Question 1

What makes leasing appear cheaper than buying?

Accepted Answer

The monthly payment comparison is misleading because a lease payment covers only the depreciation during the lease term plus a money-factor finance charge — not the full vehicle cost. You're paying for the use of the car, not its ownership. A 36-month lease on a $40,000 vehicle might have a monthly payment of $450 vs $700 for a purchase loan, but at end of term you own nothing. The calculator captures this by comparing total outflows in both scenarios, including the residual value you'd capture by owning.

Question 2

What is the money factor and how do I convert it to APR?

Accepted Answer

The money factor (also called 'lease factor') is the finance charge rate expressed in dealer notation. To convert to an approximate APR, multiply the money factor by 2,400. So a money factor of 0.00125 equals roughly 3.0% APR. Dealers often quote money factors rather than APRs because the number looks smaller. Under Reg Z (Truth in Lending, 12 CFR Part 226), retail installment sales must disclose APR; closed-end leases have somewhat different disclosure requirements under the Consumer Leasing Act (15 USC § 1667).

Question 3

What is residual value and why does it matter so much?

Accepted Answer

Residual value is the vehicle's projected worth at lease end, set at inception by the leasing company (captive finance arm or bank). It matters enormously because: (1) a higher residual means lower monthly payments (you're financing less depreciation); (2) if the car is actually worth more than its residual at end of term, you can buy it out below market value and capture the equity; (3) if the market collapsed, you return the car and walk away. NADA and Kelley Blue Book publish residual value data. Manufacturers often inflate residuals on popular models to make leases look attractive.

Question 4

How do mileage overages work and what do they actually cost?

Accepted Answer

Standard lease contracts specify an annual mileage allowance (10,000, 12,000, or 15,000 miles/year) with a per-mile overage fee ($0.15–$0.30/mile at contract time). For a 36-month lease with 10,000 mile/year limit, exceeding by 5,000 total miles at $0.25/mile costs $1,250. The calculator adds this to total lease cost based on your projected annual mileage. Note: you can often pre-purchase additional miles at signing for less than the per-mile rate — worth doing if you expect to go over.

Question 5

When does buying clearly beat leasing?

Accepted Answer

Buying beats leasing when: (1) you plan to keep the car 7+ years — depreciation per year drops sharply after Year 5; (2) you drive significantly more than 15,000 miles/year; (3) you want to modify the vehicle; (4) you buy at the right point in the depreciation curve (certified pre-owned, 2-3 years old, where someone else absorbed the steepest drop). Leasing beats buying when: (1) you want a new car every 3 years; (2) you use the car for business (lease payments can be deducted under IRC §179D up to the inclusion amount limit); (3) the manufacturer subsidy creates a below-market residual/money factor.

Question 6

What is a capitalized cost reduction?

Accepted Answer

The capitalized cost reduction (cap cost reduction) is a down payment on a lease — it lowers the amount being financed (the 'cap cost'), which reduces monthly payments. Unlike a purchase down payment, a cap cost reduction on a lease provides zero benefit if the car is stolen or totaled in Month 1 — the insurance pays off the lessor's interest, not yours. Financial planners generally advise minimizing or eliminating cap cost reductions on leases for this reason. The calculator models this trade-off.

Question 7

How does this calculator handle the buy-out at end of lease?

Accepted Answer

At lease end, you have three choices: return the car, buy it at the contract residual, or buy it and sell it privately. This calculator models the 'keep vs sell' scenario by comparing: total lease outflows vs (total purchase outflows minus the estimated residual at sale time). The residual estimate uses standard depreciation curves (Years 1-3: 15-20%/year depreciation; Years 4-7: 10-12%/year).

Car Loan vs. Lease Comparator

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