Buy vs. Lease: A Quantitative Framework for the Right Decision
Buying and leasing have fundamentally different cost structures. Learn the NPV comparison method, how residual values and mileage drive the math, and which wins for your situation.
Buying vs. leasing represents two fundamentally different approaches to vehicle acquisition: buying means purchasing an asset you’ll own outright after financing, while leasing means paying for the portion of the vehicle’s value you use during the lease term—essentially renting with a structured contract.
Key Takeaways
- 1. Monthly payments tell a misleading story. A lower lease payment doesn’t mean lower total cost—at lease end you own nothing, while a loan payment builds equity in an asset you can sell or keep driving payment-free.
- 2. Leasing means paying for depreciation only. Your lease payment covers the vehicle’s expected value drop plus financing charges. The dealer keeps the residual value—and the upside if they guessed conservatively.
- 3. True comparison requires matching time horizons. Comparing a 36-month lease to a 60-month loan is apples to oranges. You must analyze total cost over the same ownership period to see which approach actually costs less.
- 4. Your driving patterns determine the winner. Buying typically wins for drivers who keep vehicles 7+ years or drive high miles. Leasing can win for luxury vehicles with strong residuals or business use with tax advantages.
$48,500
Avg. new car price (2024)
$0.25/mi
Typical lease mileage penalty
26%
Share of new cars leased
5-6 yrs
Break-even ownership period
What Is It — Two Fundamentally Different Cost Structures
Think of buying a car like purchasing a house, and leasing like renting an apartment. When you buy, you’re building equity in something you’ll eventually own outright—and once the mortgage is paid, you live there free. When you lease, you get access to the property for a set period, your payments go entirely to the landlord, and at the end you hand back the keys and start over. Neither approach is inherently wrong, but confusing the two leads to expensive mistakes.
What You’re Actually Paying For
When you buy a $40,000 car with a loan, your payments go toward owning that entire $40,000 asset. Yes, the car depreciates, but you own whatever value remains. Drive it for 10 years, and you’ve extracted a decade of transportation from a single purchase.
When you lease, you’re paying only for the depreciation that occurs during your lease term—the difference between the car’s price and its projected value (the “residual”) when you return it. If a $40,000 car is expected to be worth $24,000 after three years, you’re financing $16,000 of depreciation plus interest-like charges. The dealer keeps the $24,000 car.
Leasing: Paying for Access
You finance the depreciation—the portion of value you “use up” during your lease term. At the end, you return the car and your equity is zero.
3-year lease on $40K car (60% residual)
$16,000
Depreciation financed + fees
Buying: Building Equity
You finance the full vehicle price and own whatever value remains. After the loan, you drive payment-free—potentially for years.
5-year loan on $40K car, keep 3 more years
$40,000
Total financed → you keep residual value
The Residual Value: The Dealer’s Bet
The residual value is the leasing company’s prediction of what the car will be worth when you return it. It’s expressed as a percentage of MSRP—a 60% residual on a $40,000 car means they expect it to be worth $24,000 after the lease.
This number matters enormously. A higher residual means you’re financing less depreciation, which means lower payments. Luxury brands like Lexus, Porsche, and certain Honda/Toyota models often have residuals of 55-65%, while vehicles that depreciate quickly might have residuals of 45% or less—making them expensive to lease relative to their sticker price.
The Perpetual Payment Trap
Leasing back-to-back means you always have a car payment—forever. A buyer who finances for 5 years and keeps the car for 10 has 5 years of payment-free driving. A serial leaser who drives for the same 10 years makes payments for all 10. Over a driving lifetime of 50 years, this difference can exceed $150,000 in today’s dollars.
Why Monthly Payment Comparisons Fail
The most common mistake in the buy-vs.-lease decision is comparing monthly payments. Yes, a lease payment on a $40,000 car might be $450/month while a loan payment is $700/month. But after 36 months of lease payments ($16,200), you have nothing. After 36 months of loan payments ($25,200), you have a car worth roughly $24,000—and only 24 payments left until you own it outright.
The only valid comparison accounts for what you have at the end: total money spent minus the value of any asset you retain. This requires comparing both options over the same time period, which we’ll break down in the next section.
