Lease vs. Buy: Compare Car Financing Options
This calculator helps you compare the true monthly cost of leasing versus taking out an auto loan on the same vehicle. A lease charges you only for the car's depreciation during your term, while an auto loan builds equity by spreading the full purchase price (plus interest) over the loan period. For a $20,000 vehicle over 3 years, a typical lease runs ~$300–$500/month while an equivalent loan runs ~$550–$650/month — but after the loan you own the car outright. Use this tool whenever you're at a dealership, refinancing, or budgeting for a new vehicle purchase.
When to use this calculator
- Deciding whether to lease a new $35,000 SUV for 3 years or finance it with a 60-month auto loan at 7% APR before a major family trip
- Comparing a $450/month lease with a $680/month loan for a $28,000 sedan when you drive under 12,000 miles/year and want lower monthly payments
- Evaluating the total cost of ownership of a $50,000 EV lease (with manufacturer incentives) vs. financing with a 72-month loan and a federal EV tax credit
- Planning a business vehicle acquisition and determining whether a lease (potentially deductible as a business expense per IRS Publication 463) or loan depreciation deduction offers better tax savings
Sample Calculation
- $20,000 vehicle, 3-year term
- ~$500/month lease
How it works
4 min readHow It's Calculated
Leasing and auto loans use fundamentally different formulas. Here are both, exactly as finance professionals apply them:
Lease Monthly Payment Formula
Depreciation Fee = (Capitalized Cost − Residual Value) ÷ Term (months)
Finance Fee = (Capitalized Cost + Residual Value) × Money Factor
Monthly Lease = Depreciation Fee + Finance Fee
Where:
Capitalized Cost = Negotiated vehicle price (e.g., $20,000)
Residual Value = % of MSRP retained after term (e.g., 55% × $20,000 = $11,000)
Money Factor = APR ÷ 2,400 (e.g., 6% APR → 0.0025)
Term = Lease length in months (e.g., 36)Example — $20,000 vehicle, 3-year lease, 55% residual, 6% APR equivalent:
Auto Loan Monthly Payment Formula
M = P × [r(1+r)^n] ÷ [(1+r)^n − 1]
Where:
P = Principal loan amount (vehicle price minus down payment)
r = Monthly interest rate (Annual APR ÷ 12)
n = Number of monthly payments (years × 12)Example — $20,000 vehicle, 3-year loan, 7% APR, $0 down:
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Reference Table
| Vehicle Price | Lease Term | Residual | Money Factor | Est. Lease/mo | Loan APR | Loan Term | Est. Loan/mo | Total Loan Cost |
|---|---|---|---|---|---|---|---|---|
| $20,000 | 36 mo | 55% | 0.0025 (6%) | ~$328 | 7.00% | 36 mo | ~$618 | ~$22,248 |
| $20,000 | 36 mo | 55% | 0.0025 (6%) | ~$328 | 7.00% | 60 mo | ~$396 | ~$23,760 |
| $35,000 | 36 mo | 52% | 0.00175 (4.2%) | ~$530 | 7.00% | 60 mo | ~$693 | ~$41,580 |
| $50,000 | 36 mo | 50% | 0.0020 (4.8%) | ~$861 | 6.50% | 72 mo | ~$842 | ~$60,624 |
| $28,000 | 39 mo | 57% | 0.0022 (5.3%) | ~$430 | 7.50% | 48 mo | ~$678 | ~$32,544 |
> Money Factor sources: typical manufacturer programs; actual rates vary by credit tier and model year. APR benchmarks from the Federal Reserve's G.19 Consumer Credit Report (Q1 2025 avg new car loan: ~7.1%).
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Typical Cases
Case 1 — Low-Mileage Commuter, $20,000 Sedan, 3 Years
A buyer driving 10,000 miles/year leases a $20,000 car at 55% residual and 0.0025 money factor:
Case 2 — High-Mileage Driver, $35,000 SUV, 3 Years
A buyer driving 20,000 miles/year would face excess mileage fees on a lease (typical overage: $0.15–$0.25/mile). At 20k miles/year with a 12k/year allowance: 24,000 excess miles × $0.20 = $4,800 in penalties added to lease cost.
Case 3 — Business Owner, $50,000 EV, Tax Considerations
Per IRS Publication 463, leased vehicles used for business can deduct the business-use percentage of lease payments (minus an "income inclusion" amount for luxury vehicles). A business owner using the car 80% for work leases a $50,000 EV at $861/month: deductible portion ≈ 80% × $861 = $689/month. If they bought it instead, they could claim Section 179 or MACRS depreciation, potentially deducting the full cost in Year 1. For 2025, the Section 179 limit is $1,160,000 (indexed annually). Tax strategy can flip the math entirely.
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Common Mistakes
1. Comparing monthly payment only, ignoring total cost. A $328 lease vs. $618 loan looks obvious — until you realize the loan leaves you with a $11,000 car after 3 years. Always compare net cost (total paid minus residual value).
