Lease vs. Buy a Car: Which Costs Less?

Walk into any car dealership and the salesperson will push whatever option generates the most profit for the dealer, which usually means a lease. "Lower monthly payments!" they'll say. And they're right - the monthly payment is almost always lower. But monthly payment is a terrible way to evaluate a financial decision. What matters is the total cost over the time you'll be driving the car.

Let's break down both options with real numbers so you can make this decision based on math, not marketing.

How Leasing Works

When you lease a car, you're essentially renting it for a set period (typically 36 months) and paying for the depreciation that occurs during that time, plus interest and fees. You don't own the car at the end of the lease - you return it and either walk away, lease another car, or buy the vehicle at its residual value.

Your monthly lease payment is based on three factors:

• Depreciation cost: The difference between the car's price (capitalized cost) and its estimated value at lease end (residual value), divided by the lease term. If a $35,000 car has a residual value of $21,000 after 36 months, you're paying for $14,000 in depreciation over 3 years.
• Finance charge (money factor): This is essentially interest on the lease. The money factor is expressed as a small decimal (like 0.0025). To convert it to an approximate APR, multiply by 2,400. So 0.0025 = roughly 6% APR.
• Taxes and fees: Sales tax on the monthly payment (not the full vehicle price in most states), plus registration, documentation, and acquisition fees.

How Buying Works

When you buy a car with financing, you're paying for the entire vehicle over the loan term (typically 48-72 months). Your monthly payment is based on the purchase price, interest rate, and loan length. Once the loan is paid off, the car is yours - no more payments until you decide to replace it.

The total cost of buying includes:

• Total of all loan payments (principal + interest)
• Down payment
• Sales tax on the full purchase price
• Insurance (which is often lower than lease-required coverage)
• Maintenance and repairs
• Minus the resale value when you eventually sell or trade in

Calculate Your Car Payment

Use the calculator below to see what your monthly payment and total cost would look like for a car purchase at different loan terms and interest rates.

A Side-by-Side Comparison

Let's compare leasing vs. buying the same $35,000 car over a 5-year period:

Scenario: Leasing

• Vehicle MSRP: $35,000
• Capitalized cost (after negotiation): $33,000
• Residual value (60% after 36 months): $21,000
• Money factor: 0.0025 (roughly 6% APR)
• Monthly payment: approximately $475
• Lease term: 36 months
• Total paid over 36 months: $17,100
• Then: lease a second car for another 24 months at similar cost
• Total paid over 60 months: $28,500
• You own: nothing

Scenario: Buying

• Vehicle price: $33,000 (same negotiated price)
• Down payment: $3,000
• Loan: $30,000 at 6% for 60 months
• Monthly payment: $580
• Total paid over 60 months: $34,800 + $3,000 down = $37,800
• Car value after 5 years: approximately $14,000-16,000
• Net cost: $37,800 - $15,000 (resale) = $22,800
• You own: a car worth $15,000

The real comparison

Over 5 years, leasing cost $28,500 and you own nothing. Buying cost $22,800 net (after resale value) and could cost even less if you keep the car longer. The buying advantage grows over time because once the loan is paid off, you have zero car payments while the leaser keeps paying every month.

If you keep the purchased car for 8 years total (3 additional years with no payment), your total cost drops dramatically. Assuming $1,500 per year in extra maintenance for an older car, your 8-year cost is about $27,300 net - still less than 5 years of leasing, and you had 3 years of payment-free driving.

The Hidden Costs of Leasing

Lease payments look attractive, but several costs hide beneath the surface:

• Mileage restrictions: Most leases allow 10,000-12,000 miles per year. Go over and you'll pay 15-25 cents per excess mile. If you drive 15,000 miles per year on a 12,000-mile lease, that's $1,350-$2,250 in excess mileage charges at lease end.
• Wear and tear charges: The leasing company will inspect the car at return and charge for anything beyond "normal wear." Dents, scratches, stained seats, worn tires, and chipped windshields can result in fees of $500-$2,000 or more.
• Disposition fee: A fee charged when you return the car at lease end, typically $300-500. It's in the fine print.
• Higher insurance costs: Lease agreements typically require higher insurance coverage limits and often gap insurance, which can add $50-100 per month to your insurance premiums.
• No equity building: Every dollar you pay in a lease is gone. When buying, a portion of each payment builds equity that you recoup when you sell.
• Early termination penalties: If your needs change and you want to end the lease early, the penalties are severe - often requiring you to pay all remaining lease payments at once.

When Leasing Makes Sense

Despite the higher total cost, leasing isn't always the wrong choice. It makes sense in specific situations:

• Business use with tax deductions. If you use the car for business, you may be able to deduct lease payments as a business expense. This can significantly reduce the effective cost. Consult a tax professional about Section 179 deductions and business lease deductions.
• You want a new car every 3 years. If you genuinely value driving the latest model with the newest technology and safety features, and you're willing to pay a premium for it, leasing provides that rotating access.
• You drive very few miles. If you're under 10,000 miles per year, the mileage restrictions won't be an issue and the depreciation cost stays low.
• You don't want to deal with selling. Leasing eliminates the hassle of selling a used car or negotiating a trade-in. You simply return it.

When Buying Makes Sense

For most people in most situations, buying wins on total cost. It particularly makes sense when:

• You plan to keep the car 5+ years. The longer you keep a car, the more buying saves over leasing. The sweet spot is buying and driving for 7-10 years.
• You drive a lot. If you put 15,000+ miles on a car each year, lease mileage penalties will eat you alive.
• You want to customize. Lease vehicles can't be modified. If you want to add accessories, change wheels, or make any modifications, you need to own the car.
• You want payment-free years. The best financial position is a paid-off car with no monthly payment. You can't achieve this with a lease.
• You have kids or pets. Interior wear from car seats, spills, and pet hair will result in wear-and-tear charges on a lease.

The Hybrid Approach: Buying Used

There's a third option that often beats both leasing and buying new: buying a 2-3 year old used car. Why? Because the steepest depreciation happens in the first two years. A car that cost $35,000 new might sell for $24,000 at two years old. Someone else absorbed that $11,000 in depreciation. You get a relatively new car with modern features, often still under factory warranty, for significantly less.

Using the same 5-year window: buying a 2-year-old car for $24,000 with a 48-month loan at 6.5%, your total paid is about $27,500. After 5 years of ownership (the car is now 7 years old), it might be worth $10,000-12,000. Net cost: roughly $16,000-17,500. That's significantly less than either leasing or buying new.

The Bottom Line

The lease vs. buy decision comes down to what you value. If you prioritize the lowest total cost and building equity, buying (especially used) wins by a substantial margin. If you prioritize always having a new car and don't mind paying more for it, leasing delivers that experience. But don't let a lower monthly payment trick you into thinking leasing is cheaper. Over time, it almost never is. Run the full 5-year numbers, account for all the hidden costs, and make the decision with your eyes wide open.