Leasing sounds attractive—lower payments, new car every few years, no hassle selling. But is it actually a good financial decision? Let's break down the real math.
How Leasing Works
When you lease, you're essentially renting the car for a set period (usually 24-36 months):
You pay for:
- The car's depreciation during the lease
- Interest (called "money factor")
- Taxes and fees
At lease end:
- Return the car
- Or buy it for the residual value
- Or lease another car
Key lease terms:
- Capitalized cost: The price you negotiate (like purchase price)
- Residual value: What the car will be worth at lease end
- Money factor: The (multiply by 2,400 to get APR)
- Mileage allowance: Usually 10,000-15,000 miles/year
Leasing vs. Buying: A Real Comparison
Let's compare a $40,000 car over 6 years:
Buying (60-month loan at 6%)
| Item | Cost |
|---|---|
| Monthly payment | $773 |
| Total payments (60 mo) | $46,380 |
| Car value at year 6 | ~$16,000 |
| Net cost | $30,380 |
| Plus: You own the car |
Leasing (Two 36-month leases)
| Item | Cost |
|---|---|
| Monthly payment | ~$450 |
| Total payments (72 mo) | $32,400 |
| Acquisition fees (×2) | $1,500 |
| Disposition fees (×2) | $700 |
| Net cost | $34,600 |
| Plus: You own nothing |
Pro Tip
After 6 years, the buyer has a car worth $16,000. The leaser has nothing. The true cost difference is even larger than it appears.
When Leasing Might Make Sense
Leasing can work if:
- You're self-employed and can deduct lease payments
- You need a new car for business image
- You want to drive more car than you could afford to buy
- You love having the latest features and technology
- You drive predictable, low miles
But be honest: Most people lease for the lower payment and never do the math on total cost.
Watch Out
Leasing is almost always more expensive than buying and keeping a car long-term. The lower payment is not the same as lower cost.
The Hidden Costs of Leasing
1. Mileage Penalties
- Standard: 10,000-15,000 miles/year
- Overage: $0.15-0.30 per mile
- 5,000 extra miles = $750-1,500 penalty
2. Wear and Tear Charges
At lease return, you're charged for:
- Dents, scratches, chips
- Interior damage
- Tire wear beyond normal
- Can easily be $500-2,000
3. Disposition Fee
Fee to return the car: $300-500
4. Early Termination
Getting out of a lease early is expensive:
- Remaining payments often due
- Early termination fees
- Could cost thousands
5. No Equity
You never build ownership. Buying lets you eventually drive payment-free.
David leased cars for 12 years—four 3-year leases. He spent over $65,000 on payments with nothing to show for it. His friend bought a $30,000 Honda, paid it off in 5 years, and drove it for 7 more years payment-free.
The True Comparison: Total Cost of Ownership
10-year comparison on a $35,000 car:
Leasing Path
| Years | Cost |
|---|---|
| Leases 1-3 (3 yr) | $14,400 |
| Leases 4-6 (3 yr) | $15,500 |
| Leases 7-9 (3 yr) | $16,700 |
| Year 10 | $5,800 |
| Fees | $3,000 |
| Total | $55,400 |
| Car owned | $0 |
Buying Path
| Years | Cost |
|---|---|
| Loan (5 yr) | $40,700 |
| Maintenance (5 yr) | $3,000 |
| Years 6-10 payment | $0 |
| Maintenance (5 yr) | $5,000 |
| Total | $48,700 |
| Car owned | ~$8,000 |
Difference: $14,700+ saved by buying
Negotiating a Lease (If You Still Want One)
If you decide to lease, negotiate these items:
1. Capitalized Cost
This is the car's price—negotiate it just like a purchase.
2. Money Factor
Ask for the "buy rate" money factor. Dealers can mark this up.
- Example: 0.00125 money factor = 3% APR (0.00125 × 2,400)
3. Mileage Allowance
Negotiate higher miles upfront—it's cheaper than overage fees later.
4. Acquisition and Disposition Fees
Sometimes negotiable, especially acquisition fee.
Do This
Get the capitalized cost as low as possible. Many people forget to negotiate the price on a lease, but it directly affects your payment.
Lease Takeovers
An alternative approach: Assume someone else's lease through sites like:
- LeaseTrader
- Swapalease
Benefits:
- Shorter commitment
- May include incentives to take over
- Skip upfront costs
Risks:
- Still responsible for wear/tear
- May inherit problems
- Need credit approval
When Buying Beats Leasing
Buying makes more sense when:
- You plan to keep the car 5+ years
- You drive high miles
- You can afford the higher payment
- You want to eventually be payment-free
- You might want to customize
- You want to build equity
The best financial strategy: Buy a reliable car, pay it off, drive it for 10+ years. This minimizes your cost per mile dramatically.
The Best of Both Worlds
Strategy for new car lovers who want to save:
- Buy a 2-3 year old certified pre-owned
- Pay it off in 4-5 years
- Drive 2-3 more years payment-free
- Repeat
You get relatively new cars without the worst depreciation and build payment-free periods.
Making Your Decision
Choose leasing if:
- Business use with
- Absolutely need lowest possible payment
- Drive under 12,000 miles/year
- Accept you're paying for convenience
Choose buying if:
- You want to own your car
- You drive average or high miles
- You keep cars more than 3 years
- You want to be payment-free eventually
- You want the best long-term value
Quick Win
Before leasing, calculate: (Lease payment × months) + all fees + what you'll pay for the next car. Compare to buying the same car, paying it off, and driving it payment-free. The buy option almost always wins over time.
The Wealthy Approach to Cars
Here's a counterintuitive truth: Many wealthy people drive modest, paid-off cars.
Why?
- Cars are depreciating assets
- Money not spent on cars can grow through investing
- Status symbols don't build wealth
The path to wealth often involves buying reliable used cars, maintaining them well, and investing the difference between what you spend and what you could spend on cars.