Lease vs Buy a Car: The Same Vehicle, Both Ways, With Every Number

Lease vs Buy: The Comparison Most People Get Wrong

The showroom comparison is monthly payment against monthly payment, and a lease always wins it. It has to. A lease charges you for the part of the car you use up over three years. A loan charges you for the whole car. Comparing those two payments is comparing renting an apartment to buying a house on the size of the cheque.

The comparison that means something is total cash out, minus whatever the car is worth to you at the end. This article runs the same vehicle both ways at the same time, on real fee structures, and shows where each one wins.

How a lease payment is actually built

A lease payment has two parts, and dealers rarely separate them for you. One part pays for depreciation. The other is interest, quoted as a money factor rather than a rate, which makes it hard to compare.

The same car, both ways

A vehicle with a $38,000 MSRP, negotiated to $36,500. You put $2,000 down either way. The lease is 36 months with a 58% residual and a 0.00225 money factor. The loan is 60 months at 6.9%.

The lease payment is $208 a month lower. The three-year cost is $404 higher. That gap is small enough to be inside the noise of a negotiation, which is the honest conclusion for a three-year horizon: on comparable terms, the two are close.

What happens at year six

Three years is where a lease ends and where a loan is only three fifths finished. Extend the horizon and the two diverge sharply, because the buyer stops paying and the lessee starts a second lease.

When leasing is genuinely the better call

• You replace the car every three years regardless. If that is a settled preference rather than a financial decision, leasing is the cheaper way to do it and avoids the resale hassle.
• The vehicle is a business expense. Lease payments are usually simpler to deduct than depreciation schedules, and the cash flow is more predictable.
• The model has an unusually high residual. A residual above about 60% on a three-year term means the lender is absorbing depreciation risk you would otherwise carry.
• There is a subsidised money factor. Manufacturer-supported leases sometimes carry money factors well below market rates, which no loan will match.
• You want to stay under warranty permanently. A three-year lease never leaves the warranty period, so unplanned repair cost is close to zero.

When buying wins, and by how much

Buying wins whenever you keep the car longer than the loan. Every month past the final payment is a month of transport at the cost of fuel, insurance, and maintenance only. On the example above, months 61 through 72 cost the buyer nothing in financing while the lessee is paying $473 a month.

Buying also wins if you drive a lot. Leases price in a mileage allowance, typically 10,000 to 15,000 miles a year, and charge 15 to 30 cents for every mile beyond it. Driving 18,000 miles a year on a 12,000-mile lease is 6,000 excess miles a year, or 18,000 across the term. At 20 cents that is a $3,600 bill on turn-in, which alone reverses the three-year comparison above.

The fees that do not appear in the payment

The early termination line deserves emphasis. A lease is a fixed-term contract, and getting out of one in month fourteen is expensive in a way that selling a financed car is not. If your circumstances might change, that asymmetry is worth more than a few hundred dollars of cost difference.

Do not put money down on a lease

A down payment on a purchase buys equity. A down payment on a lease, called a capitalised cost reduction, buys nothing you can recover. It lowers the monthly payment, and if the car is written off in month four, that money is gone. Insurance pays the lender the value of the vehicle, not your prepaid depreciation.

The example above used $2,000 down on the lease to keep the comparison symmetrical. In practice, put nothing down and accept the higher payment. The example lease with nothing down runs $533.39 a month, since the depreciation portion rises to $401.67 and the rent charge to $131.72. The total three-year cost is essentially unchanged.

What this comparison does not tell you

• The residual is an assumption about the future, not a fact. If used values fall, the lessee is protected and the buyer absorbs the loss. If they rise, the buyer captures the gain and the lessee does not.
• Insurance is not equal. Leases carry mandatory coverage minimums that are often higher than what a buyer would choose, which can add $200 to $500 a year.
• Sales tax treatment varies enormously by state, and in a handful of states it is large enough on its own to flip the answer.
• Maintenance beyond the warranty is not modelled. A buyer keeping the car to year six should expect real repair costs in years four onward, and this comparison ignores them.
• It assumes you would actually keep the purchased car for six years. If you sell at three either way, the lease and the loan are close, and the decision is about flexibility rather than money.
• The rates used are illustrative. A subsidised money factor or a credit union loan rate can move either side by more than every fee in the table combined.