John is considering buying a new car for $20,000 with $4,000 down payment and a 3-year car loan with APR 3.4%. The car's resale value will be $12,000 at the end of 3 years. The dealership also offers a lease option with $1000 security deposit which will be refunded at the end of 3-year lease. The lease monthly payment will be $300 per month and John could also invest his deposit at 1% in a saving account. Should John choose to buy or lease? Please show calculation.
When he buys the car
Cost of the car $20,000
Down payment $4,000
Car loan
APR 3.4%
Monthly interest rate 0.017%
interest paid per month $20000*0.017 = $340
Total interest paid
at the end of the 3rd year $340*36 = $12,240
(36 months)
Resale value after 3 years $12,000
When he leases the car
Security deposit $1,000(refunded after 3 years)
Monthly payment $300
Total amount paid at the
end of the 3rd year $300*36 = $10,800
(36 months)
While considering the total amounts paid after 3 years, John will lease the car.
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