Everyday decisions
Lease or buy, for the miles you will drive?
A lease looks cheaper by the month because you pay only for the part of the car you use up, plus a finance charge. That can be a fair deal if your miles and habits fit the contract. It turns expensive when you drive more than you said, want out early, or would have kept the car for ten years.
Argumont is decision support. It is not tax, legal, real estate, or financial advice. Licensed work stays with licensed people.
What a lease payment contains
The monthly payment has two parts. The first is depreciation: the negotiated price minus the residual value the lessor expects at the end, spread over the months.
The second is the rent charge, the lease's interest, worked out from a money factor. Multiply the money factor by 2,400 to see roughly the interest rate it implies.
Negotiate the price, then the lease
The selling price of a leased car is negotiable, just as when buying, and a lower price lowers every payment. Ask for the money factor, the residual, the acquisition fee, and the end-of-lease disposition fee in writing.
A quote that shows only a monthly figure is hiding the parts you can negotiate.
What a lease protects you from
In a standard closed-end lease the residual is fixed at signing. If the car is worth less at the end, that loss belongs to the lessor, and you can hand back the keys. That protection has real value for a model with uncertain resale.
Driving past the mileage allowance, excess wear, and ending early are where leases turn costly.
Lease or buy in a Decision Room
Leasing, buying new, and buying used each get their own Champion. The Challenger presses on your annual miles, the number that most often breaks a lease. The room works the payment and the total exactly, from the contract figures you enter. Grandfather asks what happens if your job changes and you need out of the contract in year two.
What to weigh
Total cost for your time with the car
Every payment and fee, set against buying and selling or keeping.
Miles and wear
Your real annual mileage against the allowance and its per-mile charge.
Flexibility
The cost of ending early or changing cars sooner than planned.
Resale risk
Who carries the loss if the car is worth less than expected.
Three years, two ways
A car with a negotiated price of $34,000 has a 36-month residual of $20,880 and a money factor of 0.0025, about 6 percent. Depreciation is $364 a month and the rent charge $137, so the payment is about $502 before tax, or $18,059 over three years. Add a $895 acquisition fee and a $395 disposition fee and the lease costs about $19,350. The allowance is 12,000 miles a year; this driver covers 16,000, so 12,000 extra miles at 25 cents add $3,000, for about $22,350 in all. Buying with a five-year loan at 6 percent and selling after three years for $19,500 costs about $19,000, including $4,494 of interest. The Verdict favors buying for this driver, and notes that sales tax is left out because states treat leases and purchases differently.
Questions
- Is leasing always more expensive?
- No. For a driver who stays within the miles and changes cars every three years, a lease can cost about the same as buying and selling, with less resale risk.
- Can I end a lease early?
- Usually, though ending early can cost thousands once the payoff and fees are counted. Read that clause before signing and put its cost in the comparison.
Further reading
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