What you should
consider.
Car
dealers are constantly advertising leases of new $30,000 cars for
$299/month. The
key to evaluating a lease is in the fine print but if you’re watching a
TV commercial, you’ll probably have trouble picking it up without a speed
reading course or risking long-term eye damage.
A
lease is simply another means of financing.
It has most of the characteristics of a loan with a few exceptions
(e.g., title of the car remains with financing company).
Unlike a loan, many of the terms of the lease are not obvious or well
understood.
As a consumer, you need to do a little work...
Get
the necessary figures
Principal:
-
The “principal” in a lease is equal to the
selling price of the car. You
need to deduct all possible discounts available from the selling price
to get a meaningful value. In
other words, you need to find out the best “cash” price on the
vehicle
Down
payment (called many other terms like capital reduction, etc.) :
-
This
is not always disclosed in the ads, but if you talk to the dealer, this
one is easy to get.
You will likely need to put up a security deposit, but if it is
refundable at the end of the lease, don’t include this in your
calculations.
Residual
value:
-
This
is usually disclosed in the lease (not the ads) and can be very
significant. The residual value (also called the buy out) is what it
will cost you (before sales tax) to purchase the vehicle at the end of
the lease term. In some leases, this value is guaranteed, meaning you
can return the car after the end of the lease without further
obligations.
If
you guarantee the residual, you must pay the difference between the
stated buy out in the lease and the wholesale value of the car at the end of
the lease.
For obvious reasons, this type can be much riskier.
Is
the lease good or bad?
One
way to evaluate whether the lease is good or bad is to figure out the
interest rate being charged.
Interest you say?
Inherent in every lease is an element of interest.
The rate is rarely disclosed so you need to do some calculations
(preferably with the help of a financial calculator or computer).
Assume
a car worth $20,000 is being offered on a lease with a three-year term,
monthly payments of $315 (excluding sales tax), a $2,000 down payment
required (excluding tax and security deposit) and a residual value of
$10,000.
If you don’t have a computer, try this “simple” formula:
A)
Total monthly payments
($315 x 36)
$11,340
B)
Residual value 10,000
Total
required to own at end of lease $21,340
(C=A+B)
Total
financed - Selling price
$20,000
D)
Down payment =
($ 2,000) 18,000
Total
implied interest $
3,340 (E=C-D)
F)
Average balance of lease outstanding
- ˝ x (D+B) $14,000
Approximate
implied rate E ¸
F ¸
number of years in lease =
$3,340 ¸
$14,000 ¸
3
7.9%
The 7.9% interest rate
should be compared to the best rate of interest you could get on a
comparable car loan. In this
case, the deal does not look too bad.
Click
here for online calculator !
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Final
considerations
After
you do all the math, don’t forget a few things:
You
will also pay sales tax (PST plus GST) on the monthly payments.
If an ad says the car will cost you $299/month, you really pay $337.87. You will also pay
sales tax on your down payment and security deposit (e.g., a $2,000 down
payment will really cost you $2,260).
Be
cautious of misleading advertising. Remember,
if someone says you can lease a $30,000 car for $299/month, you will either:
Have
a huge down payment, or
Have
an unrealistic residual value, or
Have
an extra long lease term (five years or more) meaning the total interest
paid will be extremely high; or
a
combination of the above.
Most
leases have kilometre restrictions and penalties if you drive more than a
stated number of kilometres. Make
sure this is considered in advance and included in your analysis.
Even
though you don’t have legal title to the car, you still must keep it
insured and in good condition (regular oil changes, maintenance, etc.)
Maintenance items are not included in the lease price.
If
you are using the car for business and a portion is tax deductible, the
above analysis may need to be modified.
If
you are in doubt about a leasing or financing matter, please
contact
Church Pickard.
Church Pickard Online: is an outstanding new part of our commitment to providing fast, efficient,
and innovative solutions to business.
Winning Team |
John Annesley
B. A.,
C.A. Partner
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Grant McDonald
B. Sc., C.A. Partner
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Lorana LaPorte
B. Comm., C.A., C.F.P. Partner |
Lee-Anne Harrison
B.Sc., C.A.
Audit Manager |
Erin Macrae
B.A., C.A.
Associate |
Lilia Riabets
C.G.A.
Accounting Manager |
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Peter Sinclair
Sr. Accounting
Technician |
Anna Owens
B.A., C.A. |
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B.A., C.A.
Accounting Supervisor |
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B.A., Articling
Accountant |
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B.A., C.A. |
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Accounting
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Accounting
Technician |
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Administrative Assistant |
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