Buying vs. Leasing a Car: Which One Actually Saves You More Money?

The car dealership will usually be happy to help you figure out whether to buy or lease — and their math rarely favors you. Here's the honest breakdown of when each option makes financial sense.

What Leasing Actually Is

A car lease is essentially a long-term rental agreement. You pay to use the car for 2-3 years, covering depreciation + finance charges, then return it at the end.

Key lease terms:

• Capitalized cost: The "sale price" of the car for lease purposes (negotiate this like a purchase price)
• Residual value: What the car is worth at the end of the lease (set by the lender, not negotiable)
• Money factor: The equivalent of an interest rate (multiply by 2,400 to get the APR)
• Mileage limit: Usually 10,000-15,000 miles per year; excess costs 15-25 cents per mile

The Financial Reality of Leasing

When you lease, your monthly payment covers only the depreciation + finance charges for the lease period. New cars depreciate fastest in the first 2-3 years (often 30-40% of value). So you're paying for the most expensive part of ownership while building zero equity.

Example: A $35,000 car with a 3-year lease:

• Monthly payment: ~$400-500
• Total paid over 3 years: ~$15,000-18,000
• Equity at end: $0
• Then you start over

Same car purchased with an auto loan:

• Monthly payment: ~$550-650 over 5 years

• Total paid: ~$33,000-39,000 (including interest)

• Car value after 5 years: ~$15,000-20,000

• Net cost: ~$13,000-24,000

• After the loan is paid off, you own a car worth $15,000-20,000 with no monthly payment.

When Leasing Can Make Sense

Despite the generally higher lifetime cost, leasing can be rational in specific circumstances:

You drive fewer miles than average: If you drive 8,000-10,000 miles/year instead of the average 15,000, lease vehicles with low mileage limits are less of a problem. You likely won't get penalized.

You always want a new car under warranty: If you value driving a 2-3 year old car under full warranty with the latest technology, leasing delivers that reliably. Buying a new car every 3 years is even more expensive.

You use the car for business: If you're self-employed and use the car primarily for business, a portion of lease payments may be deductible (consult a tax professional). Business lease deductions can be more straightforward than depreciation deductions.

The residual value is favorable: Occasionally, a lease has a high residual value that makes the monthly payment unusually low, or gives you the option to buy at below-market value at lease end.

When Buying Almost Always Wins

You drive a lot: High-mileage drivers (over 15,000 miles/year) typically get hit with excess mileage fees at lease end or need to buy expensive extra miles upfront.

You want to customize the vehicle: Leased cars must be returned in original condition. No lift kits, no tinted windows that weren't factory-included, no aftermarket modifications.

You plan to keep the car long-term: The longer you keep a car after it's paid off, the better the financial case for buying. A car you own outright for 5 years costs essentially nothing (just maintenance) compared to perpetual lease payments.

You have unpredictable income: Lease payments are hard to pause. If your financial situation changes, breaking a lease is expensive (often several thousand dollars in early termination fees).

The Real Math: 10-Year Cost Comparison

Let's compare two people over 10 years, both wanting reliable transportation:

Person A — Perpetual Leaser:

• Leases a $35,000 car every 3 years at $450/month
• Total lease payments over 10 years: ~$54,000
• Insurance (leases often require higher limits): slight premium
• Zero equity at end

Person B — Buys and Holds:

• Buys a $35,000 car with 20% down ($7,000) and finances $28,000 at 7% for 5 years: ~$554/month
• Total loan payments: ~$33,240
• Year 6-10: no car payment (just maintenance/insurance)
• Car value at year 10: ~$8,000 (still driveable, worth something)
• Net 10-year cost: ~$33,240 − $8,000 salvage + $7,000 down = ~$32,240

10-year advantage to buying: ~$22,000 in this scenario.

The perpetual leaser effectively pays for the same benefit while never accumulating an asset.

What About Buying a New vs. Used Car?

The cheapest route overall is often buying a 2-4 year old used car in good condition with cash (or a small loan). You let someone else absorb the steepest depreciation while getting a reliable, relatively modern vehicle.

A 3-year-old car often sells for 30-40% less than new while having 80-90% of its useful life remaining.

The "But I Can Afford the Payment" Trap

Dealerships often try to focus your attention on the monthly payment rather than the total cost. "Can you afford $400/month?" obscures the real question: "Do you want to spend $48,000+ over 10 years on transportation while building no equity, or spend $32,000 while ending up with an asset?"

The total cost matters more than the monthly payment.

Practical Tips If You Do Lease

1. Negotiate the capitalized cost like you would a purchase price — it's not fixed
2. Check the money factor — convert to APR and compare to market rates
3. Know your mileage needs accurately — don't underestimate
4. Consider gap insurance — if the car is totaled, gap insurance covers the difference between what you owe and what insurance pays
5. Read the wear-and-tear guidelines — understand what counts as "normal" wear to avoid end-of-lease charges

The Bottom Line

Financially, buying a car (especially used) and keeping it for years almost always beats perpetual leasing. The math isn't close over a decade.

Leasing can make sense for specific situations: business use with tax implications, very low annual mileage, or a genuine preference for always driving new cars with warranty coverage. But go in with eyes open about the cost.