Comprehensive Guide
Learn more in our Loans & Mortgage Guide.
How it works
Leasing pays for the car's depreciation during your term — a 3-year lease on a $36,000 car with a $21,000 residual costs roughly the $15,000 of depreciation, plus fees. Buying pays the full price, amortized. The engine prices both paths: the buy side as a loan from price minus down payment, the lease side as lease payments over the term plus inception fees. The cash comparison, though, is only half the story: at the end of a 5-year loan you own a car worth something; at the end of a 3-year lease you need another lease or a balloon payment. The engine's difference line is the dollar gap, and the residual is the number that quietly decides the whole comparison — a generous residual subsidises the lease, a low one punishes it. The rule of thumb: if you drive under 12,000 miles a year and always want a newer car, leasing can be rational; if you keep cars beyond their warranty, buying almost always wins on total cost.Formula
Lease total = payments x term + fees | Buy total = down + loan payments (full amortization)
Tips
- Negotiate the price before discussing the lease — the residual and money factor both start from it.
- The difference line flips for high-mileage drivers; leases bill overage at 15-25 cents a mile.
- Buying wins on any horizon where you keep the car past its loan term.
- Check lease contracts for the money factor — multiply by 2400 to see the effective APR and compare it to loans.
Frequently asked questions
Is it cheaper to lease or buy a car?
Total cost: buying wins whenever you keep the car past the loan term, because the lease pays the depreciation forever without ever building equity. Leasing can win for people who must drive a new car and trade every 3 years — the comparison depends on your horizon, mileage and the residual, all inputs here.
Why is my lease payment lower than a loan payment?
You finance only the depreciation (price minus residual) during the lease, not the full price; and the term is shorter. Lower payment, no ownership. The money factor (the lease's interest) is also built in — contract disclosure lists it, and multiplying by 2400 reveals the APR.
What happens at the end of a lease?
You return the car (paying for excess mileage or damage), buy it outright at the residual, or lease another. Dealers take the returned car to auction — the residual on the contract is the number you can negotiate against at lease end.
Can I negotiate a lease?
Yes, the same as a purchase: the capitalized cost (negotiated price), the money factor, the residual and the fees are all negotiable pieces. Change the residual or money factor by even a point and the monthly payment moves materially — this calculator shows the total lease cost sensitivity.