Let’s get into the nitty-gritty. Let’s start with a Toyota Corolla priced at $26,000. We’ll look into an example dealing with a 3-year loan and a 3-year lease. Assume the Corolla will depreciate up to about 50% of the original value, or $13,000. The finance rate and lean for this example will be 5.0% APR. Finally, let’s assume no down payment was made.

The Loan

First, let’s look at what we can expect from the payments on our loan. Pull up an Auto Lease Calculator and plug in the numbers above into a 3-year term. Our payments will be $779.24 per month and the cost of financing comes to $2052.76. All together our cost will be $28,052.

Now we can see how much money we can recover from our 28k cost. Whether we trade or sell the vehicle, we can expect to make over 50% of the cost back. After 3 years of use, the depreciations compounded with wear, tear, and financing, we can still expect a considerable return. Only 3 years of consistent, healthy, use won’t bring the value down of the lease too much. In our example, our recouped cost is $15,052

The Lease

Now let’s focus on the lease. We are doing the same calculations as we did on the loan but now we have to factor in the average $600 acquisition fee and the $350 disposition fee. The wear and tear to the vehicle applies here as well.

Let’s reference the lease calculator again to finalize our work. Our monthly cost now comes to $460.13. After 36 months our total costs will be $16,915 after adding the disposition cost. Additionally, financing comes out to $2,993

At this point in our work, we now need to consider the “money factor.” The money factor replaces the concept of an interest rate in terms of our loan. Take the initial interest rate and divide it by 2400. This brings a 5.0% APR to a money factor of .0021. And finally, add on the residual value of the care and we will have a clear idea of what our final cost will be.

Final Breakdown

Finally, we must consider sales tax. Sales tax is paid on purchased vehicles and leased vehicles. This tax will vary based on state. We’ll assume a local tax rate of 6.0%. For a $26,000 vehicle the tax for a purchase is $26,000 x .06 = $1560. For a lease, the tax is applied to each monthly payment ($460.13 in our example). So, $460.13 x .06 x 36 months = $993.