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Intro to "Monthly Payments when Leasing or Financing a Vehicle"

 

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Monthly payments when leasing or financing a vehicle The monthly payments calculated with a long term contract for the use of a car or any other vehicle (motorcycle, snowmobile, boat, ATV, RV, etc.) will differ if it is leased or financed. There is in fact a significant difference on the payments if leasing or financing.

For starters, when you rent a vehicle, you pay for its use during a definite period only, without becoming the owner at the end of the term. The monthly cost related to the lease will then reflect the cost of one month of use. The calculations are made differently in the case of financing, because it is a purchase with payments that are spread out over a period of time. The costs are applied on the complete term and then amortized on a fixed period of time, which ranges normally from 1 to 5 years, not only one month.

The payments will be smaller when leasing because the contract includes a residual value at the end of the term and you will pay on a monthly basis until the balance reaches that residual value. The monthly payments are calculated on the total amount to finance minus the residual value. In the case of financing, you don't have a residual value and the contract requires you to pay the complete amount, until the balance reaches zero. Your payments will therefore be bigger with a loan.

Additionally, when leasing, the percentage of taxes will be applied only on the monthly rent and the initial cash down, but not on the full amount. This means that the monthly payments are calculated on the total amount excluding taxes, as opposed to financing where the taxes are applied immediately on the total price of the vehicle, and the payments are calculated after. If there is cash down, it will be applied on the price including taxes and the payments will be calculated on the remaining amount. You will then pay interests on the taxes with a loan.

The taxes seem higher when financing, but if you decide to buy the vehicle at the end of the lease at the residual value, you will pay taxes on that residual value, which balance things out a little bit. However, if you exchange an old vehicle with a new one, no tax is applied on the exchange value and the taxes will be applied on the net amount after the exchange has been done, so you save with both options.

Finally, the monthly lease payments are made at the beginning of the month, so you won't pay any interests on the first payment, only capital, but when you finance, the monthly payments are made at the end of the month, so you will pay cumulated interests on the first payment.

You can verify what will be your monthly payments by filling up the Monthly payments when leasing or financing a vehicle calculator:

These reasons explain why the interest is lower when you finance the vehicle. If you want to have a better picture of the total costs between renting and financing, and evaluate your options, you can complete the Buy or Lease a Car (Vehicle)? calculator.

 

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Numbers in our calculators are rounded to two decimals.
The same calculations made in an Excel spreadsheet may differ slightly.

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