Should You Lease or Buy a Car?

Walk into any dealership and the salesperson will talk about your monthly payment. 'Can you do $450 a month?' That's the wrong question. The right question is: what does this car actually cost me over the next 3–7 years, all-in?

When you lease, you pay for the car's depreciation during the lease term plus a finance charge. When you buy, you pay for the entire vehicle — but you own an asset that you can sell later. The total cost comparison is what matters, and it depends heavily on how long you plan to keep the vehicle.

This guide explains how to make the right comparison, what numbers to watch, and when leasing vs buying makes sense for your situation.

A lease payment has two components: the depreciation charge and the finance charge. The depreciation charge is (Net Cap Cost − Residual Value) ÷ Lease Term. The finance charge is (Net Cap Cost + Residual Value) × Money Factor.

The money factor is the lease equivalent of an interest rate. Multiply any money factor by 2,400 to get the equivalent APR. A money factor of 0.00125 equals 3.0% APR. A money factor of 0.003 equals 7.2% APR — which is quite high. Always ask the dealer for the money factor and compare it to published manufacturer rates.

The residual value — what the car is worth at lease end as a percentage of MSRP — is the other key variable. A higher residual means lower monthly payments because you're financing less depreciation. High-residual vehicles (Honda, Toyota, Jeep Wrangler) are the best to lease. Low-residual vehicles penalize you for more depreciation.

Leasing can be the right choice in specific situations. If you consistently want a new car every 3 years, leasing turns that preference into a predictable payment. If you primarily drive under 12,000 miles per year, you won't incur overage fees. If the manufacturer is running a subsidized lease with an artificially high residual or low money factor, the numbers can genuinely favor leasing.

Leasing also makes sense if you're self-employed and can deduct a portion of lease payments as a business expense (consult your accountant). In that scenario, the tax advantage can shift the comparison.

Buying wins when you plan to keep the vehicle more than 5 years. Once your loan is paid off, you have zero vehicle payment — a powerful financial position. The car retains enough value to represent real equity.

Buying also wins if you drive more than 15,000 miles per year. The additional lease mileage cost can easily exceed $500–$1,500 per year, completely eliminating the monthly payment advantage of leasing.

Finally, buying wins when interest rates are low and residual values are artificially deflated — making lease payments higher relative to what you'd actually lose in depreciation if you owned.