Lease vs. buy: which is cheaper?

The right way to compare lease vs. buy

Most people compare monthly payments. That's the wrong comparison — a lease monthly is artificially lower because you're not paying off the full vehicle. The right comparison is the 3-year total outlay for each path:

• Lease: Due at signing + all monthly payments + any excess-mileage penalty at return
• Buy (and sell at 3 years): Down payment + all monthly payments + remaining loan balance at month 36 − estimated trade-in value

The lease path ends with no asset. The buy path ends with a car worth some amount. That asset value is the key number that often makes buying cheaper in total.

How lease payments are calculated

A lease payment has two components:

1. Depreciation component: (Capitalized cost − residual value) ÷ number of months. This is the portion of value you're "using."
2. Finance component: (Capitalized cost + residual value) × money factor. This is the interest equivalent on the portion you haven't paid.

The capitalized cost is the negotiated price (not necessarily MSRP — you can negotiate). The residual value is set by the manufacturer, not by the market — it's their estimate of what the car will be worth at lease-end. A higher residual means a lower monthly payment, which is why manufacturers sometimes inflate residuals to make lease deals attractive.

Example: $40,000 vehicle, 36-month lease, 55% residual ($22,000), money factor 0.00125:
Depreciation: ($40,000 − $22,000) ÷ 36 = $500/mo
Finance: ($40,000 + $22,000) × 0.00125 = $77.50/mo
Monthly payment: ~$578 (before tax)

What the lease total looks like

Using the example above with $2,000 due at signing and 12,000-mile annual allowance (no overage):

• Due at signing: $2,000
• Monthly payments: $578 × 36 = $20,808
• Lease 3-year total: ~$22,808
• Asset at end: $0 (car returned)

What the buy total looks like

Same $40,000 vehicle, $5,000 down, 7% APR, 60-month loan:

• Monthly payment: ~$693
• Payments at 36 months: $693 × 36 = $24,948 + $5,000 down = $29,948
• Remaining loan balance at month 36: ~$16,200
• Estimated trade-in at 36 months (45% depreciation): ~$22,000
• Net position: paid $29,948, owe $16,200, own car worth $22,000
• Buy 3-year net cost: $29,948 + $16,200 − $22,000 = $24,148

In this example, leasing is ~$1,300 cheaper over 3 years (excluding sales tax, insurance, maintenance). The margin is modest, and it depends heavily on the specific money factor and residual.

When the math flips

Buying wins when:

• You keep the vehicle past the lease term (no more payments after payoff)
• The money factor is high (leasing becomes expensive)
• You drive more miles than the lease allows (excess-mileage penalties add up fast)
• The vehicle holds its value better than the residual assumed

Leasing wins when:

• The manufacturer subsidizes the money factor below market rates
• You stay under the mileage limit every year
• You want to always drive a current-model-year vehicle
• You deduct lease payments as a business expense

The hidden costs of leasing

• Excess-mileage fees: Typically $0.15–$0.30 per mile over the limit. At $0.25/mile and 3,000 extra miles/year, that's $2,250 over a 3-year lease.
• Disposition fee: ~$300–$400 charged when you return the car and don't lease another from the same manufacturer.
• Wear-and-tear charges: Dents, scratches, tire wear, and interior damage above the lessor's "normal" threshold can result in significant charges at return.
• Early termination: Ending a lease early is expensive — often costing as much as the remaining payments.
• Insurance requirements: Most lease contracts require lower deductibles and higher liability limits than you might otherwise carry, raising your premium.

Use the calculator

The Lease vs. Buy Calculator lets you enter your specific money factor, residual, mileage allowance, and buy scenario to see the full 3-year comparison side by side. For the total ownership picture, use the 5-Year TCO Calculator.