When you get a new car, you can usually either buy it, with cash or a loan, or lease it, paying to use it for a set number of years. Leases often advertise appealingly low monthly payments, while buying offers ownership and freedom from mileage limits. Which costs less depends on how long you keep cars, how much you drive, and what you value.
This guide explains how leases work, compares the costs fairly, and helps you decide which option fits your situation.
How a lease works
When you lease, you're essentially paying for the part of the car's value you use up during the lease, plus interest-like charges and fees. At the end, you return the car, or you may have the option to buy it.
The main parts of a lease:
- Capitalized cost: the negotiated price of the car, similar to the purchase price. It can and should be negotiated.
- Residual value: the car's estimated value at the end of the lease, set by the leasing company.
- Depreciation: the difference between the capitalized cost and the residual value. Most of your monthly payment covers this.
- Money factor: the lease's financing charge. Multiplying it by 2,400 gives a rough equivalent APR; for example, a money factor of 0.0025 is about a 6% APR.
- Term: usually two to four years.
- Mileage allowance: commonly 10,000 to 15,000 miles a year, with a charge for each mile over.
- Due at signing: often the first payment, fees and sometimes a down payment, called a capitalized cost reduction.
Leasing vs buying at a glance
| Leasing | Buying | |
|---|---|---|
| Monthly payment | Usually lower | Usually higher |
| Ownership | You return the car (or buy it at the end) | You own it once the loan is paid |
| Long-term cost | Usually higher if you always lease | Usually lower, especially if you keep the car for years |
| Mileage | Limited, with charges for going over | Unlimited |
| Wear and customization | Charges for excess wear; modifications restricted | Your choice; wear affects resale value |
| Repairs | Usually within the factory warranty for most of the lease | Out-of-warranty repairs become your cost as the car ages |
| Ending early | Can be expensive | You can sell anytime (subject to any loan balance) |
| Insurance | Often higher required limits, plus collision and comprehensive | Collision and comprehensive required while you have a loan |
Comparing costs fairly
Lease payments are usually lower than loan payments for the same car, because you're only paying for part of its value. But comparing monthly payments alone is misleading. Here's an illustrative comparison over different periods:
- Leasing: $3,000 due at signing and $450 a month for 36 months comes to $19,200 over three years, after which you have no car and start again.
- Buying: a $35,000 car with $3,500 down and a 60-month loan at 7% means payments of about $624 a month, about $40,924 in total over five years. After that, you own a car that still has value, and you have no payment.
Over three years, leasing looks far cheaper. But over six years, the leaser has paid for two leases, roughly $38,400 at the same prices, and owns nothing, while the buyer has finished paying and still owns a car worth several thousand dollars or more. The longer you keep a car after paying it off, the more buying tends to win. These figures are illustrative; real lease and loan terms vary widely.
Costs to watch for in a lease
- Excess mileage charges, often a set amount per mile over the allowance. If you drive more than you expected, these can add up quickly.
- Excess wear and tear at the end, such as dents, interior damage or worn tires beyond "normal" wear.
- Acquisition and disposition fees at the start and end of the lease.
- Early termination costs, which can be substantial if you need to end the lease early.
- Insurance requirements, which can be higher than you'd choose otherwise. Many leases include gap coverage; check before buying it separately. See What Is Gap Insurance?
When leasing can make sense
- You like driving a newer car every few years, with the latest safety features, and accept paying for that.
- You drive a predictable, moderate number of miles that fits within the allowance.
- You want lower monthly payments and predictable costs, mostly within the warranty.
- You use the car for business, where leasing can have tax implications worth discussing with a tax professional.
- A strong lease deal is available, such as a manufacturer promotion with a high residual value and low money factor.
When buying usually makes more sense
- You keep cars for many years after the loan is paid off. Payment-free years are where buying saves the most.
- You drive a lot, or your mileage is unpredictable.
- You want to modify the car, or you're hard on vehicles.
- You want flexibility to sell whenever you choose.
