Why comparing monthly payments answers the wrong question
A lease payment covers only the depreciation you use plus finance charges on the money tied up in the car. A loan payment covers the whole vehicle. Of course the lease payment is smaller — it is buying less. Comparing the two directly is like comparing a three-year rent cheque with a mortgage payment and concluding that renting is cheaper.
The honest comparison needs three corrections. First, a fixed horizon: decide how long you want transport for, and price both structures over exactly that period. Second, all the cash, not just the monthly part — drive-off money, disposition fees, mileage overages on the lease; down payment and any balance still owed on the loan. Third, terminal value: at the end of the horizon the leaseholder has nothing and the buyer has a car worth something, minus whatever is still owed on it.
Once those three are in place the arithmetic is a straightforward discounted cash flow. Both paths become a stream of outflows and, for the purchase, one inflow at the end. Discounting matters because the two structures put money at different times: leasing spreads cost evenly, while buying front-loads it and returns a lump at the end. At a 0% discount rate that timing difference is invisible, which is why the default here is not zero.
What each side of the comparison contains
The lease side is the sum of every cash demand the contract makes over the horizon, discounted to today. Each lease cycle starts with an amount due at signing and ends with a disposition fee, and the monthly payment sits between them. If your horizon is longer than one lease term, the calculator assumes you sign an identical replacement lease — which means paying drive-off money again. That assumption is generous to the lease in one respect and harsh in another: real replacement leases are priced on whatever the market offers at that time, which could be better or worse.
Excess mileage is charged at the contract rate for every mile over the allowance across the whole horizon. This is the item people most often leave out, and on a long commute it is the item that decides the answer.
The buy side starts with the down payment, adds the discounted stream of loan payments, and then subtracts what you walk away with. That terminal figure is resale value − loan balance, and the balance comes from the standard amortisation identity B = L(1+r)m − M((1+r)m − 1)/r evaluated at the earlier of your horizon and the loan term.
When the loan runs longer than the horizon, that balance can exceed the resale value and the equity goes negative. Long terms and small down payments are what create that position, and it is not a modelling artefact — it is the reason lenders and consumer regulators pay attention to loan terms beyond 72 months.
What is deliberately left out of both sides: insurance, fuel, registration and routine maintenance, because they are broadly similar between a leased and a purchased car of the same model. Where they are not similar — a purchase held past the warranty period, for instance — the purchase carries repair risk this calculation does not price.
Worked example: five years of transport, zero discount rate
Take a $30,000 car. The lease is $400 a month for 36 months with $2,000 due at signing and a $395 disposition fee. The purchase is $3,000 down with the remaining $27,000 financed at 0% over 36 months. You want the car for 60 months and you expect it to be worth $12,000 then. To keep the arithmetic visible, set the discount rate to 0.
- Lease payments. 60 months × $400 = $24,000.
- Drive-off money. The first lease starts in month 1 and a replacement starts in month 37, so you pay $2,000 twice = $4,000.
- Disposition. Only one lease term completes inside the horizon, at month 36, so one fee of $395.
- Net cost of leasing. 24,000 + 4,000 + 395 = $28,395.
- Loan payment. $27,000 ÷ 36 = $750 a month at 0%.
- Purchase outlay. $3,000 down + 36 × $750 = 3,000 + 27,000 = $30,000.
- Equity at month 60. The loan is paid off at month 36, so the balance is zero and the equity is the full resale value, $12,000.
- Net cost of buying. 30,000 − 12,000 = $18,000.
- Difference. 28,395 − 18,000 = $10,395 in favour of buying, which is $10,395 ÷ 60 = $173.25 a month.
The gap is large because the horizon is much longer than the lease term. Two years of the purchase are payment-free while the lease keeps charging $400 a month plus another drive-off. Shorten the horizon to 36 months and the same inputs give $16,795 for leasing against $12,000 for buying — still favouring the purchase, but by $4,795 rather than $10,395. Horizon length is the most powerful single input in this comparison.
Reading the answer honestly
Buying almost always wins on total cost over a long horizon, and the reason is structural rather than promotional: leasing charges you for depreciation plus finance every single month, forever, while a purchase stops charging once the loan is retired. The comparison gets interesting only over short horizons, on cars with unusually strong residuals, or when the manufacturer is subsidising the lease with a money factor below what you could borrow at.
Three things flip the answer toward leasing. A subsidised money factor means the lease finance cost is below market — check it by running the lease worksheet through the auto lease payment calculator and converting the money factor to an APR. An inflated residual means the bank is guessing high on future value and you get to hand the risk back to them. And a short horizon means the transaction costs of buying and selling a car land on very few months.
Three things push it toward buying. High mileage, because overage charges are pure cost while extra miles on an owned car only lower the resale figure you already entered. A long hold, for the reason above. And a good used-car market, which raises the resale credit that leasing never gives you.
Treat the resale figure as the weak link. It is the only input in the model that is genuinely unknowable, and the answer is sensitive to it: every dollar of resale is a dollar off the cost of buying, discounted. Run the comparison twice with a pessimistic and an optimistic value and see whether the conclusion survives both. If it does not, the decision is closer than any single number suggests.
Loan balance remaining after 36 payments
| Loan APR | 48-month loan | 60-month loan | 72-month loan |
|---|---|---|---|
| 5% | 26.9% | 43.0% | 53.7% |
| 7% | 27.7% | 44.2% | 55.2% |
| 9% | 28.5% | 45.4% | 56.7% |
A 72-month loan still owes more than half the original amount after three years. Compare that against what the car is actually worth at three years: if the resale figure is below the balance, you are underwater and cannot sell without bringing cash.
Assumptions and limits of this comparison
- Insurance, fuel, registration and routine maintenance are excluded. They are similar across both structures for the same vehicle, but a purchase held past the warranty carries repair risk the model does not price.
- Sales tax on the purchase is not added separately. Enter a price that already includes any tax your state charges up front, so the two sides stay comparable.
- Early lease termination is not modelled. Ending a lease before its term normally means paying the remaining payments, not just walking away. If your horizon does not land on a lease anniversary, treat the result as optimistic for leasing.
- Replacement leases are assumed identical. In reality the price, residual and money factor will all have moved by the time you sign again.
- Wear-and-tear charges are excluded. Lease returns are inspected, and damage beyond normal wear is billed at turn-in.
- The buy path assumes you actually sell at the horizon. If you keep the car longer, the resale credit moves further out and buying looks better still.
The other options either structure hides
Leasing then buying out the car. Most leases carry a purchase option at the residual. If the car is worth more than the residual at turn-in, exercising the option captures that difference — effectively a lease that became a purchase. Whether it beats a straight purchase depends on the rent charge you paid for three years to get there.
Buying used instead of new. The steepest part of a car's depreciation curve happens in the first two or three years, which is exactly the part a new-car lease charges you for. A two-year-old car financed conventionally often beats both paths modelled here, and the arithmetic is the same — put the used price in as the vehicle price and a shorter loan against it.
Paying cash. Set the down payment to the full price and the loan term to anything; the loan payment becomes zero and the model prices the opportunity cost of the cash through the discount rate. That is the correct treatment: cash is not free, it is worth whatever you would otherwise earn.
Before committing to either structure, check the payment against your budget rather than against the car you want. The car affordability calculator works from income and existing obligations, and lenders will run the same ratio you can compute with the debt-to-income ratio calculator — a lease payment counts in it just as fully as a loan payment. For the loan side in isolation, including the effect of term length on total interest, use the auto loan payment calculator. Businesses weighing the same question on equipment should use the lease vs buy NPV calculator, which handles depreciation deductions and tax shields that do not apply to a personal vehicle.