Leasing vs. Buying a Car: Total Cost Over Three and Six Years
Leasing often looks cheaper per month, and over three years it can be. Over longer periods, buying and keeping usually wins. Here is a side-by-side cost model and the lease terms that drive the result.
Leasing and buying are often compared on the monthly payment. That comparison is misleading, because at the end of a loan you own a car that's worth something, and at the end of a lease you don't. A fair comparison counts everything you pay and everything you have left.
This guide runs a hypothetical $40,000 car through both options over three and six years, then explains the lease terms that make one lease cheaper than another.
The short version
- A lease payment covers mostly the car's expected depreciation during the lease, plus a finance charge and fees.
- A loan payment covers the whole price, but you keep the car's remaining value.
- In our example, leasing was about $3,300 cheaper over three years, but buying and keeping was about $6,600 cheaper over six years.
- The longer you keep a car, the more buying tends to win, because the most expensive years of depreciation are behind you.
- Leases add costs for excess mileage, wear and tear, and early termination.
How a lease payment is built
A lease payment has two main parts:
- Capitalized cost: the negotiated price of the car, plus certain fees, minus any down payment or rebates. It's negotiable, just like a purchase price.
- Residual value: what the leasing company expects the car to be worth at lease end, usually set as a percentage of MSRP.
- Money factor: the lease's interest rate in different form. Multiply by 2,400 for an approximate APR. A money factor of 0.00250 is roughly 6% APR.
Sales tax treatment, acquisition fees, and disposition fees vary by state and lessor.
The example
A hypothetical $40,000 car.
Lease: 36 months, $3,000 due at signing, $450 a month. Residual value 58% of price, or $23,200. Mileage limit fits the driver's needs.
Buy: $3,000 down, $37,000 financed for 60 months at 7%, which is $732.64 a month. We assume the car is worth the same 58% after three years and 38% after six years. Depreciation varies a lot by model.
Over three years
| Lease | Buy | |
|---|---|---|
| Cash paid over 36 months | $19,200 | $29,375 |
| Value you hold at the end | $0 | Car worth $23,200, loan balance $16,364: equity $6,836 |
| Net cost | $19,200 | $22,539 |
Over three years, leasing costs about $3,339 less in this example. Leasing companies can sometimes offer favorable terms through subsidized money factors or high residual values, which can make short-term leasing cheaper than buying.
Over six years
Assume the leaser signs a second, identical lease. The buyer pays off the loan in five years and keeps the car.
| Two leases | Buy and keep | |
|---|---|---|
| Cash paid over 6 years | $38,400 | $46,959 |
| Value you hold at the end | $0 | Car worth $15,200, no loan |
| Net cost | $38,400 | $31,759 |
Show the numbers behind this chart
| Net cost | |
|---|---|
| 3 years: lease | $19,200 |
| 3 years: buy | $22,539 |
| 6 years: two leases | $38,400 |
| 6 years: buy and keep | $31,759 |
Over six years, buying and keeping is about $6,641 cheaper. And year seven costs the buyer only maintenance and insurance, while the leaser is still making payments.
Why buying wins over time
Cars lose value fastest in their first few years. A lessee pays for that steep early depreciation every lease cycle. A buyer pays for it once, then drives through the flatter part of the curve. The longer you keep a car after the loan is paid off, the bigger the advantage.
When leasing can make sense
- You want a new car every few years and accept paying for that.
- You drive predictable, moderate miles within the lease limit.
- The lease has strong manufacturer incentives, such as a low money factor or high residual.
- You use the car for business, where tax treatment may differ. A tax professional can advise.
- You want to avoid long-term repair risk on cars with expensive out-of-warranty repairs.
Lease costs that surprise people
Excess mileage. Leases set an annual mileage limit and charge per mile above it at turn-in. Estimate your driving honestly and buy extra miles upfront if needed, which is usually cheaper than paying at the end.
Wear and tear. Dents, scratches, worn tires, and interior damage beyond "normal" can be charged at turn-in. Lessors define what's normal.
Early termination. Ending a lease early can cost a lot, sometimes most of the remaining payments.
Disposition fee. A fee at lease end if you don't buy or lease another car from the same company.
Gap coverage. Many leases include it, because the lease balance can exceed the car's value early on. Check rather than assume.
Buying out a lease
Most leases let you buy the car at the end for the residual value plus fees. If the car is worth more than the residual on the open market, buying it out can be a good deal. If it's worth less, you can simply return it.
Insurance
Leasing companies usually require higher liability limits and collision and comprehensive coverage with a maximum deductible. That can make insuring a leased car more expensive than insuring an older, owned car where you might choose to drop physical damage coverage; see when to drop collision and comprehensive.
Questions to ask on any lease
- What is the capitalized cost, and is it negotiable?
- What is the residual value, and as a percentage of what?
- What is the money factor? Multiply by 2,400 for the approximate APR.
- What is the mileage limit and the per-mile charge above it?
- What fees apply at signing and at turn-in?
- What does early termination cost?
The takeaway
Leasing can be the cheaper way to drive a new car for a few years, especially with strong incentives. Buying and keeping a car well past its loan is usually cheaper over the long run. Compare total cost and what you have left at the end, not just the monthly payment.
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