How It Works — NPV Comparison, Residuals, and Mileage
To make a true apples-to-apples comparison, you need to calculate the total cost of each option over the same time period. The math isn’t complicated, but it requires tracking several components that salespeople often gloss over.
The Money Factor: Leasing’s Hidden Interest Rate
Money Factor to APR Conversion
APR = Money Factor × 2,400
0.00125
= 3.0% APR
0.00208
= 5.0% APR
0.00250
= 6.0% APR
Leases don’t advertise an interest rate—they use a “money factor,” a small decimal that looks insignificant but converts to a meaningful APR. A money factor of 0.00250 sounds trivial until you multiply by 2,400 and realize you’re paying 6% annual interest. Always ask for the money factor and convert it before signing.
Six-Year Cost Comparison: A Real Example
Let’s compare a $40,000 vehicle using a 60-month purchase loan versus two consecutive 36-month leases, both analyzed over 6 years. We’ll assume 6% APR for the loan and an equivalent money factor (0.0025) for the lease, with a 60% residual.
| Cost Component | Buy (60-mo loan) | Lease (36 mo × 2) |
|---|---|---|
| Purchase price / cap cost | $40,000 | $40,000 |
| Down payment | $5,000 | $2,000 |
| Monthly payment | $656 | $389 |
| Number of payments | 60 | 36 + 36 |
| Total payments | $39,360 | $28,008 |
| End-of-term value you own | $12,800 | $0 |
| Total cost (payments − residual) | $31,560 | $30,008 |
*Assumes 6% APR equivalent, $40K MSRP, 60% residual, 10K miles/year, no excess wear charges. Buyer keeps car through year 6 with 32% residual value ($12,800).
In this scenario, the total costs are surprisingly close over 6 years—$31,560 for buying versus $30,008 for leasing. But extend to year 8 or 10, and buying pulls ahead dramatically because the buyer has no payments in years 6-10 while the leaser keeps paying.
Practical Takeaway
The break-even point between buying and leasing typically falls around 5-6 years. If you plan to keep vehicles longer than that, buying almost always wins. If you genuinely want a new car every 3 years regardless of cost, leasing provides that convenience—but understand you’re paying a premium for it.
The Mileage Equation
Leases restrict annual mileage, typically to 10,000, 12,000, or 15,000 miles. Exceed your limit, and you’ll pay $0.15 to $0.30 per excess mile at lease end—a nasty surprise that can add thousands to your total cost.
| Mileage Scenario | Additional Cost | Notes |
|---|---|---|
| 10,000 miles/year | $0 | Standard limit |
| 12,000 miles/year | $15–25/mo more | Common upgrade |
| 15,000 miles/year | $40–60/mo more | High-mileage lease |
| Actual: 14,000 miles/year on 10K lease | $3,000 penalty | 12K excess × $0.25/mile |
*Excess mileage fees vary by manufacturer; $0.25/mile is typical for mainstream brands.
Tale of Two Drivers: Dana vs. Morgan
Dana: The Long-Term Owner
- • Buys a $40,000 car with 60-month loan
- • Keeps the car for 10 years total
- • Drives 14,000 miles per year (no penalty)
- • Sells for $8,000 at year 10
Total 10-year cost:
$36,360
$303/month effective cost
Morgan: The Serial Leaser
- • Leases equivalent vehicles, 36 months each
- • Three consecutive leases over 9 years
- • 12,000-mile lease, actually drives 14,000
- • Pays excess mileage each term
Total 9-year cost:
$57,024
$528/month effective cost
Over a decade, Dana’s buying strategy costs $20,664 less than Morgan’s serial leasing—enough for a substantial down payment on Dana’s next vehicle. The difference compounds further over a lifetime of vehicle ownership.
What It Means for You — Which Option Wins for Your Driving Profile
The buy-vs.-lease decision isn’t about finding a universal winner—it’s about matching your driving patterns, financial situation, and preferences to the option that costs you less for what you actually want. Here are the four factors that matter most.
The Four Levers You Control
1. How Long You Keep Vehicles
This is the single biggest factor. If you keep cars 7+ years, buying wins decisively because you get years of payment-free driving. If you genuinely switch every 3 years, the calculation is closer.
2. Your Annual Mileage
High-mileage drivers (15,000+ miles/year) should almost always buy. Lease mileage penalties add up fast, and buying lets you drive unlimited miles with no per-mile cost.