- You're buying a used car, where the biggest depreciation has already happened.
Buying your leased car at the end
Many leases let you buy the car at the end for its residual value plus fees. This can be a good deal if the car is worth more than the residual value, or if you know its history and want to keep it. Compare the buyout price with the market value of similar cars, and arrange financing as you would for any used car purchase.
Questions to ask before deciding
- How long do you usually keep a car?
- How many miles do you drive a year, and how certain is that?
- What's the total cost of each option over the period you'd realistically have the car?
- For a lease: what's the capitalized cost, residual value, money factor, mileage allowance and all fees?
- For a loan: what's the APR, term and total interest? See How APR Works on Auto Loans.
- Could you comfortably afford the payment, insurance and other costs either way? See How Much Car Can I Afford?
Lease terms in plain English
| Term | What it means |
|---|---|
| Capitalized cost | The car's negotiated price in a lease |
| Capitalized cost reduction | A down payment on a lease, which lowers the monthly payment |
| Residual value | The car's estimated value at the end of the lease |
| Money factor | The lease's financing charge; multiply by 2,400 for a rough APR equivalent |
| Acquisition fee | A fee charged by the leasing company to set up the lease |
| Disposition fee | A fee charged when you return the car at the end |
| Excess wear and tear | Damage beyond normal use, charged when you return the car |
| Purchase option | The price at which you can buy the car at the end of the lease |
How to negotiate a lease
- Negotiate the capitalized cost first, exactly as if you were buying the car. Every dollar off the price lowers your payment.
- Ask for the money factor and convert it to an approximate APR, so you can compare it with loan rates.
- Check the residual value. A higher residual means lower payments, but it's usually set by the leasing company rather than negotiated.
- Choose a realistic mileage allowance. Paying for more miles upfront is usually cheaper than paying excess charges later.
- Be cautious with large down payments on a lease. If the car is totaled early, that money is often lost, even with gap coverage.
- Ask for every fee in writing, including what's due at signing and at return.
Insurance on a leased car
Leasing companies own the car, so they set insurance requirements, which are often stricter than for a financed car:
- Collision and comprehensive are required, often with a maximum deductible.
- Liability limits are commonly required at higher levels than your state's minimum.
- The leasing company is listed on your policy as the owner or additional insured.
Get an insurance quote for the specific car before signing a lease, so the total monthly cost doesn't surprise you. See Comprehensive vs Collision Coverage.
Lease transfers and ending a lease early
If you need to get out of a lease early, the options include returning the car and paying the early termination costs, buying the car and selling it yourself, or, if the leasing company allows it, transferring the lease to someone else. Lease transfer services connect people who want out of a lease with people looking for a short-term lease. Fees and rules vary by leasing company, and some don't allow transfers at all, so check your contract.
Putting it together
- Leasing usually means lower payments and a newer car, but no ownership and limits on mileage and wear.
- Buying usually costs less over time, especially if you keep the car well after paying it off.
- Compare total costs over the period you'd actually have the car, not just monthly payments.
- Negotiate a lease's price just as you would a purchase, and read every fee.
To estimate the loan side of the comparison, try our Car Loan Calculator, and compare loan lengths with the Monthly Car Payment Calculator.
Frequently asked questions
Is it cheaper to lease or buy a car?
Leasing usually has lower monthly payments, but buying usually costs less over time, especially if you keep the car for several years after paying off the loan. Compare total costs over the period you'd realistically have the car.
Can you negotiate a lease?
Yes. The capitalized cost (the car's price) can usually be negotiated, and you can ask about the money factor, fees and mileage allowance. A lower capitalized cost reduces your monthly payment.
What happens if I go over the mileage on a lease?
You'll usually pay a charge for each mile over your allowance when you return the car. If you expect to drive more, it's often cheaper to choose a higher mileage allowance at the start.
Can I end a lease early?
Usually, but it can be expensive, because you may owe remaining payments or the difference between the car's value and what's left on the lease. Read the early termination terms before signing.
