The Lease Payment That Seems Lower Often Costs You More
A $45,000 SUV can be leased for $649/month or financed for $895/month. Over 36 months, the lease looks like it saves $8,856. But by month 60, the buyer owns a vehicle worth $22,000 while the lease customer has nothing and must start over. The total 5-year cost tells a very different story than the monthly payment.
How Lease Payments Are Calculated
A lease payment has two components:
Depreciation charge + Finance charge = Base monthly payment
Where:
- Depreciation charge = (Capitalized cost − Residual value) ÷ Lease term
- Finance charge = (Capitalized cost + Residual value) × Money factor
- Money factor = APR equivalent ÷ 2,400 (e.g., 6% APR = 0.0025 money factor)
For a $45,000 vehicle, 36-month lease, 55% residual ($24,750), money factor 0.0025:
- Depreciation: ($45,000 − $24,750) ÷ 36 = $20,250 ÷ 36 = $562.50
- Finance charge: ($45,000 + $24,750) × 0.0025 = $69,750 × 0.0025 = $174.38
- Base payment: $562.50 + $174.38 = $736.88 (before taxes/fees)
True 5-Year Cost Comparison
Same $45,000 vehicle, two scenarios over 5 years. Assuming: 3% annual depreciation beyond lease term, 6% financing rate for purchase.
| Cost Item | Lease (36mo + new lease) | Buy (finance 60mo) |
|---|---|---|
| Down payment / cap cost reduction | $3,000 | $9,000 (20%) |
| Monthly payments | $737 × 36 = $26,532 then new lease | $700 × 60 = $42,000 |
| 2nd lease (months 37–60) | ~$850 × 24 = $20,400 (newer/pricier) | $0 |
| Disposition fee (end of lease) | $300 | $0 |
| Over-mileage fees (if applicable) | $500 estimated | $0 |
| Total cash outflow | $50,732 | $51,000 |
| Vehicle value at month 60 | $0 (returned) | ~$20,000 |
| True net 5-year cost | $50,732 | $31,000 |
Buying costs $19,732 less over 5 years on a net basis. The equity in the owned vehicle is a real asset — it can be traded in, sold, or driven payment-free for years 6–10+.
When Leasing Wins
Despite the math favoring ownership in most long-term scenarios, leasing can be superior when:
- Business use: Lease payments may be deductible; tax advantages can shift the math significantly
- You always want a new car every 3 years: If you'd trade in a bought car at 3 years anyway, the equity comparison weakens (you do have equity, but you're constantly rolling it into new purchases)
- High residual value vehicle: Manufacturers sometimes subsidize residuals, making lease payments artificially low. Check if the residual is above market value.
- Low mileage driver: Leases penalize high-mileage drivers (typically $0.15–$0.25/mile over limit); low-mileage drivers aren't penalized
- Cash flow constraints: The lower monthly payment genuinely allows investing the difference at a return exceeding the equity foregone
The Mileage Math
Most leases allow 10,000–15,000 miles/year. The average American drives ~14,000 miles/year. At a 12,000-mile limit with 14,000 average annual driving over 3 years: 6,000 over-mileage miles × $0.20 = $1,200 in penalties. Always negotiate mileage upfront (adding miles at signing costs $0.05–$0.08/mile, far less than end-of-lease penalty rates).
The Opportunity Cost Argument for Leasing
Leasing advocates argue: take the down payment difference ($6,000 in this example), invest it at 7%, and the equity argument weakens. $6,000 invested for 5 years at 7% = $8,418. That's a $2,418 gain, but still far short of the $19,732 net cost advantage of buying. The opportunity cost argument rarely closes the gap.
Bottom Line
If you keep vehicles long-term, buying almost always wins on total cost. If you're certain you'll always want a new vehicle every 2–3 years and the residual is manufacturer-subsidized on a high-residual model, leasing can be competitive. Always compare total net cost over a 5+ year horizon — not monthly payment. Use the CalcPeek loan calculator to calculate the exact financing cost for any purchase scenario.