How does a car lease actually work?

You pay only for the depreciation during your term plus a finance charge. The monthly payment ≈ (vehicle price − residual value) ÷ months + (vehicle price + residual value) × money factor. At the end you return the car or buy it for the residual. Mileage limits and excess-wear charges apply.

What is a money factor?

The money factor is the lease equivalent of an interest rate. Multiply by 2400 to convert to APR — e.g. a money factor of 0.0025 equals 6% APR. Lower is better; ask the dealer for the buy rate, not the marked-up sell rate.

Is leasing cheaper than buying?

Monthly payments are usually 30–40% lower on a lease for the same car, so cash flow looks better. But buying is almost always cheaper long-term because you keep the residual value as equity. Leasing wins when you want a new car every 3 years, drive low miles, or value not dealing with depreciation risk.

What is residual value and why does it matter?

Residual value is what the leasing company estimates the car will be worth at lease end (typically 50–60% of MSRP for a 36-month lease). Higher residuals mean lower lease payments because you're financing less depreciation. Brands with strong residuals (Toyota, Honda, Lexus, Porsche) lease better than brands that depreciate fast.

What about UK PCP and HP?

PCP (Personal Contract Purchase) is functionally a lease with a balloon payment option to buy at the end — use the lease side of this calculator. HP (Hire Purchase) is functionally a loan — use the buy side. The maths is the same as US lease/finance once you map money factor to APR and balloon to residual.

⚖️ Lease vs Buy Car Calculator

Compare the true total cost of leasing versus financing a car. Models residual value, money factor, depreciation and resale equity.

Vehicle Price

Currency

Term

Down / Cap Reduction

Sales Tax (%)

🏷️ Lease Side

Residual Value (% of price)

Money Factor (or APR %)Enter as APR % (e.g. 6.0). MF = APR/2400.

💰 Buy Side

Loan APR (%)

Resale Value at end of termWhat you'd sell the car for after the term.

⚠️ Illustrative only. Excess mileage, wear charges, gap insurance, maintenance and disposition fees not modelled. Sales tax treatment of leases varies by state. Not financial advice.

Lease vs Buy — How to Decide

Leasing and buying are two different financial products that look similar on the dealer's screen. Leasing means you pay only for the depreciation during your term plus a finance charge — at the end you walk away (or buy the residual). Buying means you finance the full vehicle, take on all depreciation, but keep any equity at resale. The right answer depends on how long you keep cars, how many miles you drive, and how you value cash flow versus long-term cost.

The Lease Maths

Lease payment ≈ depreciation fee + finance fee, where:

Depreciation fee = (capitalised cost − residual) ÷ term in months
Finance fee = (capitalised cost + residual) × money factor

Money factor × 2400 = APR. So a money factor of 0.0025 is the same as a 6% APR. Always ask the dealer for both numbers.

Why Buying Usually Wins Long-Term

Lease payments are typically 30–40% lower than equivalent loan payments — but you have nothing to show at the end. Three back-to-back 36-month leases (9 years total) on the same car class will cost noticeably more than buying once, paying off the loan in 5 years, and driving the paid-off car for another 4. The break-even tilts toward leasing only if you reliably trade in every 3 years anyway.

When Leasing Makes Sense

You want a new car every 2–4 years and value the latest tech / safety
You drive under 10,000–15,000 miles a year (excess mileage charges hurt)
You can write off the lease as a business expense
You're leasing a brand with strong residuals (Toyota, Honda, Lexus, Porsche)
You don't want to deal with selling the car later

When Buying Makes Sense

You keep cars 7+ years
You drive a lot of miles
You modify cars (mods void most leases)
You want the asset on your balance sheet
The car holds value well and you'd want to keep it long-term

⚠️

Important Note: This comparison ignores excess-mileage fees, wear-and-tear charges, gap insurance, sales tax timing differences, and the opportunity cost of capital. For a binding decision get full quotes in writing and run them through your accountant.

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