● Money & small business
Lease vs buy a car: the lower payment isn't the cheaper deal (worked example)
The lease payment is almost always lower than the loan payment for the same car. That's not because leasing is cheaper: a lease only charges you for the part of the car you use up, while a loan payment also buys you the car. To compare them fairly, look at the net cost over the same period: all the cash you pay out, minus what you own at the end. You can run your own two offers in the car loan vs lease calculator.
The two offers
A $42,500 SUV (MSRP $45,000), 7.25% sales tax, $850 of fees at signing and a $6,000 trade-in, which goes toward either deal.
| Buy | Lease | |
|---|---|---|
| Terms | 60 months at 6.49%, $4,000 down | 36 months, $2,500 down, 57% residual, money factor 0.0021, 10,000 miles a year |
| Monthly payment | $687.51 | $411.79 |
| Due at signing | $4,850.00 | $3,761.79 |
How the lease payment is built
The lease starts from the capitalized cost: $42,500 + the $895 acquisition fee − $2,500 down − the $6,000 trade-in = $34,895. The residual is what the bank expects the car to be worth at the end: 57% of the $45,000 MSRP, $25,650. Each month you pay:
- Depreciation: ($34,895 − $25,650) ÷ 36 = $256.81
- Finance charge: ($34,895 + $25,650) × 0.0021 = $127.14 (a money factor of 0.0021 is about 5.04% APR: multiply by 2,400)
- Sales tax on the payment: 7.25% of $383.95 = $27.84
Total: $411.79. Note that the residual is a percent of MSRP, not of the price you negotiated, so a discount off the price lowers the lease payment directly.
Net cost over the 36 months
| Buy | Lease | |
|---|---|---|
| Down payment and fees | $4,850.00 | $3,350.00 |
| Payments made | $24,750.36 (36 × $687.51) | $14,824.44 (36 × $411.79) |
| Mileage overage (13,500 miles a year on a 10,000 allowance, $0.25 a mile) | – | $2,625.00 |
| Turn-in fee | – | $395.00 |
| Cash paid out | $29,600.36 | $21,194.44 |
| Minus what you own: a car worth $25,650, less $15,435.31 still owed | −$10,214.69 | $0 |
| Net cost | $19,385.67 | $21,194.44 |
Buying comes out $1,809 cheaper over the same 36 months, even though it takes $8,406 more cash along the way. The difference is the $10,215 of equity you hold at the end.
The number that decides it: the car's value at the end
The buyer's result depends on what the car is really worth after three years. Here the two deals cost the same at a value of $23,841, 53.0% of MSRP. Above that, buying wins; below it, leasing does.
| Value after 36 months | Buy: net cost | Lease: net cost | Cheaper |
|---|---|---|---|
| 45% of MSRP ($20,250) | $24,785.67 | $21,194.44 | Lease, by $3,591 |
| 50% ($22,500) | $22,535.67 | $21,194.44 | Lease, by $1,341 |
| 53% ($23,850) | $21,185.67 | $21,194.44 | Lease, by $9 (about the same) |
| 55% ($24,750) | $20,285.67 | $21,194.44 | Buy, by $909 |
| 57% ($25,650), the lease's residual | $19,385.67 | $21,194.44 | Buy, by $1,809 |
| 60% ($27,000) | $18,035.67 | $21,194.44 | Buy, by $3,159 |
The lease's residual is the bank's own forecast, so it's a reasonable starting point. A model that holds its value better than the bank expects favours buying. One that depreciates faster favours leasing, because the bank carries that loss.
Your mileage can flip the answer
With the value fixed at 57% of MSRP, only the lease changes with mileage, through the overage charge (buying at higher mileage would also lower the resale value, which this table leaves fixed):
| Miles a year | Overage at turn-in | Lease: net cost | Buy: net cost | Cheaper |
|---|---|---|---|---|
| 8,000–10,000 | $0 | $18,569.44 | $19,385.67 | Lease, by $816 |
| 12,000 | $1,500 | $20,069.44 | $19,385.67 | Buy, by $684 |
| 13,500 | $2,625 | $21,194.44 | $19,385.67 | Buy, by $1,809 |
| 15,000 | $3,750 | $22,319.44 | $19,385.67 | Buy, by $2,934 |
| 20,000 | $7,500 | $26,069.44 | $19,385.67 | Buy, by $6,684 |
If you expect to go over, ask whether you can buy extra miles when you sign and at what rate, and compare that with the overage charge.
Keeping the car is where buying pulls ahead
After the loan is paid off, the buyer's cost drops to repairs and upkeep, while a lessee starts a new lease. Assume the buyer keeps the SUV for 8 years, it's then worth 32% of MSRP ($14,400), and it needs $700 a year more upkeep than a new car after year 3. Against repeating the same lease for 8 years, buying costs $35,200.74 and leasing $56,518.51, a difference of $21,318. That comparison flatters leasing a little: the trade-in only helps once, and prices on the next leases usually rise.
What this leaves out
- What the extra cash for buying could earn elsewhere.
- Insurance: a lease may require higher liability limits or gap coverage; check the contract.
- Sales tax rules: most US states tax each lease payment, as here, but a few tax the whole lease up front, and some don't reduce the taxable price by a trade-in.
- Wear-and-tear charges at turn-in, and early termination, which is expensive on a lease.
All figures above come from the same month-by-month loan schedule and lease formula, checked independently to the cent. They're a worked example, not advice: use the numbers from your own written offers.