How the lease vs buy comparison works
Leasing and buying are compared over the same stretch of time: the lease term. For the lease, everything you pay is a cost, because you hand the vehicle back at the end. For buying, you pay the down payment, the sales tax and fees and the loan payments, but at the end you own a car with a value. So the net cost of buying is what you paid, plus what you still owe on the loan, minus what the car is worth.
The option with the lower number costs less over the period. The break-even car value is the value at the end that makes both equal. Car values are hard to predict, so this is the number to think about: if you expect the car to be worth more than that, buying wins.
How a lease payment is built
The Federal Reserve's consumer guide to vehicle leasing names two main costs in a lease payment. The depreciation is the adjusted capitalized cost minus the residual value: the value the car loses while you drive it, spread over the term. The rent charge works like interest on a loan and is found with the money factor. The monthly sales or use tax comes on top.
The guide's own example: a money factor of 0.00354 on an adjusted capitalized cost of US$18,800 and a residual value of US$12,350 gives an average rent charge of about US$110.27 a month. The down payment on a lease is called a capitalized cost reduction; the Federal Reserve's leasing FAQ counts cash down, a trade-in allowance and rebates as part of it.
Money factor and APR
The Federal Reserve points out that a money factor is not a lease rate and cannot be turned into one by moving the decimal point. You can still compare it with a loan rate. On a lease the balance falls from the adjusted capitalized cost to the residual value, so the average balance is about half their sum. Interest at a yearly rate of APR on that average balance is APR ÷ 12 × (cap cost + residual) ÷ 2 a month. Set that equal to the rent charge and you get:
So a money factor of 0.0025 is roughly a 6% APR. It is an approximation, not the exact rate, but it is close enough to tell whether the lease charges more or less than the loan you were offered. Switch the field between Money factor and APR to enter whichever you have.
Mileage and the end of the lease
A lease comes with a yearly mileage allowance because the residual value is based on the expected mileage, and the Federal Reserve describes excess mileage charges as the way lessors recover the extra loss in value. The calculator multiplies the miles you drive over the allowance by the charge per mile, and adds the fee due when you return the car. Wear and damage charges are not included, because they depend on the condition of the car.
What the calculator leaves out
- Opportunity cost: money paid at signing could have earned interest elsewhere. The calculator does not count that, so the side with more cash up front looks a little cheaper here than it is.
- Insurance, fuel and repairs are not part of the comparison.
- Keeping the car longer: the comparison ends with the lease term. If you would keep a bought car for years after the loan is paid off, those payment-free years are not counted here.
- Tax rules: the calculator taxes the full price when you buy and each monthly payment when you lease. If your lease also taxes the down payment or fees, add that tax to the lease fees.
For a closer look at the loan itself, with trade-in, the full schedule and a term comparison, use the car loan calculator. The cost per mile calculator adds fuel and running costs.
How to use the lease vs buy car calculator
- 1Enter the price you negotiated for the vehicle, your sales tax rate and the lease term in months.
- 2Fill in the lease offer: the money down, the residual value and the money factor or APR, then the fees and the mileage allowance. Fill in the loan you would take to buy and what you think the car will be worth at the end.
- 3Read which option costs less, check the break-even car value and the year table, and copy the result or a link to compare offers.
Sources
- Federal Reserve, Keys to Vehicle Leasing: depreciation and amortized amounts
- Federal Reserve, Keys to Vehicle Leasing: the rent charge and money factor
- Federal Reserve, Keys to Vehicle Leasing: what goes into a lease payment
- Federal Reserve, Keys to Vehicle Leasing: frequently asked questions
Frequently asked questions
What is a money factor?
It is the number most lessors use to work out the rent charge, the leasing version of interest. The Federal Reserve's leasing guide shows the rent charge as the money factor times the adjusted capitalized cost plus the residual value, and notes that the money factor is usually not disclosed to you, so ask the dealer for it. Multiplied by 2,400 it gives roughly the equivalent APR; the guide below shows why.
What is the residual value?
The value the lessor expects the car to have at the end of the lease. It is fixed in the contract. You pay for the drop from the adjusted capitalized cost to the residual, so a higher residual means a lower payment. The Federal Reserve notes that the residual is based on the expected mileage, which is why leases have a mileage limit.
What does the break-even value mean?
It is the value your car would need at the end of the lease term for buying and leasing to cost exactly the same. If you think the car will be worth more than that, buying costs less over the period; if it will be worth less, leasing does.
Is sales tax handled the same way for a lease?
Not always. The Federal Reserve says that in most states the tax included in each lease payment replaces the initial sales tax on the purchase price of the vehicle. The calculator taxes the full price when you buy and each payment when you lease, at the rate you enter. Rules differ by state, so check yours.
Does the calculator include insurance and maintenance?
No. Insurance, fuel, repairs and maintenance are left out. If one of them differs between leasing and buying for you, add the difference to the fees of that side.
Is anything I enter sent to a server?
No. Every calculation runs in your browser. The share link carries your numbers in the link itself, so you can reopen the comparison later.