Is it cheaper to lease or buy a car?

Over a single short term, leasing usually has the lower monthly payment because you only finance depreciation plus a finance charge — not the whole vehicle. But over a full ownership horizon (say 6+ years), buying is usually cheaper in total cash, because once the loan is paid off you keep driving with no payment and still own a resale asset. The honest answer depends on your hold period: lease wins if you replace the car every 2–3 years; buying wins the longer you keep it.

How do I compare the total cost of leasing vs. buying?

Normalize both options to the same number of years and sum every outflow. For the lease path, add all payments, cap-cost reductions (down payments), mileage penalties, and disposition fees — and capture no residual, because you never own the car. For the purchase path, add the down payment, all loan payments, and total interest, then subtract the vehicle's estimated resale value at the end. If purchase outflows minus resale value beat the lease total, buying wins on net cost.

What is the money factor on a lease?

The money factor is the lease's finance charge expressed as a small decimal instead of a percentage. To convert it to an approximate APR, multiply by 2,400: a 0.00200 money factor is roughly 4.8% APR, and 0.00350 is roughly 8.4% APR. Dealers can quote a money factor above the captive lender's 'buy rate' and keep the spread, so ask for the buy rate and the markup separately — most states don't require them to disclose it.

What is residual value and why does it matter?

Residual value is the leasing company's projection of what the car will be worth at lease end, set at signing. It drives the whole deal: a higher residual means you finance less depreciation, so your payment is lower. On a $40,000 vehicle with a 36-month lease, each $1,000 change in residual moves the payment by about $27.78 ($1,000 ÷ 36 months). Manufacturers sometimes inflate residuals on popular models to make a lease look cheap — so an unusually low advertised payment is often a residual or money-factor subsidy, not a better car.

Do mileage caps make leasing a bad deal?

They can. Leases set an annual mileage allowance (commonly 10,000–15,000 miles) and charge an overage fee — often $0.15–$0.30 per mile — when you exceed it at turn-in. Twenty thousand miles over a 3-year lease at $0.25/mile is $5,000 you owe on top of every payment. If your real driving runs higher than the allowance, buy a higher-mileage allowance up front (it's cheaper than the overage rate) or buy the car outright, because high-mileage drivers rarely come out ahead leasing.

When does leasing actually make financial sense?

Leasing makes sense when you genuinely want a new car every 2–3 years, drive within the mileage cap, want the lowest monthly payment to free up cash flow, or can write the lease off as a legitimate business expense. It also hedges fast-depreciating or rapidly-changing segments (like EVs with shifting tech), since you hand the residual risk back to the lessor. It is the wrong tool if you keep cars a long time, drive a lot, or want to build equity in an owned asset.

Why do dealers push the monthly payment instead of total cost?

Because a lease payment finances only the depreciation over the term, it always looks lower than a loan payment on the same car — and most buyers stop reading at that line. Under the Consumer Leasing Act (Regulation M), closed-end lease disclosures must show the total of scheduled payments but are not required to state the money factor or APR, which leaves a real gap a finance office can work in. The defense is simple: ask for total cash outflow over the full term, not the monthly number.

Can I buy the car at the end of a lease?

Yes — most leases include a purchase option at a price equal to the stated residual value (sometimes plus a small fee). That option becomes valuable when the car's real market value at lease end exceeds the residual the lessor locked in at signing, because you can buy below market and either keep the car or resell it. If the market value is below the residual, walk away and let the lessor absorb the loss — that downside protection is one of leasing's genuine advantages.

Lease vs. Buy

Lease vs. buy: the real math most dealers don't show you

By Byron MaloneLast verified May 2026

Founder & Editor, Bedrocka Tools

The money factor conversion (MF × 2,400 = APR equivalent), residual value sensitivity, and 5-year total cost comparison that dealers prefer you not see. A lease payment covers only depreciation + finance charge — not vehicle ownership. The break-even depends on your mileage, hold period, and the specific residual value baked into your deal.

How it’s calculated

Lease net cost   = Σ(monthly payments) + cap-cost reduction
                   + mileage overage + disposition fee
                   (no residual captured — you never own it)

Buy net cost     = down payment + Σ(loan payments) + total interest
                   − resale value at end of hold period

Money factor     APR ≈ money factor × 2,400
Residual impact  Δpayment ≈ Δresidual ÷ lease-term-months

Decision rule:
  if (Buy outflows − resale value) > Lease outflows  → lease wins
  if (Buy outflows − resale value) < Lease outflows  → buy wins

Assumptions: both paths are normalized to the same number of years; the lease path assumes you re-lease (or walk) at term end and capture no equity; the buy path uses a depreciation-curve estimate for resale value, which is the largest source of error and should be sanity-checked against NADA or KBB. Insurance, taxes, and maintenance are assumed roughly equal across the two paths for the same vehicle and so are netted out; if your lease carries gap insurance or a higher coverage requirement, add that differential back in.

