362.71 monthly savings at 8% you
will earn $704.87 in interest over the two year evaluation
period. This more than makes up for your $601.47
deficit. 
Table 1:
Cost of Owning Vehicle 
Down
payment 
$(
741.64) 
24
payments of $906.85 
$(21,764.40) 
Loan
Payoff 
$(20,461.03) 
Selling Price 
$ 26,590.20 


Total Cost of Ownership 
$
16,376.87 
Table 2:
Cost of Leasing Vehicle 
Initial Lease Fee 
$(
741.64) 
23
lease pymts of $544.14 
$(12,515.22) 
Lease Payoff 
$(29,223.40) 
2
pymts as penalty 
$( 1,088.28) 
Selling Price 
$
26,590.20 


Total Cost to Lease 
$
16,978.34 

If you are
considering leasing and you think that there is a chance
that you will have to terminate your lease early, make sure
that you understand the early termination clause in your
lease contract. In most cases there will be more than
one financing choice available to you, each with its own
cost of early termination. Sometimes it is worth it to
have a slightly higher monthly payment in exchange for a
better early termination option.
Analyzing early termination
options is one of the services that we offer to our
customers. If you have any questions or concerns in
this area, please call us at 18008005327 or shoot off an
email. 