Portfolio Project: What s More Economical? Purchasing or Leasing a Car?

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1 Portfolio Project: What s More Economical? Purchasing or Leasing a Car? When you are an adult, your success in life is going to depend on math. After all, some of the most important numbers in an adult s life relate to money. Money is needed for everything from housing and food to transportation and entertainment. It s important to know how to handle money. For this project, you will look into purchasing a car and comparing different car-buying options. Buying a car takes a lot of money there s the down payment, monthly payments, gas costs, insurance, and maintenance. But there are ways to save money too. It all depends on your decision-making process and math. Objective The student will be able to: o Describe the importance of math as it relates to money o Strategically weigh short- and long-term benefits o Understand the difference between buying and leasing a product Plan To get information for specific makes and models of cars, check out Edmunds.com. By clicking on New Cars or Used Cars and choosing True Cost to Own, you can see a projection of the first five years of costs. When making a big expensive purchase such as a car, it s important to look into the future and to calculate costs. In this project, you will compare three different ways to own a car: A new car purchase A leased or rented car A used car purchase 1

2 New Car Purchase Although owning a new car is nice, the cost of buying a new car has risen faster than the earning power of most people. As the cost of new cars has risen, the length of loans has increased. Many new car loans are stretched as long as five or six years to keep the monthly payments lower. In the example, you will be using a 6% interest, three-year loan so you can more easily compare it to a three-year lease contract. Imagine a car owner bought a new car that cost $20,000 and drove it 12,000 miles per year. Here is how the first year s expenses look. New Car Ownership First Year (3-year 6%) Down $3,000 $608 per month $7,296 Insurance $1,140 Maintenance & Repairs $100 $300 TOTAL $11,536 In the above example, the buyer made a down payment of $3,000 to reduce the monthly payments. This required a large lump sum of money to drive away in the car. Clearly, during the first year of ownership, the costs were very high. 2

3 Over Five Years For the first three years, the car payments are high. Then, after the loan is paid off, the car is still fairly new and expenses are lower. By the end of the five years, here s how the totals look: New Car Ownership Five-Year Total (3-year 6%) Down $3,000 $608 per month $21,888 Insurance $5,700 Maintenance & Repairs $1,100 ($300 included in monthly payments $1,000 for first TOTAL $32,388 Because of the loan, $2,988 was spent on interest alone that s money that you have to pay off in addition to the loan. A significant amount of money was also spent on insurance and government fees. Leasing a New Car When someone rents a car without actually buying it, they are said to be leasing it. As the cost of new vehicles has risen, the popularity of leasing has also increased. Here are some of the reasons people lease: No large down payment Lower monthly payments Lower sales tax than if purchasing a car In other words, you pay little money out of pocket, and you make smaller monthly payments. Keep these points in mind as you look at the numbers. Again, we chose a $20,000 vehicle and examined the cost of a three-year lease, assuming it would be driven 12,000 miles per year. 3

4 New Car Lease First Year (3-year 6%) Down $1,000 $4,200 $350 per month Insurance $1,380 Maintenance & Repairs $100 $300 TOTAL $6,680 Notice that the first year of leasing a car costs $6,680, which is less than the $11,536 spent on a new car during the first year. However, in our five-year scenario, a second three-year lease must be initiated. This would require paying another round of drive-off fees, government fees, and more lease payments. Check out how that affects the five-year total. New Car Lease Five-Year Total (two 3-year 6%) Down $2,000 $350/month for 36 $21,840 months $385/month for 24 months Insurance $6,900 Maintenance & Repairs $800 $1,230 TOTAL $32,140 With the added fees, renting a car ends up being similar to the cost of buying a car. Plus, a leaseholder doesn t actually own his or her car after the leasing period; he or she has to give it back. Meanwhile someone who bought his or her car can drive it until it breaks or can sell it. 4

5 Used Car Ownership Buying or leasing new cars is expensive. It s time for some good news used cars are much less expensive. In this example, we assumed that a person bought a used car for $10,000 at an 8% interest rate because used car loans are financed at higher rates. Used Car Ownership First Year (3-year 8%) Down $2,000 $3,420 $285 per month Insurance $850 Maintenance & Repairs $300 $200 TOTAL $6,570 As you can see, the first-year expenses are still pretty high. But after three years, the picture improves the car is paid off and expenses remain almost level. It is also cheaper to buy insurance for a used car than a new car. You may end up paying slightly more in maintenance and repairs than for a new car, but the savings more than make up for it. The real savings of owning a used car comes from all the years of potential service it provides after it s paid off until the wheels fall off. In other words, after the car is paid off, the cost of keeping the car is very low until it finally completely breaks down. Look at the five-year total. Used Car Ownership Five-Year Total (3-year 8%) Down $2,000 $10,260 $285 per month Insurance (rates drop after first three years) $3,430 Maintenance & Repairs $2,700 ($200 included in monthly $650 payments for first TOTAL $18,390 5

6 Produce Answer the following questions. 1. Why are maintenance and repair fees more expensive for a used car than for a new car? 2. Over five years, how much more expensive is it to buy a new car than to lease a new car? How much more expensive is it to buy a new car than a used car? 3. In the long run, why might buying a new car actually be cheaper than leasing one? Reflect Here are the answers to the previous questions: 1. Car parts become less effective and break over a period of time. Used cars are more likely to need pieces fixed, parts replaced, and regular checkups. All those trips cost money. 2. It costs $248 more to buy a new car than to lease a new car. It costs $13,998 more to buy a new car than to buy a used car. 3. When you own a car, the only major expenditures you need to make are gasoline, insurance, and maintenance. Leasing carries the same price for monthly payments, plus you never own the car. A leaseholder must make payments on the car for as long as he or she wants to use it. Go back to Edmunds.com. Click on New Cars and select True Cost to Own, and then pick a car that you would want to buy. Scroll down, and write True Cost to Own in your journal. Then choose Used Cars in the top bar and select True Cost to Own. Select the same car as a used car. In your journal, write the true cost of the used car. Then compare the two prices. Which is more expensive, and by how much? How can math help you save money when you re making buying decisions? 6

7 Content Math Portfolio Project Rubric Exemplary Good Satisfactory Unsatisfactory Student answers all the required questions, demonstrates logical thinking, and backs up reasoning with support or examples. Student answers all the required questions but backs up only some reasoning with support or examples. Student answers all the required questions, but it is sometimes difficult to understand the reasoning and support examples. Student answers only some of the questions. Responses are not related to the questions. Reflection There is evidence of reflection and insight supported by pertinent details. Student clearly demonstrates understanding and application of concepts. There is evidence of some reflection supported by pertinent details. Student demonstrates some understanding and application of concepts. There is evidence of some reflection, but it is not supported by pertinent details. Student demonstrates some understanding and application of concepts. There is no evidence of reflection or insight and very little understanding of concepts. Clarity and organization Ideas are well organized with clear connections between conclusions and reasoning or examples. Examples are wellstated and entirely clear. Ideas are organized with connections between conclusions and reasoning or examples. Examples are generally easy to understand. Ideas are organized but lack connections between conclusions and reasoning or examples. Ideas are not thought out, and no clear conclusions are drawn. Grammar All grammar and spelling are correct. There are only one or two errors in grammar or spelling. There are several grammar or spelling errors. There are many grammar or spelling errors. 7