Why the monthly payment comparison is misleading

Lease monthly payments look lower because you’re only paying for depreciation during the lease term — not the full vehicle cost. A $40,000 vehicle that depreciates 50% in 3 years means you’re financing ~$20,000 in depreciation (plus a finance charge). The remaining $20,000 residual is returned to the dealer. The loan payment finances the full $40,000. Per the Federal Trade Commission’s leasing guidance, the monthly payment is only one term of the deal — the capitalized cost, money factor, residual, and mileage allowance matter just as much, and dealers know most consumers stop at the monthly line.

The correct comparison: sum all outflows in both scenarios over the same period. For a lease, sum all payments + fees + mileage penalties. For a purchase, sum all loan payments + insurance differential + the vehicle’s projected residual value you’d capture at sale. The purchase may win on net wealth even with a higher monthly payment, if the residual value captured at Year 5 exceeds the cumulative payment premium.

Money factor: the lease interest rate dealers hide

The money factor is the finance charge rate expressed in lease notation — a small decimal that looks innocuous until you convert it. Formula: Money Factor × 2,400 = approximate APR.

Common money factors and their APR equivalents:

0.00125 = 3.0% APR
0.00200 = 4.8% APR
0.00250 = 6.0% APR
0.00350 = 8.4% APR

Dealers may offer a money factor higher than the ‘buy rate’ (what the captive finance company charges) and pocket the spread — similar to dealer markup on conventional loans. Ask the F&I manager for the buy rate and the dealer markup separately. Some states require disclosure; most don’t.

Under the Consumer Leasing Act (Regulation M, 15 U.S.C. § 1667), closed-end lease disclosures must include the total of scheduled payments, but not the money factor or APR — a notable consumer protection gap that the Consumer Financial Protection Bureau flags as a frequent source of auto-financing complaints.

Residual value: the number that drives lease economics

Residual value is the vehicle’s projected worth at lease end, set by the leasing company at inception. A higher residual means lower payments (you’re financing less depreciation) AND creates a potential buyout opportunity if the market beats the residual.

NADA and KBB publish projected residual values. Manufacturers manipulate residuals on popular models to make lease deals look attractive — artificially high residuals subsidize payments. When you see an advertised lease deal with unusually low payments, check whether an inflated residual or subvented money factor is driving it.

Residual sensitivity: on a $40,000 vehicle with a 36-month lease, each $1,000 change in residual changes the monthly payment by approximately $27.78 ($1,000 ÷ 36 months). A 5% difference in residual assumption ($2,000 on a $40,000 vehicle) = $55.56/month difference.

A worked example, and what I watch for

Worked example: a $40,000 SUV, 36-month lease at a 0.00200 money factor (~4.8% APR) with a 60% residual ($24,000) and a $2,000 cap-cost reduction. You finance ~$16,000 of depreciation plus the finance charge, landing near $450/month — about $16,200 in payments plus the $2,000 down and a ~$395 disposition fee, so roughly $18,595 of cash outwith nothing owned at the end. Buy the same SUV with $2,000 down on a 72-month, 6.5% loan and you pay ~$640/month; over a 6-year hold that’s ~$48,000 in payments and down, but the SUV is still worth ~$13,000 at Year 6 — so net cash is ~$35,000 for six years of driving versus ~$37,000 for two back-to-back leases over the same span. Buying wins here, but only because the hold period is long.

In my experience pricing these deals out for operators and family members, the monthly payment is the single most misleading number on the sheet, and the residual is the lever nobody asks about. I’ve seen two identical advertised leases differ by $80/month purely because one carried an inflated, subvented residual and the other didn’t — same car, same term, very different total cost. There is no blanket “always buy” or “always lease” rule: run both paths to the same horizon, subtract the resale value on the buy side, and let the arithmetic decide. The shorter you keep cars and the closer you stay to the mileage cap, the more leasing earns its keep.

The 5-year total cost comparison

To compare lease vs buy on equal footing, normalize to the same time period and include all outflows:

Lease path (two consecutive 3-year leases to equal 6 years):

Payments on both leases
Cap cost reductions (down payments) on both leases
Mileage penalties on Lease 1 if overages occurred
Lease-end fees and disposition fees (~$300–500)
No residual value captured (you don’t own the vehicle at end)

Purchase path (6-year ownership):

Down payment
60 or 72-month loan payments
Total interest paid
Minus: vehicle resale value at Year 6 (estimated using depreciation curve)

If Purchase Total Outflows − Resale Value > Lease Total Outflows, leasing wins on net cost. If Purchase Total Outflows − Resale Value < Lease Total Outflows, buying wins. The Car Loan vs. Lease Comparator automates this calculation for your specific deal terms, and the Car Depreciation Calculator estimates the resale value the buy path depends on.

Frequently asked questions

Primary sources cited

Sources: formulas and disclosures on this page are cited to primary regulatory and named industry sources, and the comparator math is open source. Read our full methodology for sourcing standards and our correction policy.