Question

Tim needs a new car while he attends college in the United States for the next three years. The car he would like has a MSRP of $15,000. A local dealer can get him a 3-year loan with a 7% interest rate if Tim can give them a $1,500 down payment.

The same dealer offers the same car to lease with a money factor of 0.00271 and a residual value of 75%. The lease requires an additional fee of $1,250 to cover Tim’s security deposit and the acquisition and documentation fees for the car.

Tim is looking to drive the car home with the smallest initial out-of-pocket cost. Which of the following statements is true?
a.
The initial out-of-pocket cost is less for the lease.
b.
The initial out-of-pocket cost is less for the loan.
c.
The initial out-of-pocket cost is the same for the lease and loan.
d.
The initial out-of-pocket cost for a lease is not comparable to that of a loan.

Answer 1

a. The lease.

Loan requires a $1,500 down payment up front. The lease requires a $1,250 fee at signing. $1,250 < $1,500, so the lease has the smaller initial out‑of‑pocket cost.