Lease vs. buy: the total cost model
Key takeaways
04 · ideas- Leasing: you pay for depreciation only, then give it back
- Buying: higher monthly cost, but you keep the asset
- Over 10 years, buying almost always wins financially
- Leasing makes sense for business deductions or frequent upgraders
Basic level
The essentials · 1 min
Leasing means paying to use a car for 2–4 years. You pay for the depreciation (the value lost during your use), then return the car. You build no equity.
Buying means paying the full price over time. After the loan is paid, you own the car — an asset with remaining value.
Monthly cost: Leasing is often cheaper per month. But monthly cost is the wrong comparison. Total cost over 10 years almost always favors buying.
Intermediate level
How it applies · 2 min
10-year total cost comparison
Scenario: $35,000 car, moderate driving, 5% financing.
Buy option:- 60-month loan: $660/month
- After 5 years: own a ~$15,000 car
- Keep 5 more years with no payment: pay only maintenance
- 10-year total cost: ~$39,600 + $10,000 maintenance = $49,600
- Residual value of car after 10 years: ~$5,000
- Net cost: ~$44,600
- 36-month lease: $450/month
- Return at 36 months, lease a new similar car
- 3 leases over 10 years: ~$450 × 120 months = $54,000
- Residual value: $0
- Net cost: ~$54,000
Buying saves ~$9,400 over 10 years in this scenario.
When leasing makes sense:- You use it as a business expense (lease payments often fully deductible)
- You genuinely want a new car every 3 years and factor in the premium as a lifestyle cost
- Your job requires a specific type of vehicle and the company doesn't provide one
Advanced level
The math, step by step · 2 min
Depreciation curve and lease structuring
Cars depreciate fastest in years 1–3. Typical depreciation:- Year 1: -15 to -25% of MSRP
- Year 2: -10 to -15%
- Year 3: -8 to -12%
- Years 4–7: -5 to -8% per year
A lease payment is essentially:
Where cap cost = negotiated price, residual = estimated value at lease end, finance charge = (Cap cost + Residual) × money factor × months.
Money factor: The lease equivalent of APR. Convert: APR = Money Factor × 2,400.
A money factor of 0.00125 = APR of 3%.
Negotiating a lease: Cap cost is negotiable — dealers often don't advertise this. Residual and money factor are set by the manufacturer's financing arm and non-negotiable. Focus negotiation on reducing the cap cost and acquiring fee.
GAP insurance: If your leased car is totaled, you owe the full remaining lease value, which may exceed the car's actual value. GAP insurance covers this difference. Many lease agreements include it — check before paying for it separately.