Lesson 2

Explore

Depreciation refers to the decrease in value of an asset. A vehicle will depreciate due to wear and tear, age, and obsolescence. This means an older vehicle is typically worth less than a newer one.

You may have discussed in Share 1 that many types of merchandise can be leased. Cars, computers, and photocopiers are just a few examples. There is a fundamental difference between leasing and purchasing—when you lease something, you don’t own it—you’re just paying the decrease in value due to depreciation. On the contrary, when you purchase something, you own it. There are some vehicle leases that give you the option to purchase the vehicle at the end of the lease term. These types of leases can be called “lease to buy.” The amount to purchase the vehicle is based on the value of the vehicle when the lease is over.

Try This 2

Kalila would like to drive a brand new $38 000 sports car. The car dealer has provided her with two options. Both options involve a down payment of $1000, an annual interest rate of 0.99%, and a 48-month term.

Option 1: The first option is to purchase the vehicle. Since Kalila has a $1000 down payment, she ends up borrowing $37 000 at an annual interest rate of 0.99%.

Option 2: The second option is to lease the vehicle. The dealer has indicated the car will be worth $15 000 at the end of the lease. Since this is a lease, Kalila only has to pay the amount the car depreciates, $38 000 − $15 000 = $23 000. With the $1000 down payment, this means she needs to borrow a total of $22 000.