Lease or buy a car? How to compare the real cost

Leasing a car usually costs less each month than buying it with a loan, but at the end of a lease you hand the car back and own nothing, while a buyer owns a car with resale value. Comparing the two fairly means looking at total cost over the same period, minus whatever the car is still worth to the buyer. That is what the lease vs buy calculator does, and this guide explains the moving parts so you can trust or challenge the answer. It is general information, not financial advice.

How a lease works

A lease is a long-term rental. The leasing company buys the car, predicts what it will be worth at the end of the term (the residual value), and you pay for the difference between the price and that residual, plus a finance charge, spread over the term. That is why leasing is cheaper per month: you are paying for the depreciation you use, not the whole car. At the end you return the car, and you may owe charges for extra miles, damage beyond normal wear, or a disposition fee. Many leases also let you buy the car for the residual value. In the UK the closest equivalents are personal contract hire (a pure lease) and personal contract purchase (PCP), which ends with an optional final payment to keep the car.

Lease terms worth knowing

• Capitalised cost is the price the lease is based on. It is negotiable, just like a purchase price.
• Residual value is the predicted end-of-term value. A higher residual means lower payments.
• Money factor is how US leases often express the finance charge. Multiplying it by 2,400 gives a rough equivalent APR, so a money factor of 0.0025 is about 6%.
• Mileage allowance sets how far you can drive per year before paying a per-mile charge at the end.
• Due at signing covers the first payment, any down payment and fees. A large down payment on a lease is money you do not get back if the car is written off.

Comparing like with like

The fair comparison uses the same period for both options, usually the lease term. For the lease, add everything you pay: the amount due at signing, every monthly payment and any end-of-lease charges. For buying, add the down payment and the loan payments made during that period, then subtract your equity at the end: what the car is worth minus whatever is still owed on the loan. The lower net figure is cheaper. Insurance, maintenance and taxes can differ between the two, so I left them out of the calculator rather than guess; add them yourself if they differ in your case.

A worked example

Using the calculator's default figures over 36 months:

• Lease: $3,000 due at signing, 36 payments of $399 and $400 of end charges, a total of $17,764, with nothing left at the end.
• Buy: a $35,000 car with $5,000 down and a $30,000 loan at 6.5% over 60 months, about $587 a month. After 36 months you have paid about $26,131. If the car loses 15% a year it is worth about $21,494, and about $13,177 is still owed, so your equity is about $8,317. Net cost: about $17,814.

Here the two are almost identical, which shows how sensitive the answer is. If the car loses 20% a year instead, it is worth about $17,920 after three years and buying costs about $21,388, so leasing is roughly $3,600 cheaper. Keep the bought car for the full five years and the net cost of about $24,690 is spread over 60 months, around $411 a month against the lease's $493, and you then own the car outright. The car depreciation calculator helps you choose a realistic rate, and How car depreciation works and how to lose less of it explains why the first years cost the most.

When each one makes sense

Leasing tends to suit people who want a new car every few years, drive predictable, moderate mileage, keep cars in good condition and value a lower monthly payment and fixed costs. Buying tends to win for people who keep cars for many years, drive a lot, or want the freedom to modify or sell whenever they like; the longer you keep a car after the loan is paid off, the cheaper buying becomes. Before signing either, compare the finance cost: the car loan calculator shows payments and total interest, the loan comparison calculator compares offers, and How loan interest actually works explains how the interest is charged.