Is it cheaper to lease or buy a car?

Leasing has lower monthly payments but you build no equity. Buying costs more monthly but you own the asset. Over 10 years of driving the same car, buying is nearly always cheaper. Over a 3-year window where you'd replace the car anyway, leasing can be similar or cheaper depending on residual and money factor.

What is money factor in a car lease?

Money factor is the lease equivalent of interest rate. Multiply by 2,400 to convert to APR. Money factor 0.00150 = 3.6% APR. A lower money factor means cheaper financing in the lease. Compare the money factor to current car loan rates to determine if the lease financing is competitive.

What is residual value in a car lease?

Residual value is the manufacturer's projected vehicle value at lease end, set as a percentage of MSRP. A $40,000 car with a 60% residual has a $24,000 residual. Higher residual = less depreciation financed = lower monthly payment. Vehicles with high residuals (typically luxury and popular brands) are cheapest to lease.

What happens if I go over mileage on a lease?

You pay an excess mileage fee, typically $0.15–$0.30 per mile over the contracted limit. Going 5,000 miles over a 36-month lease at $0.25/mile = $1,250 due at turn-in. Budget carefully — leasing is expensive for high-mileage drivers. Consider buying if you drive more than 15,000 miles/year.

Can I negotiate the price on a leased car?

Yes — the capitalized cost (selling price) is negotiated exactly like a purchase price. Never accept MSRP as the cap cost. Reducing the cap cost by $1,000 reduces your monthly payment by about $27 on a 36-month lease. The residual and money factor are set by the manufacturer and are typically non-negotiable.

Lease vs. Buy Car Calculator: The Real Cost Comparison

Compare the true cost of leasing vs. buying a car over any time horizon. Covers money factor, residual value, capitalized cost, and when leasing makes financial sense.

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The Fundamental Difference: What You're Paying For

When you buy: You pay for 100% of the vehicle's value (with financing costs). At payoff, you own the asset.

When you lease: You pay only for the portion of the vehicle's value you consume during the lease term (depreciation + finance charge + fees). At lease end, you return the vehicle or pay residual to buy it.

Leasing is not inherently cheaper than buying — it's a different financial structure. The right choice depends on your priorities, annual mileage, and what you do with the car at term end.

Key Lease Terms Defined

Capitalized cost (cap cost): The agreed selling price of the vehicle (equivalent to the purchase price in a buy scenario). You negotiate this — it's not fixed at MSRP.

Residual value: The manufacturer's projected value of the vehicle at lease end, expressed as a percentage of MSRP. A $45,000 car with 58% residual has a $26,100 residual value. Higher residual = lower monthly payment (you're financing less depreciation).

Money factor (MF): The lease equivalent of interest rate. Convert: APR = Money Factor × 2,400. A money factor of 0.00150 = 3.6% APR.

Monthly payment formula:

Monthly Payment = (Depreciation + Finance Charge) ÷ Lease Term + Acquisition Fee ÷ Term

Depreciation = (Cap Cost − Residual Value) ÷ Months
Finance Charge = (Cap Cost + Residual Value) × Money Factor

Lease vs. Buy 3-Year Comparison

Vehicle: $45,000 sedan; 3-year scenario; 12,000 miles/year

Lease: - Residual: 58% ($26,100) - Money factor: 0.00150 (3.6% APR) - Cap cost: $43,000 (after negotiation) - Monthly: ((43,000 − 26,100) ÷ 36) + ((43,000 + 26,100) × 0.00150) + ($795 acq ÷ 36) - ≈ ($469) + ($104) + ($22) = $595/month - Down: $2,500 drive-off - Total 3-year cost: $595 × 36 + $2,500 = $23,920 - Asset value at end: $0 (return car)

Buy (loan): - Price: $43,000 at 6.5% APR, 60-month loan = $840/month - 3-year payoff: $840 × 36 = $30,240 paid, ~$19,500 remaining balance - Resale value at 3 years: ~$26,100 (55% of original $45K or similar to residual) - Net cost after 3 years: $30,240 + $43K − $26,100 (resale) − $23,500 (remaining equity) = complex

The simpler comparison: Total cash out in 3 years: - Lease: $23,920 out-of-pocket, no asset - Buy: $30,240 out-of-pocket, vehicle worth ~$26,100

Net 3-year "cost" of buying: $30,240 − $26,100 = $4,140 equity + resale value Net 3-year "cost" of leasing: $23,920, no asset

When Leasing Makes Financial Sense

You drive fewer miles than the lease limit (12,000–15,000/year)
You always want a new car every 2–3 years anyway
You use the car as a business expense (leasing offers more deduction flexibility)
You can't afford the buy payment but the lease fits your budget
Manufacturer is offering subsidized money factor or high residual (check leasehackr.com for scores)

When Buying Makes More Sense

You drive more than 12,000–15,000 miles/year
You plan to keep the car 5+ years
You want equity and total-cost-of-ownership efficiency
You modify vehicles
You want to pay off debt and own without recurring payments

Frequently Asked Questions

Is it cheaper to lease or buy a car?: Leasing has lower monthly payments but you build no equity. Buying costs more monthly but you own the asset. Over 10 years of driving the same car, buying is nearly always cheaper. Over a 3-year window where you'd replace the car anyway, leasing can be similar or cheaper depending on residual and money factor.
What is money factor in a car lease?: Money factor is the lease equivalent of interest rate. Multiply by 2,400 to convert to APR. Money factor 0.00150 = 3.6% APR. A lower money factor means cheaper financing in the lease. Compare the money factor to current car loan rates to determine if the lease financing is competitive.
What is residual value in a car lease?: Residual value is the manufacturer's projected vehicle value at lease end, set as a percentage of MSRP. A $40,000 car with a 60% residual has a $24,000 residual. Higher residual = less depreciation financed = lower monthly payment. Vehicles with high residuals (typically luxury and popular brands) are cheapest to lease.
What happens if I go over mileage on a lease?: You pay an excess mileage fee, typically $0.15–$0.30 per mile over the contracted limit. Going 5,000 miles over a 36-month lease at $0.25/mile = $1,250 due at turn-in. Budget carefully — leasing is expensive for high-mileage drivers. Consider buying if you drive more than 15,000 miles/year.
Can I negotiate the price on a leased car?: Yes — the capitalized cost (selling price) is negotiated exactly like a purchase price. Never accept MSRP as the cap cost. Reducing the cap cost by $1,000 reduces your monthly payment by about $27 on a 36-month lease. The residual and money factor are set by the manufacturer and are typically non-negotiable.

Last updated 7/28/2026