Lease vs Buy: The Real Cost Comparison
Monthly lease payments are always lower than loan payments for the same vehicle. But comparing monthly payments is misleading. The complete comparison must account for: down payments, all payments over the comparison period, disposition fees, and crucially — what asset you own at the end.
The Residual Value Factor
When you buy, you own an asset at the end. A $35,000 car held for 6 years may still be worth $14,000–$18,000. This residual value dramatically changes the true net cost of buying. Subtract that from your total buy cost to compare apples to apples with leasing (which returns $0 in asset value).
When Leasing Makes More Sense
Leasing wins when: you always want a new car under warranty, you drive low mileage, the car depreciates unusually fast (lowering residual value), the lease has unusually favorable money factor (interest equivalent), or you use the vehicle for business and want maximum deductibility.
Frequently Asked Questions
Leasing has lower monthly payments and upfront costs, but buying is almost always cheaper in the long run if you keep the car past the loan payoff. The key difference: when you buy, you build equity and eventually own an asset. Leasing means perpetual payments with nothing to show at the end.
Leasing advantages: lower monthly payments (typically 20%–40% less than loan payments), lower down payment required, always drive a newer car with warranty coverage, no trade-in hassle, and potentially tax-deductible for business use. Best for people who want new cars every 3 years and drive average mileage.
Buying advantages: build equity in an asset, no mileage restrictions, freedom to modify the car, lower insurance costs possible, no wear-and-tear fees, and zero payment once the loan is paid off. Best for people who keep cars long-term (7+ years) or drive high mileage.
The residual value is the leasing company's estimate of the car's worth at the end of the lease term, expressed as a percentage of MSRP. Higher residual value = lower lease payments. You can purchase the car at lease end for this amount. Residual values typically range from 45%–65% for 3-year leases.
A disposition fee (typically $200–$400) is charged by the leasing company at lease end if you return the car and do not buy it or lease another vehicle from them. It covers inspection and re-sale costs. Some manufacturers waive it for loyal customers or when leasing another vehicle.
Cap cost reduction (capitalized cost reduction) is the lease equivalent of a down payment. It reduces the capitalized cost of the vehicle, lowering your monthly lease payment. Unlike a car purchase down payment, cap cost reduction is not recoverable if the car is stolen or totaled — GAP insurance is even more important for leases.
Standard leases allow 10,000–15,000 miles/year. Excess mileage fees range from $0.15–$0.30 per mile. If you drive 20,000 miles/year on a 12,000-mile lease, you may owe $1,200–$2,400 extra per year. High-mileage drivers should buy rather than lease.
Leasing often wins for business use since lease payments are typically fully deductible for business vehicles (subject to luxury car limits). With buying, you deduct depreciation over several years. Consult a CPA — the answer depends on your specific business structure, vehicle cost, and usage percentage.
Early lease termination can be extremely costly — typically the remaining payments plus additional fees. Unlike a car loan, you cannot simply sell the car. Consider this a key risk of leasing: you are committed for the full lease term. Some manufacturers offer lease transfer programs as an alternative.
Both lease payments and loan payments are reported to credit bureaus and can help build credit with on-time payments. Neither has a significant credit-building advantage over the other. Both appear as installment accounts on your credit report.