Car Lease vs Buy Calculator

How a monthly lease payment is built

A lease is a contract for the part of the car you use up, not for the whole car. The lender buys the vehicle, sets a price for what it will be worth the day you hand back the keys, and charges you for the gap between those two numbers. Everything else in the payment is interest and tax on that gap.

Three pieces go into the monthly figure:

• Capitalized cost. The price the lease is written on, which is the MSRP minus any discount you negotiate, minus the cash you put down at signing. On a $38,000 car with $3,000 down, that is $35,000.
• Residual. The predicted value at the end of the term, quoted as a percent of MSRP. A 55 percent residual on a $38,000 car is $20,900.
• Money factor. The lease version of an interest rate. Multiply it by 2,400 to get the APR, so 0.00125 is 3 percent.

The math runs in two lines. Depreciation is the capitalized cost minus the residual, divided by the number of months. The rent charge is the money factor times the capitalized cost plus the residual. Sales tax goes on the sum in most states, charged month by month rather than on the whole car.

The rent charge is where the lender makes its money, and it is charged on the capitalized cost plus the residual, which is more than the car is worth at any point. A higher residual cuts the depreciation a lot and raises the rent charge a little, so a car that holds its value leases far cheaper than one that does not. The Federal Reserve publishes the same arithmetic in its auto loan and lease guidance if you want a second read on it.

Worked example: a $38,000 car kept for six years

Here is the whole comparison on one car. A $38,000 vehicle, 36 month lease at 55 percent residual and a 3 percent lease rate, $3,000 due at signing, 7 percent sales tax, 12,000 miles a year. The lease payment comes out to $493.85.

The buy side uses the same car at the same price: $5,000 down, a 60 month loan at 6.5 percent, and tax paid on the full purchase price. Tax brings the amount financed to $35,660, and the payment is $697.73 a month. Over the 60 months you pay $41,864 in total, of which $6,204 is interest.

Comparing the two needs one more step, because the buyer still owns something at the end. After six years the calculator values the car at about $11,552, using an 18 percent drop per year off the $38,000 sticker. Cash out for the buyer is $46,863, minus the $11,552 the car is worth, so the net cost of buying is $35,311.

The lease side has no resale value to subtract, but it does have a second contract. Six years at 36 months per lease means two rounds of $3,000 due at signing plus 72 monthly payments of $493.85, which totals $41,557. So over six years, buying costs $6,246 less than leasing the same car.

Run the same comparison at three years and the answer flips. Three years of leasing costs $20,779, while buying and selling at the 36 month mark nets $24,829, so the lease is $4,051 cheaper. The car loses its value fastest in the first three years, and the lease is priced on that exact curve. The buyer carries the same loss plus the interest on the loan.

Miles, wear and the charges at turn-in

Mileage is the part of a lease that people underestimate. A lease is written with an annual allowance, usually 10,000, 12,000 or 15,000 miles, and every mile above it is billed at turn-in. The rate is commonly 20 to 30 cents a mile, and it is charged on the total overage for the whole term, not per year.

Wear charges are separate. The car has to come back with tires above the tread limit, no body damage beyond normal wear, and a clean interior. A set of tires at turn-in can be $800, a bumper scuff $400, and a cracked windshield $300. Lenders publish a wear guide with a small ruler for dents and scratches, and the inspector works from that card, not from your opinion of what counts as normal.

That last row is why a long commute and a lease rarely mix. Twelve thousand dollars of overage over six years is more than the gap between leasing and buying in the first place, and it lands as a single bill at the end. If you drive 18,000 miles a year, price the lease at a 15,000 or 18,000 mile allowance instead, or accept that the buy side wins by a wider margin than the base numbers suggest.

Year by year: where the two lines cross

Costs move in steps, so the honest way to compare is year by year. The table below runs the same default car through both paths and stops at the end of each year. Lease cost is cash out the door, including each signing payment. Buy cost is cash paid minus the car's resale value at that point, so it is the money you will never see again.

The crossover sits in year four, and it is narrow: $309 on a $29,000 decision. Two things drive it. First, the loan balance falls below the resale value somewhere around month 42, so the buyer has real equity instead of negative equity. Second, the lease has to be replaced at month 36, and that replacement carries another $3,000 at signing plus a fresh set of payments at full price.

Notice the step in the lease column at year 4 and again at year 7. Those are contract starts, not rate changes. A lease never gets cheaper with age, while a loan ends. Once the loan is paid off in month 60, the only costs left are fuel, insurance, tires and repairs, which is why the buy line flattens while the lease line keeps climbing.

