Lease vs buy a car
By Jude Wallis
A lease pays for the part of the car you use. A $30,000 car with an $18,000 residual over 36 months costs $393.33 a month. A loan pays for all of it: $586.98 a month at 6.5 percent, and after 36 payments you still owe $13,176.97 on a car that is yours.
| Lease | Buy with a loan | |
|---|---|---|
| What the payment covers | Depreciation of $333.33 a month plus $60 of rent charge. | Interest plus principal, so the balance falls every month. |
| Monthly cost here | $393.33 for 36 months. | $586.98 for 60 months. |
| Position at month 36 | Nothing owned, nothing owed, keys handed back. | A car owned outright once the remaining $13,176.97 is cleared. |
| How the rate is quoted | As a money factor, 0.00125 here, which is 3 percent APR. | As an APR, 6.5 percent here. |
| What the contract limits | Mileage and wear, priced per mile over the allowance. | Nothing. Drive it as far as you like. |
| The number that decides it | The residual. A high residual makes the lease cheap. | The rate and the term, because both set how fast the balance falls. |
On this page
The lease payment is two separate charges
Split the $393.33 and it stops looking like a rental price and starts looking like arithmetic. Depreciation is the $30,000 capitalised cost minus the $18,000 residual, spread over 36 months, which is $333.33. The rent charge is the money factor applied to the two numbers added together, not subtracted: $60 a month. Add them and you have the payment.
That second piece is where lease quotes hide. The money factor 0.00125 looks like nothing until you multiply it by 2400 and read 3 percent. The money factor calculator does that conversion, and money factor against APR explains why the 2400 is there at all.
The loan payment is larger because it buys more
Financing the same $30,000 at 6.5 percent over five years costs $586.98 a month. That is about half as much again as the lease, and the extra is not a penalty: it is the part of the car the lease never asked you to pay for. After 36 payments the balance is down to $13,176.97, and the difference between the car's worth and that balance is yours.
So the comparison is not payment against payment. It is a payment that ends in nothing against a payment that ends in equity, and the honest version of the question is what the car is worth at month 36 against the $13,176.97 still owed. The car loan calculator and the remaining loan balance calculator give both halves.
Where each one fits
A lease prices certainty over a fixed window: known payment, known term, known hand-back. A loan prices ownership, which is worth most to a driver who keeps cars long after the last payment. The residual is the hinge, because it is simultaneously the reason a lease payment is low and the value you are giving up. Car finance and depreciation covers what happens to that residual in the years after a lease would have ended, and how car leases work walks the payment line by line. This is educational material, not financial advice.
Worked examples
A 36-month lease on a \$30,000 car
The capitalised cost is $30,000, the residual is $18,000, the term is 36 months and the money factor is 0.00125. What is the monthly payment?
- Depreciation is the $30,000 cost minus the $18,000 residual, spread over 36 months, so $333.33 a month.
- The rent charge adds the two values instead of subtracting: 30000 plus 18000 is 48000, times 0.00125, which is $60.
- Add the two charges: 333.33 plus 60 is $393.33.
The lease payment is $393.33 a month, of which $333.33 is depreciation and $60 is the finance charge.
The same car financed instead
The same $30,000 car is financed at 6.5 percent over five years. What is the payment, and what is left owing after 36 months?
- Amortise $30,000 over 60 monthly payments at 6.5 percent a year, which is $586.98 a month.
- Walk the schedule forward 36 payments and the balance has fallen to $13,176.97.
The loan costs $586.98 a month, and at the point the lease would have ended, $13,176.97 is left to clear on a car you own.
Common questions
Why is the lease payment so much lower?
Because it only pays for the value the car loses in 36 months, not the whole $30,000 price. The $18,000 residual is never repaid by you.
Is a money factor of 0.00125 a good rate?
Multiply by 2400 and it is 3 percent APR. Judge it against car loan rates, not against other money factors.
Does a bigger down payment make a lease cheaper?
It lowers the capitalised cost and so the payment, but the money is gone if the car is written off early.
Is this financial advice?
No. It is educational material comparing two ways of paying for the same car.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.