2. Ignoring mileage limits on leases. Standard leases allow 10,000–15,000 miles/year. Overages at $0.15–$0.25/mile add up fast. 5,000 excess miles at $0.20 = $1,000 surprise fee at lease-end.
3. Confusing Money Factor with APR. A money factor of 0.0025 equals 6% APR (multiply by 2,400). Dealers sometimes quote money factors without context; always convert: APR = Money Factor × 2,400.
4. Overlooking acquisition and disposition fees. Leases typically include a bank acquisition fee ($595–$995) at signing and a disposition fee ($300–$500) at return. These can add $900–$1,500 to true lease cost that don't appear in the monthly figure.
5. Assuming GAP insurance is included. If a leased or financed car is totaled, your insurer pays market value — which may be less than your remaining balance. GAP coverage costs $20–$40/year added to auto insurance (or ~$300–$700 financed into the loan). Without it, you could owe thousands on a car you no longer have.
6. Not accounting for early termination penalties. Breaking a lease early can cost 3–6 remaining monthly payments plus fees. Auto loans can typically be paid off early with minimal or no prepayment penalty.
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Related Calculators
Frequently asked questions
Is leasing always cheaper per month than buying?
Yes, in almost every scenario, because a lease payment only covers the vehicle's depreciation during your term — not the full purchase price. On a $20,000 car with a 55% residual, you're only financing $9,000 of value over 36 months. The tradeoff is that at lease end you own nothing, while a loan payment builds equity. Lower monthly outlay doesn't mean lower total cost.
What is a 'money factor' and how do I convert it to an interest rate?
A money factor is the leasing equivalent of an interest rate, expressed as a small decimal (e.g., 0.0025). To convert it to an APR, multiply by 2,400: 0.0025 × 2,400 = 6% APR. Dealers are not always required to disclose the money factor; you can ask for it directly or compute it if you know the APR being offered.
How does the residual value affect my lease payment?
The higher the residual value, the lower your monthly payment — because you're financing less depreciation. A car with a 60% residual on a $20,000 MSRP retains $12,000 in value, so you finance only $8,000 over the term. A car with a 45% residual retains only $9,000, costing you $11,000 in depreciation payments. Always choose high-residual vehicles for leasing to minimize monthly cost.
What credit score do I need to get a competitive lease or auto loan rate?
According to Experian's State of the Auto Finance Market (2024), borrowers with scores of 720+ (Super Prime/Prime) receive the best lease money factors and loan APRs — often 5–7% for new cars. Borrowers in the 580–669 range (Near Prime) may face rates of 10–15%+. A score below 580 (Subprime) can push auto loan APRs above 20%, making leasing through a manufacturer's captive lender often more accessible.
Can I deduct lease or loan payments on my taxes?
Only if the vehicle is used for business. Per IRS Publication 463, business-use lease payments are deductible proportionally (e.g., 70% business use = 70% of payments deductible, minus a luxury vehicle income inclusion amount). For purchased vehicles used in business, you may claim Section 179 expensing (up to $1,160,000 in 2025) or MACRS depreciation. Personal-use vehicle payments are not deductible.
What happens if I want to exit a lease early?
Early termination is one of the most costly aspects of leasing. Penalties typically equal the sum of remaining monthly payments plus a termination fee, minus the car's current market value — which can easily total $3,000–$8,000 on a midrange vehicle. Options include lease transfer (allowed by some lenders via services like Swapalease), buying out the lease, or rolling negative equity into a new vehicle (not recommended, as it compounds debt).
Is gap insurance required on a lease?
Most auto lease agreements include GAP (Guaranteed Asset Protection) coverage automatically — a key advantage over buying. However, you should verify this in your contract. For auto loans, GAP is optional but strongly recommended, especially if you made a small down payment (under 20%) or have a long loan term (60–84 months), since new cars lose 15–25% of value in the first year, per Kelley Blue Book depreciation data.
Does the federal EV tax credit affect lease vs. buy decisions?
Significantly. Under the Inflation Reduction Act (2022), the $7,500 Clean Vehicle Credit for new EVs goes to the buyer/owner — not the lessee — when you purchase. However, if you lease, the leasing company (the legal owner) claims the credit and may pass some savings to you via a lower capitalized cost or reduced money factor. As of 2024, the IRS allows the credit to be transferred to dealers at point of sale, making the benefit more immediate for buyers.
How do mileage limits work, and what should I expect to pay for overages?
Standard leases allow 10,000, 12,000, or 15,000 miles per year. Excess mileage charges typically run $0.10–$0.25 per mile depending on the vehicle and lender (luxury vehicles are at the high end). You can pre-purchase additional miles at lease signing for $0.05–$0.10/mile — cheaper than paying overages at return. Always estimate your annual mileage honestly before signing; underestimating is a very common and expensive mistake.