(please see disclaimer at the end of the article)

I think back to car-buying experiences when I knew nothing about how credit and finance worked.  There is that tendency to just focus on how low that monthly payment can go.  You know you want that car.  So, here is how a potential car buying scenario can go wrong.

You are emotionally attached to the car.  You know the feeling.  I have been there too many times.  I must go ahead and admit…I have a weakness when it comes to cars.  That is my big stewardship struggle.  Fortunately, I am better than I used to be.  You want the deal to work out and it all hinges on making the payment work.  The finance manager says to you, “I have a deal for you.  The best way to get a lower payment is to lease.”

Are you really getting the best deal with a lease?  Thus the lease versus finance debate begins.

I had a listener send me some real numbers on a lease that he just did on his car.  He wanted me to compare it to a straight finance deal.  The analysis portion of it is pretty easy.  Most people do a lease for the low payment.  A lease is nothing more than a debt that has an interest rate.  You just don’t see all of the finance terms.

Is the lease really the best route to go?  Well, if the low payment is your focus, you can achieve the same objective by taking out a conventional loan at a much longer loan payment schedule.  By doing so, this lowers the payment.  In most cases, it is lower than the lease payment.  Plus, at the end of the period you have equity in the car, unlike the lease, where you give the car back with no equity.

Let’s look at a real-life example from a listener.

Car Type:

2008 Toyota Corolla

Lease agreement:

Monthly payments of $359.24

48 month lease

He pays the lease rate of $359.24 a month for 48 months and then turns the car back in or has the option to buy it at a reduced rate.

This consumer could have financed the entire deal ahead of time through my lender of choice (www.penfed.org) and had these terms:

Monthly payments of $344.32

No lease

Total amount financed is $18,118.95

Conventional car financing interest rate 5.29%

Paid off in 60 months

At the end of the lease (48 months), he would have just turned the car back into the dealer.  On the other hand, at the end of 48 months of the conventional loan, his note would have only been $3,589.24.  Chances are that the car would be worth at least twice that amount at that point.  Therefore, he could sell the car at the end of 4 years and have equity to put into another car.

Let’s say that you wanted to get the car payment even lower.  Pentagon Federal Credit Union will also offer these rates:

5.29% up to 72 months – this would reduce the payment to $294.23

7.09% up to 84 months – this would reduce the payment to $274.25

If you are looking at a leasing deal, run the same numbers in a conventional loan.  That will tell you whether or not this is a good deal.