Buying vs Leasing a Car: Which Costs Less?

What a $35,000 Car Costs You Over 3 Years

Run the same $35,000 vehicle both ways over a 3-year window. Financed with $3,500 down at 7% annual percentage rate (APR) over 60 months, the loan payment runs about $624 a month, or roughly $22,450 paid over 36 months on top of the down payment, for about $25,950 in total cash out. After 3 years the loan balance sits near $13,930. The Bureau of Labor Statistics (BLS) tracks new-vehicle depreciation at roughly 11% in year one and around 10% to 14% in each of the next two years, which puts this car's value near $23,800 after 3 years. Subtract the loan balance from that value and the buyer holds about $9,870 in equity, which brings the real 3-year cost down to roughly $16,080.

Lease the same car over 36 months with a $2,000 due-at-signing payment, a residual value around 58% of the original price, and a money factor equal to roughly 3% APR, and the payment lands near $419 a month, or about $17,100 in total cash out including the signing fee. At the end of the lease there's no equity to subtract, because the car goes back. In this example, buying edges out leasing on 3-year cost, and that gap only widens in year four and beyond, once the loan is paid off and the owner drives payment-free while a leaser who wants to keep driving a car has to sign another lease.

Why Lease Payments Are Lower Than Loan Payments

A loan payment covers the entire price of the car, because you're buying all of it. A lease payment covers only the gap between the car's price today and what it's expected to be worth when the lease ends, plus a finance charge on that gap. That's why the same car, at the same price, produces a noticeably smaller monthly number on a lease than on a loan.

The tradeoff is what that lower payment buys you. A loan payment builds equity with every dollar. A lease payment buys temporary use of a car you're required to return, with no equity building at all, which is the core of the Consumer Financial Protection Bureau (CFPB)'s guidance that a lease payment functions like rent rather than an installment toward ownership.

Money Factor and Residual Value, Explained Plainly

A money factor is a lease's version of an interest rate, shown as a small decimal like .00125 instead of a percentage. Multiply it by 2,400 to get a rough equivalent APR, so .00125 works out to about 3%. A dealer can quote a low-sounding money factor while marking up the car's price, so compare the total lease cost, not just the money factor, before you sign.

Residual value is the leasing company's prediction of what the car will be worth when the lease ends, set as a percentage of its original price. A higher residual value means a smaller gap between price and residual, which means a lower monthly payment, because you're financing less depreciation. Residual value is set by the leasing company up front and doesn't move with the actual used-car market, which is why some leases signed during unusual used-car price swings turned out to be unusually good or unusually bad deals in hindsight.

Mileage Caps and What Happens If You Go Over

Most leases cap annual mileage at 10,000 to 15,000 miles, and going over that limit triggers a per-mile fee at lease-end, on top of whatever your payment already was. A driver who commutes long distances or takes regular road trips can blow past a 12,000-mile cap without noticing until the final bill arrives.

Buying carries no mileage limit at all. High mileage still costs you, just differently: it lowers what the car is worth when you eventually sell or trade it in, rather than showing up as a specific fee at a specific deadline. If your annual mileage is genuinely unpredictable, that difference alone is often reason enough to buy instead of lease.

When Leasing Genuinely Wins

Leasing wins for a driver who reliably stays under the mileage cap and would rather trade every few years than deal with a used-car sale. It also wins for someone who wants to be under a manufacturer's warranty for essentially the entire time they own the car, since most leases run shorter than typical warranty coverage.

A self-employed person or business owner who uses the vehicle for work has another real reason to lease: a portion of the lease payment can often be written off as a business expense, which changes the math in ways a personal loan payment doesn't. Confirm your specific deduction with a tax professional before assuming it applies to your situation, since the rules depend on business-use percentage and the vehicle itself.

When Buying Wins

Buying wins for anyone who drives more than the typical 12,000-to-15,000-mile lease cap, since there's no penalty for putting real miles on a car you own. It also wins for anyone who tends to keep a car for 7, 8, or more years, because once the loan is paid off, the payments stop entirely while a leaser who wants to keep having a car is signing a new agreement.

Buying is also the better fit for anyone who wants to build equity toward the next vehicle instead of starting from zero every lease cycle. Our car affordability calculator and how to buy a car guide both walk through setting a realistic budget before you shop, which matters more on a purchase than on a lease since you're committing to the full price either way.

Why Dave Ramsey Tells People Not to Lease

Ramsey Solutions argues that leasing bundles a car's depreciation, the dealer's profit, and an interest charge into one monthly number without disclosing the effective interest rate the way a loan legally has to, since a lease isn't classified as a loan under federal law. That's a real structural point: a lease's true cost of capital is harder for an average shopper to compare against a loan's published APR.

Ramsey's broader objection is behavioral as much as mathematical. A driver who leases car after car never stops making a payment, while a driver who buys and pays off a loan eventually drives payment-free for however long the car lasts after that. Whether that tradeoff matters to you depends on whether you'd actually keep driving the paid-off car or trade it in anyway once it's out of warranty.

5 Real Disadvantages of Leasing a Car

Leasing carries five downsides worth weighing against its lower monthly payment. No equity is the biggest one. Every payment goes toward use of the car, not ownership of it, so you have nothing to show for it once the lease ends. Mileage penalties are the most common surprise. Go over your annual cap and you pay a per-mile fee at turn-in, often between 15 and 30 cents a mile.

Wear-and-tear charges hit next, and the leasing company decides what counts as excessive, a judgment made only after you've already returned the car. Early-termination costs add another risk: ending a lease before its term is up typically costs more than finishing it out, which makes a lease a poor fit if your situation might change. Maintenance rounds out the list, since oil changes, tires, and brakes are still your responsibility on most leases, the same as if you owned the car outright.

What Would Change This Recommendation

If used-car values stayed unusually high the way they did during recent supply disruptions, buying's equity advantage would grow even larger, since a car would hold more of its value than the BLS's typical depreciation curve predicts. If a lease residual value was set unusually high relative to the car's real expected value, the monthly lease payment would drop further and the math could tilt back toward leasing even for a longer-term driver.

A business owner with a genuine, documented deduction on the lease payment should run their own after-tax numbers, since that single factor can flip this comparison on its own. For most personal drivers without that write-off, run your own numbers through the auto loan calculator before deciding between buying vs leasing a car, since the 60/40 split in this example moves with your own rate, term, and mileage.

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