Lease vs. buy: the real math most dealers don't show you

Why the monthly payment comparison is misleading

Lease monthly payments look lower because you're only paying for depreciation during the lease term — not the full vehicle cost. A $40,000 vehicle that depreciates 50% in 3 years means you're financing ~$20,000 in depreciation (plus a finance charge). The remaining $20,000 residual is returned to the dealer. The loan payment finances the full $40,000. Dealers know that most consumers stop at the monthly payment line without computing total 3 or 5-year outflows.

The correct comparison: sum all outflows in both scenarios over the same period. For a lease: sum of all payments + fees + mileage penalties. For a purchase: sum of all loan payments + insurance differential + the vehicle's projected residual value you'd capture at sale. The purchase may win on net wealth even with a higher monthly payment, if the residual value captured at Year 5 exceeds the cumulative payment premium.

Money factor: the lease interest rate dealers hide

The money factor is the finance charge rate expressed in lease notation — a small decimal that looks innocuous until you convert it. Formula: Money Factor × 2,400 = approximate APR.

Common money factors and their APR equivalents: - 0.00125 = 3.0% APR - 0.00200 = 4.8% APR - 0.00250 = 6.0% APR - 0.00350 = 8.4% APR

Dealers may offer a money factor higher than the 'buy rate' (what the captive finance company charges) and pocket the spread — similar to dealer markup on conventional loans. Ask the F&I manager for the buy rate and the dealer markup separately. Some states require disclosure; most don't.

Under the Consumer Leasing Act (15 USC § 1667b), closed-end lease disclosures must include the total of scheduled payments, but not the money factor or APR — a notable consumer protection gap.

Residual value: the number that drives lease economics

Residual value is the vehicle's projected worth at lease end, set by the leasing company at inception. A higher residual means lower payments (you're financing less depreciation) AND creates a potential buyout opportunity if the market beats the residual.

NADA and KBB publish projected residual values. Manufacturers manipulate residuals on popular models to make lease deals look attractive — artificially high residuals subsidize payments. When you see an advertised lease deal with unusually low payments, check whether an inflated residual or subvented money factor is driving it.

Residual sensitivity: on a $40,000 vehicle with a 36-month lease, each $1,000 change in residual changes the monthly payment by approximately $27.78 ($1,000 / 36 months). A 5% difference in residual assumption ($2,000 on a $40,000 vehicle) = $55.56/month difference.

The 5-year total cost comparison

To compare lease vs buy on equal footing, normalize to the same time period and include all outflows:

Lease path (two consecutive 3-year leases to equal 6 years): - Payments on both leases - Cap cost reductions (down payments) on both leases - Mileage penalties on Lease 1 if overages occurred - Lease-end fees and disposition fees (~$300-500) - No residual value captured (you don't own the vehicle at end)

Purchase path (6-year ownership): - Down payment - 60 or 72-month loan payments - Total interest paid - Minus: vehicle resale value at Year 6 (estimated using depreciation curve)

If Purchase Total Outflows - Resale Value > Lease Total Outflows, leasing wins on net cost. If Purchase Total Outflows - Resale Value< Lease Total Outflows, buying wins. The Car Loan vs. Lease Comparator automates this calculation for your specific deal terms.

Primary sources cited

• Reg Z — Consumer Leasing Act, 15 USC § 1667
• NADA Guides — Vehicle Valuation
• IRS Rev. Proc. 2024-14 — Standard Mileage Rates