Question 1

What makes leasing appear cheaper than buying?

Accepted Answer

The monthly payment comparison is misleading because a lease payment covers only the depreciation during the lease term plus a money-factor finance charge — not the full vehicle cost. You're paying for the use of the car, not its ownership. A 36-month lease on a $40,000 vehicle might have a monthly payment of $450 vs $700 for a purchase loan, but at end of term you own nothing. The calculator captures this by comparing total outflows in both scenarios, including the residual value you'd capture by owning.

Question 2

What is the money factor and how do I convert it to APR?

Accepted Answer

The money factor (also called 'lease factor') is the finance charge rate expressed in dealer notation. To convert to an approximate APR, multiply the money factor by 2,400. So a money factor of 0.00125 equals roughly 3.0% APR. Dealers often quote money factors rather than APRs because the number looks smaller. Under Reg Z (Truth in Lending, 12 CFR Part 226), retail installment sales must disclose APR; closed-end leases have somewhat different disclosure requirements under the Consumer Leasing Act (15 USC § 1667) and Regulation M.

Question 3

What is residual value and why does it matter so much?

Accepted Answer

Residual value is the vehicle's projected worth at lease end, set at inception by the leasing company (captive finance arm or bank). It matters enormously because: (1) a higher residual means lower monthly payments (you're financing less depreciation); (2) if the car is actually worth more than its residual at end of term, you can buy it out below market value and capture the equity; (3) if the market collapsed, you return the car and walk away. NADA and Kelley Blue Book publish residual value data. Manufacturers often inflate residuals on popular models to make leases look attractive.

Question 4

How do mileage overages work and what do they actually cost?

Accepted Answer

Standard lease contracts specify an annual mileage allowance (10,000, 12,000, or 15,000 miles/year) with a per-mile overage fee ($0.15–$0.30/mile at contract time). For a 36-month lease with 10,000 mile/year limit, exceeding by 5,000 total miles at $0.25/mile costs $1,250. If you expect to go over, you can fold an estimate into the lease monthly payment input here, or pre-purchase additional miles at signing — usually for less than the per-mile rate. Note: a loan has no mileage cap, which is one of the structural advantages of buying for high-mileage drivers.

Question 5

When does buying clearly beat leasing?

Accepted Answer

Buying beats leasing when: (1) you plan to keep the car 7+ years — depreciation per year drops sharply after Year 5; (2) you drive significantly more than 15,000 miles/year (no overage penalties); (3) you want to modify the vehicle; (4) you buy at the right point in the depreciation curve (certified pre-owned, 2-3 years old, where someone else absorbed the steepest drop). Leasing beats buying when: (1) you want a new car every 3 years; (2) you use the car for business and deduct lease payments (subject to the inclusion-amount limit); (3) the manufacturer subsidy creates a below-market residual or money factor. This calculator settles the arithmetic for your specific window — the lifestyle factors are yours to weigh.

Question 6

What is a capitalized cost reduction?

Accepted Answer

The capitalized cost reduction (cap cost reduction) is a down payment on a lease — it lowers the amount being financed (the 'cap cost'), which reduces monthly payments. Unlike a purchase down payment, a cap cost reduction on a lease provides zero benefit if the car is stolen or totaled in Month 1 — the insurance pays off the lessor's interest, not yours. Financial planners generally advise minimizing or eliminating cap cost reductions on leases for this reason. Enter whatever cap cost reduction your offer carries in the lease down payment field, and the calculator folds it into total lease cost.

Question 7

How does this calculator handle the value of the car at the end?

Accepted Answer

On the buy side, it computes your equity at the end of the comparison window as your estimated resale (or trade) value minus the loan balance you still owe at that month. That equity is subtracted from your total outflows to get the buy net cost — because you can sell the car and pocket it (or it can be negative if you're under water). On the lease side, equity is always zero: you return the car and own nothing. That asymmetry is the entire point of comparing net cost rather than monthly payment.

Question 8

Why does the resale value estimate matter so much to the result?

Accepted Answer

Because it is the single biggest swing factor on the buy side. The loan path's net cost equals down payment plus payments made minus end-of-window equity, and that equity is resale value minus remaining balance. A $7,000 swing in resale value moves the buy net cost by the full $7,000 — often enough to flip which option is cheaper. That's why this calculator treats resale as an explicit input you control rather than burying it in a fixed depreciation curve: change it and watch the answer move. Use NADA, Kelley Blue Book, or recent comparable sales for a defensible estimate.

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