Lease vs Buy a Car: Which Costs Less? A Real Example

Leasing usually means a lower monthly payment and a new car every few years, but you never own it and you pay for that convenience over time. Buying usually costs more per month at first, but once the loan is paid off you own an asset and can drive it payment-free for years. If you keep cars for a long time, buying almost always wins. If you want a new car every three years and drive under the mileage limit, leasing can make sense.

Quick check: see your monthly payment if you buy with our free car loan calculator.

How a car lease works

When you lease, you pay for the part of the car’s value you use up, plus interest and fees. The leasing company sets a residual value, what it expects the car to be worth at the end, and your payments cover the drop from the price to that residual.

A lease payment has three parts:

• Depreciation: the price minus the residual value, divided by the number of months.
• Finance charge: based on the money factor, the lease version of an interest rate. Multiply it by 2,400 to get the approximate APR. A money factor of 0.0025 is about 6%.
• Sales tax: in most US states, charged on each payment rather than the whole price.

A real example: $40,000 car

Lease: 36 months, residual 58% ($23,200), money factor 0.0025. Depreciation is about $467 a month and the finance charge about $158, so the payment is about $625 a month before tax. With about $3,000 due at signing, three years costs roughly $25,500, and you hand the car back.

Buy: $5,000 down and a 60-month loan for $35,000 at 7%, about $693 a month. After three years you have paid about $29,950 and still owe about $15,500. If the car is worth $23,200, you have about $7,700 of equity. Net cost over three years: roughly $22,200.

Keep the car for eight years instead, and the gap grows a lot. After the loan ends in year five, you drive for three more years with no payment at all, while a leaser would be on their third lease.

Pros and cons of leasing

Pros:

• Lower monthly payment for the same car
• A new car every two to four years, always under warranty
• No trade-in or selling hassle at the end
• Can make sense for business use, where lease payments may be partly deductible

Cons:

• You never stop making payments
• Mileage limits, usually 10,000 to 15,000 miles a year, with charges of about 15 to 30 cents per extra mile
• Fees for excess wear and tear, plus acquisition and disposition fees
• Ending a lease early can be very expensive
• Higher insurance requirements in many cases

Pros and cons of buying

Pros:

• You own the car and build equity
• No mileage limits or wear charges
• You can sell or trade any time
• Years of payment-free driving after the loan

Cons:

• Higher monthly payment
• Repair costs once the warranty ends
• You take the depreciation risk if values drop

When leasing makes sense

• You drive under 12,000 miles a year and keep the car in good shape.
• You want the latest safety tech and always want a warranty.
• The manufacturer is offering a subsidized lease with a high residual or low money factor. This is common on slow-selling models and some electric cars.
• You use the car for business and your accountant confirms the tax benefit.

When buying makes sense

• You keep cars for five years or more.
• You drive a lot, for work or a long commute.
• You want the lowest total cost over time.
• You have kids, pets or a lifestyle that is hard on interiors.

Negotiating a lease

Many people do not know a lease is negotiable. You can, and should, negotiate:

• The price (capitalized cost), exactly like when buying. Every $1,000 off lowers the payment by about $30 a month on a 36-month lease.
• The money factor. Ask for the “buy rate” from the bank. Dealers can mark it up.
• Fees and add-ons. Ask for a full breakdown.

The residual value is set by the leasing bank and usually is not negotiable. Avoid putting a large amount down on a lease. If the car is stolen or totaled early, that money is usually gone.

What about buying out the lease?

Most leases let you buy the car at the end for the residual value. If the car is worth more than the residual, which happened to many people when used car prices jumped in 2021 and 2022, buying it out can be a good deal. If it is worth less, hand it back and let the leasing company take the loss.

Before you shop, check how much car you can afford so the payment fits your budget whichever way you go.

Frequently asked questions

Is leasing a waste of money?

Not always, but it is usually the more expensive way to drive over the long run. You pay for the most expensive years of a car’s life, when depreciation is highest, again and again.

Does leasing affect my credit?

A lease shows on your credit report like a loan. On-time payments help your score, and missed payments hurt it the same way.

Can I lease a used car?

Some dealers offer used car leases, but they are less common and the terms are often less attractive.

Is it better to lease an electric car?

Often, yes. EV technology and prices change quickly, which makes resale values harder to predict. A lease shifts that risk to the leasing company. Note that the US federal EV tax credit ended for vehicles bought or leased after September 30, 2025.

This article is general information, not financial advice. Lease terms vary by brand, lender and region, so ask for the full numbers in writing.