The residual is the number that decides the deal

If you take one number out of a lease quote, take the residual. It sets the depreciation you finance, and the depreciation is 75 to 85 percent of the payment. On this $38,000 car, the residual moves the payment more than a full point of interest does.

At a 50 percent residual the car is worth $19,000 at turn-in, the depreciation part is $444.44, and the payment is $547.78. At 55 percent it is $20,900, $391.67 and $493.85. At 60 percent it is $22,800, $338.89 and $439.92. At 65 percent it is $24,700, $286.11 and $385.99. Each point of residual is worth about $11 a month on this car, or roughly $380 over the term.

That is why two cars with the same sticker price can lease $150 apart. Trucks and SUVs with strong resale lease well; sedans and electric cars with fast depreciation lease badly, even when the sticker looks similar.

The catch is that a high residual is a promise, not a gift. If the market value at turn-in comes in below the residual, you owe the difference only if you buy the car, and you would not. If the market comes in above it, the car is worth more than the buyout, and you can buy it and sell it for a profit. Either way, the residual is the lender's forecast, and the forecast is the deal.

What buying costs over the same years

The buy side has costs that the lease quote hides inside a warranty. Tires on a 40,000 mile car run $600 to $900 a set, brakes $400 to $700 per axle, and scheduled service at $100 to $200 a visit. Over six years, budget $1,200 to $2,000 for a new car that stays on schedule. Those costs land after year three, which is exactly when the lease would have ended.

Fuel is the same either way, because it is the same car. If you want to know what the driving itself costs, the EPA's fuel economy guidance on driving habits shows how much of your bill comes from speed and idling rather than from the car. For a rough per mile figure, the IRS standard mileage rate bundles fuel, insurance, repairs and depreciation into one number, and it is a fair sanity check on both paths.

Insurance is the quiet difference. A leased car must carry full coverage with a low deductible for the whole term, and many leases require gap coverage. A car you own free and clear can drop to liability only once it is worth less than the deductible. On a six year old car that can be $80 to $120 a month of savings that the lease never gets to claim, which widens the buy advantage in the later years.

Registration, property tax and fees are usually similar, though a few states charge a lease tax up front and a personal property tax on the assessed value each year. Check the state motor vehicle office before you sign, because a 1 percent annual property tax on a $38,000 car is $380 a year that neither payment quote shows.

What this comparison leaves out

This calculator compares cash flows on the car. It does not model everything, and four omissions are worth naming.

• The down payment could earn something. $5,000 invested at 4 percent for six years is about $6,326. Put that against the buy column and the gap narrows by roughly $1,300.
• Credit tier changes both rates. A 6.5 percent loan is a good-credit number. At 12 percent the same $35,660 loan costs $793.24 a month and $11,935 in interest, which pushes the crossover out to year six.
• Negotiation moves the lease more than the loan. Every $1,000 off the selling price cuts the lease payment by about $31 a month, because the discount comes straight out of the depreciation while the residual stays where it was. On a loan it cuts the payment by about $20.
• Early exit is expensive. Selling a financed car early means paying off the loan, which can leave you owing more than the car is worth in the first 24 months. Ending a lease early means paying the remaining payments. Both paths punish a change of plan, the lease more so.

The calculator also assumes the car is sold at trade-in value rather than private party, which is the conservative choice. A private sale typically brings 5 to 10 percent more, which would push the buy advantage up by $600 to $1,200 at the six year mark. It assumes the lease is renewed at the same terms, with no loyalty discount and no price increase on the next car.

One more assumption: the lease is written on MSRP. In practice the capitalized cost is negotiable, and a $2,000 discount on the selling price lowers the payment to about $435. Run your own quote through the fields above rather than trusting the default, since the default is a typical deal, not your deal.

When leasing is the right call

Leasing wins when the term matches how long you keep a car. If you trade every three years, the lease is cheaper than buying and selling on the same schedule, by about $4,000 on the example above. It also wins when you want a car that stays under warranty the whole time, when you can write the payment off as a business expense, and when you would rather keep $5,000 in the bank than tie it up in a down payment.

Buying wins when you keep a car past four years, when you drive more than 15,000 miles a year, when you park on a street where bumpers get scuffed, and when you want to stop having a car payment. The last one is the biggest. A paid-off car at year seven costs insurance, fuel and repairs, and nothing else, which is a monthly number a lease can never reach.

A practical rule: if the answer to "how long will I keep this car" is under 36 months, lease it. If it is over 48 months, buy it. Between 36 and 48 months, the two paths land within a few hundred dollars of each other, and the tiebreaker is how much you value driving a new car versus owning the one you have. Set the years field to your honest answer, not your hopeful one, and the calculator will show you the number that matters.