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

Explanation:

To compare the initial out-of-pocket cost for the lease and loan options, we need to calculate the total cost for each option.

For the loan option, we can calculate the total cost as follows:

Total cost = MSRP + down payment + interest

= $15,000 + $1,500 + $1,050 (7% of MSRP)

= $17,550

For the lease option, we can calculate the total cost as follows:

Total cost = (MSRP x money factor x 36) + acquisition and documentation fees + security deposit

= ($15,000 x 0.00271 x 36) + $1,250

= $5,925 + $1,250

= $7,175

Since the total cost for the lease option is less than the total cost for the loan option, the initial out-of-pocket cost is less for the lease. Therefore, the correct statement is:

a. The initial out-of-pocket cost is less for the lease.