Why Leasing Makes Sense

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At SMG, our brokers constantly discuss why leasing makes sense to the majority of customers.  The number 1 thing we hear is:

I don’t want to pay for 3 years and have nothing to show for it at the very end.

The truth is you will be able to keep thousands in your pocket and have more flexibility.
Here is why:

  1. With a lease, you only pay the depreciation on the car plus interest and sales tax on your monthly payments!  More importantly, you do NOT pay any sales tax on the residual value of the car which can save you thousands right off the bat.
  2. You get to upgrade every 3-4 years.
  3. You won’t suffer from any crashes or devaluation.

Here is a quick calculation to help you better understand the mechanics of a lease:

The assumptions:

  • Car has MSRP of $40,000
  • Dealership has agreed to sell the car for $37,725 which includes the lease acquisition cost.
  • Let’s assume that you’re giving a down payment of $1000.  That gets subtracted from the agreed sales price.
  • Adjusted cap cost is $36,725.
  • Residual Percent (assuming 12K miles per year) is 56%.
  • Money Factor (referred to as rents or interest) is .00120 (equivalent APR is 2.88%).
  • Term is 36 months.
  • Sales tax rate is 8.75%.

The math:

  • Calc Residual: MSRP x Residual % ($40,000 x 56% = $22,400)
  • Calc Depreciation: Sales Price – Residual ($36,725 – $22,400 = $14,325)
  • Calc Rents/Interest: (Sales Price + Residual) x Money Factor x Term ($36,725 + $22,400) x .00120 x 36 = $2,554)
  • Calc Base Payment: Depreciation + Interest ($14,325 + 2554 = $16,879)
  • Calc Monthly Payment: Base Payment / Lease Term ($16,879 / 36 = $468)
  • Calc Monthly Payment w/ Tax: Payment x Tax Rate ($468 x 1.0875 = $508.95)


There it is. $508 per month and drive off is only first month’s payment. Thus, approximately $1,000. The out of pocket for 3 years is $1,000 + $900 drive off + 35 payments at $508 = $19,680.

You may say, Wow – that is a lot of money to essentially rent a car. Let’s say you put down $1,000 and financed the car for 36 months at 1.9%. The payment would be $1,135 per month vs. $508 per month.

There is certainly no right or wrong answer when it comes to whether you should lease or buy a car, but there are a lot of advantages to leasing. Another thing to consider is that you have the contractual right to buy the car at any time during the lease term. You already know in advance exactly how much you will have to pay to buy out your lease ($22,400) and If you love the car, you get to buy a pre-owned car from yourself!

One thought on “Why Leasing Makes Sense

  1. Roxie says:

    whoah this blog is great i like reading your articles.

    Stay up the good work! You already know, many people are hunting around for this information, you can help them greatly.

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