Car Lease vs Buy, Explained
After reading this you will be able to compare the cash cost of buying a car with a loan against leasing it over the same period, and see why the answer depends heavily on how long you keep the car.
What this comparison actually measures
Leasing and buying feel different month to month, but the honest question is simple: over the years you plan to keep the car, which path costs you less cash? To answer it you add up everything you pay under each option, then subtract anything you get back.
When you buy with a loan, you pay a down payment, then monthly payments that include interest, and at the end you own an asset you can sell. That resale value is money returned to you, so it reduces the true cost of buying. When you lease, you pay an upfront fee, then monthly payments, and at the end you hand the car back and own nothing.
Here is the hook. Suppose you keep a 30000 car for five years. Buying might cost you around 18700 net of resale, while leasing might cost 23000. Buying wins by roughly 4300. But shorten the window to two years and the picture can flip, because a car loses most of its value early and you have not yet recovered that loss through use.
When to use it, and when not
Use this comparison when you have a concrete ownership window in mind and real quotes for both options: a lease payment from a dealer and a loan rate from a lender. The tool assumes the buy and lease periods are the same length. That keeps the comparison fair.
Do not lean on it when the two options differ in ways it cannot see. Leases cap your mileage and charge for excess, often 0.15 to 0.30 per mile over the limit. Leases may require you to carry higher insurance. Buying leaves you exposed to repair bills after the warranty ends. This calculator compares cash flows only, so treat those differences as separate line items you weigh yourself.
The comparison is most reliable when your ownership window matches the lease term exactly. If you plan to keep a bought car for ten years but the lease you are quoted runs three, you are comparing two different questions.
The formula and the intuition behind it
The cost of buying is the down payment, plus the sum of all loan payments, minus the resale value you recover at the end.
Here D is the down payment, n is the number of years you keep the car, M is the monthly loan payment, and R is the resale value at the end. The term 12 \cdot n counts the months. This assumes the loan term equals your ownership window; if the loan is shorter, the payments stop earlier and you simply own the car outright for the remaining time.
The monthly loan payment itself comes from the standard amortization formula on the financed amount (price minus down payment):
Here P is the car price, r is the monthly interest rate (the annual rate divided by 12), and N is the total number of loan payments. The fraction spreads the borrowed amount plus interest evenly across every month.
The cost of leasing is simpler, because you get nothing back at the end:
Here L_D is the lease down payment and fees, and L_M is the monthly lease payment. Whichever of C_{\text{buy}} and C_{\text{lease}} is smaller wins for that window.
A worked example with the demo numbers
Five-year buy against a five-year lease
Use the demo data: price 30000, down payment 5000, annual rate 7%, loan term 5 years, ownership window 5 years, resale 12000, lease payment 350, lease down 2000.
- Financed amount: P - D = 30000 - 5000 = 25000.
- Monthly rate: r = 0.07 / 12 \approx 0.005833. Payments: N = 60.
- Monthly loan payment: M = 25000 \cdot \frac{0.005833}{1 - (1.005833)^{-60}} \approx 495.03.
- Total loan payments: 60 \cdot 495.03 \approx 29702.
- Cost of buying: 5000 + 29702 - 12000 = 22702.
- Cost of leasing: 2000 + 60 \cdot 350 = 2000 + 21000 = 23000.
Buying costs about 22702, leasing about 23000. Buying wins by roughly 298. This is close, which is common at five years. The interest you pay on the loan (about 4702 over the term) nearly cancels the resale value you recover, so the two options land near each other.
The resale value is the single number that most changes the answer, and it is the hardest to predict. Check a used-car listing site for cars like yours at the age you plan to sell, then run the calculator twice: once with an optimistic resale and once with a pessimistic one.
Reading the result across different windows
The interesting behavior appears when you vary how long you keep the car. Leasing cost grows in a straight line: each extra year adds 12 \times 350 = 4200. Buying cost also grows, but resale value falls faster in early years and slower later, so the net buy cost curve bends.
The pattern in the chart is the whole story. At two years, leasing can win because the bought car has lost a lot of value you have not offset. Past five years the lease keeps charging full monthly rent while the buyer, especially after the loan ends, pays nothing more and still owns something.
Common mistakes
The first mistake is comparing a low monthly lease payment to a higher monthly loan payment and stopping there. In the demo, the lease is 350 a month and the loan is 495. Leasing looks cheaper. It is not, once you account for the 12000 you get back when you sell. Monthly outlay and total cost are different questions.
The second mistake is ignoring the down payments. You pay 5000 upfront to buy and 2000 to lease. That 3000 gap favors leasing on cash flow, and the calculator includes it, but it is easy to forget when you only look at monthly figures.
The third mistake is treating resale as certain. If your 12000 estimate turns out to be 9000, the buy cost rises by 3000 and leasing wins. If accidents or high mileage cut resale, or if you owe mileage penalties on the lease, the real numbers move.
The comparison ignores the opportunity cost of your down payment. The 5000 you tie up in a bought car could have been invested. If you want to account for that, treat the difference in upfront cash as money that could grow, and revisit the answer when the gap is small.
Related tools
A car is a large purchase, so it helps to see it against the rest of your money. The Net Worth Calculator shows a car as an asset that depreciates and a loan as a liability. The 50/30/20 Budget Calculator tells you whether the monthly payment fits your take-home pay. If a big down payment would drain your reserves, check the Emergency Fund Calculator first.
For the smaller running costs, the Price Per Use Calculator reframes a car as cost per trip, and the Inflation Calculator shows what a resale value years from now is worth in present-day money. If you are buying across borders, the Currency Converter handles the exchange.
Frequently asked questions
Is leasing ever cheaper than buying?
Yes, over short windows or when resale value is weak. In the demo, leasing costs about 23000 over five years against 22702 for buying, so the two are close. Cut the window to two or three years and leasing often wins, because a bought car loses value fastest early on.
Why does the loan payment exceed the lease payment but buying still wins?
Because a loan builds equity in something you can sell. The 495 monthly loan payment is higher than the 350 lease payment, but at the end you recover 12000 in resale. The lease returns nothing.
What if I keep the car longer than the loan?
Once the loan is paid off, you make no more payments but you still own the car. Extra years of ownership add no monthly cost while the lease keeps charging, which is why buying pulls further ahead the longer you keep the car.
Does this include maintenance and insurance?
No. It compares cash payments and resale only. Maintenance, mileage penalties on the lease, and any insurance difference are separate figures you should weigh alongside the result.
How do I choose a resale value?
Look up used listings for the same make, model and age you expect to sell at, then use a figure slightly below the asking prices, since sellers rarely get their full ask. Run the calculator with a low and a high estimate to see how sensitive the answer is.
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