3. Your Down Payment Strategy
For purchases, a larger down payment reduces interest paid. For leases, minimize your down payment—if the car is totaled, you lose that money. Just pay first month and fees.
4. What You Negotiate
On a lease, negotiate the selling price (cap cost) and money factor—not the monthly payment. Dealers can manipulate payments by extending terms or hiding fees. Know your numbers.
Reality Check: When Leasing Actually Makes Sense
Despite the math favoring buying for most people, leasing genuinely wins in specific situations. If you own a business and can deduct lease payments as a business expense, the after-tax math can favor leasing. If you want a luxury vehicle that depreciates rapidly but has a subsidized high residual (manufacturers sometimes inflate residuals to move inventory), you’re essentially getting a discount on depreciation.
Leasing also provides value if you genuinely prioritize always having the latest safety features, a warranty-covered vehicle, and predictable transportation costs—and you’re willing to pay for that convenience. The mistake is leasing while telling yourself you’re “saving money” with lower payments.
Pro Tip
If you’re considering a lease, check the vehicle’s residual value before negotiating. Vehicles with residuals above 55% are better lease candidates; those below 50% are usually cheaper to buy. You can find current residual values on sites like Edmunds or by asking the dealer directly—they’re set by the leasing company, not negotiable.
What If You’re Currently Leasing?
If you’re at the end of a lease, you have three options: return the car and lease again (perpetuating the payment cycle), return and buy something else, or buy out your current lease. The buyout option is worth considering if you’ve kept the car in good condition and the residual value is lower than market value—you’d essentially be buying a used car you know the history of at a predetermined price.
If you’re mid-lease and want out, options are limited and usually expensive. Early termination fees can equal all remaining payments. Your best bet is often a lease transfer service (like Swapalease) that lets someone else assume your lease, though you may need to offer incentives.
Watch Out: The “One-Pay” Lease Trap
Some dealers pitch “one-pay” leases where you pay the entire lease upfront for a discount. This eliminates the interest charge but creates a massive risk: if the car is totaled or stolen, insurance pays the leasing company, not you. You could lose $15,000+ with nothing to show for it. If you have that much cash, you’re usually better off buying.
The Bottom Line
For most drivers, buying and keeping a car for 7+ years costs significantly less than serial leasing—often $20,000 or more per decade. Leasing makes financial sense primarily for business use with tax deductions, luxury vehicles with strong residuals, or drivers who explicitly value always having a new car and accept the premium. Run the numbers for your specific situation before deciding.
Try It Out — Compare Buying and Leasing Your Next Car
The examples above use averages, but your situation has specific numbers: the car you’re considering, your likely interest rate, the actual residual value, and how long you plan to keep driving. Use the calculator below to run a personalized comparison and see which option truly costs less for your circumstances.
Quick Start Calculator
Calculated buy payment: $626 /mo for 60 months
Cost Comparison
Leasing Saves You
$5,501
over 36 months
Net Cost to Buy
$18,101
Cost to Lease
$12,600
Monthly Payment Difference
+$276/mo to buy
Equity Built by Buying
$7,439
vehicle value minus remaining loan at month 36
Cumulative Net Cost Over Time
What to Look For in the Results
Total Cost to Buy
Your all-in cost for purchasing: down payment plus all loan payments, minus the resale value of the car at the end of your ownership period.
Total Cost to Lease
Your all-in cost for leasing over the same period: all down payments, monthly payments, and fees across however many lease terms fit your time horizon.
Net Cost Difference
The dollar amount you save by choosing the less expensive option. A positive number means buying saves money; negative means leasing does.
Effective Monthly Cost
Total cost divided by total months for each option. This lets you compare true monthly cost of ownership, not just the payment amount.
Disclaimer: This calculator provides estimates for educational purposes and should not be considered financial advice. Actual costs will vary based on specific loan terms, lease contracts, taxes, insurance differences, maintenance costs, and other factors not fully captured here. Residual values are estimates and actual resale prices depend on market conditions, vehicle condition, and mileage. Consult with a financial advisor before making significant vehicle financing decisions.
Run the Full Analysis
The interactive calculator above is a quick-start version. The full tool offers more inputs, detailed breakdowns, data tables, and CSV export.
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