Sarah and Tyler Hudson, a dual-income couple in their late 20s, want to replace their 7-year-old car, which has 90,000 miles on it and needs some expensive repairs. After reviewing their budget, the Hudsons conclude that they can afford auto payments of not more than $370 per month and a down payment of $2,000. They enthusiastically decide to visit a local dealer after reading its newspaper ad offering a closed-end lease on a new car for a monthly payment of $265. After visiting with the dealer, test-driving the car, and discussing the lease terms with the salesperson, they remain excited about leasing the car but decide to wait until the following day to finalize the deal. Later that day, the Hudsons begin to question their approach to the new car acquisition process and decide to reevaluate their decision carefully. Assume that the Hudsons can get the following terms on a lease or a bank loan for the car, which they could buy for $15,000. This amount includes tax, title, and license fees. Lease: 48 months, $265 monthly payment, 1 month's payment required as a security deposit, $300 end-of-lease charges; a residual value of $6,690 is the purchase option price at the end of the lease.
Loan: $2,000 down payment, $13,000, 48-month loan at 6 percent interest requiring a monthly payment of $305.31; assume that the car's value at the end of 48 months will be the same as the residual value and that sales tax is 7 percent.
The Hudsons can currently earn interest of 4 percent annually on their savings. They expect to drive about the same number of miles per year as they do now.