Lease vs. Buy Calculator

How the lease payment is built

The Federal Reserve's consumer leasing guide breaks a lease payment into parts. This calculator uses the same structure:

Depreciation

The adjusted capitalized cost (the negotiated price plus any fees added to the lease, minus your down payment and other reductions) minus the residual value, spread over the term. In the Fed's words, "Depreciation = Adjusted capitalized cost - Residual value."

Rent charge

The lease's version of interest. The Fed explains that to get the average monthly rent charge, "the money factor is multiplied by the sum of the adjusted capitalized cost and the residual value."

Tax

The Fed notes that the tax in a lease payment is set by the state or county where the car is registered, and that "in most states, this monthly tax replaces the initial sales tax on the purchase price." Check your state's rule; some tax a lease differently.

Money factor vs. APR. Multiplying a money factor by 2,400 gives a rough APR equivalent, because the rent charge is applied to the cap cost plus the residual, which is about twice the average balance. It is only an approximation. The Fed is blunt that a money factor "is not a lease rate and cannot be converted to a lease rate by moving the decimal point," and that it "typically is not disclosed to you." Ask for it.

Worked example

A car with a $36,000 MSRP, negotiated to $34,000. The 36-month lease has a 58% residual ($20,880.00), a money factor of 0.0025, $2,000 down, a $695 acquisition fee added to the lease, $500 in other fees at signing, a $395 disposition fee, 12,000 miles a year and 6% tax on each payment.

• Adjusted capitalized cost: $34,000 + $695 - $2,000 = $32,695.00.
• Depreciation: $328.19 a month. Rent charge: $133.94. Tax: $27.73. Payment: $489.86.
• Total cost of the lease, including everything due at signing and the disposition fee: $20,529.96.

Buying the same car with $2,000 down and a 60-month loan at 6.5% costs $681.68 a month. Over the same 36 months you pay $26,540.65, but you own a car. If it is worth the residual at the end, you still owe $15,302.85 on the loan and have $5,577.15 in equity, so buying costs $20,963.50. In this case leasing comes out $433.54 cheaper.

Small changes flip the answer. Drive 15,000 miles a year instead and the lease adds $2,250.00 in mileage charges, making buying $1,816.46 cheaper. Or if the car holds its value better than the residual and is worth $22,500 after three years, buying wins by $1,186.46.

What this comparison leaves out

• Keeping the car longer. The comparison stops when the lease ends. Buying usually gets cheaper the longer you keep the car after the loan is paid off, while leasing again starts a new set of payments.
• Who carries the risk. In a closed-end lease, the Fed notes, the lessor bears the risk of the car's future market value. If used-car prices fall, a lessee can walk away; a buyer owns the loss.
• Wear and tear and early termination. Lease-end charges for excess wear, and the cost of ending a lease early, can be large. Read those sections of the lease before signing.
• Higher mileage lowers a bought car's value too. If you drive more, lower the "value at the end" figure as well as raising expected miles.

Frequently asked questions

Where do I find the money factor and residual?

Ask the dealer for both, along with the capitalized cost. The residual is disclosed in the lease, but the money factor often is not volunteered, so you may need to ask directly.

Can I negotiate a lease?

Yes. The negotiated price (capitalized cost) works the same way as in a purchase: every dollar off lowers the depreciation you pay. The money factor and fees can also be negotiable, and a pre-approval or competing lease quote gives you leverage.

Is a big down payment on a lease a good idea?

It lowers the monthly payment, but it is prepaid depreciation. If the car is stolen or totaled early in the lease, you may not get that money back, so ask how the lease handles it before putting a lot down.

What is the acquisition fee?

A fee charged by the leasing company to set up the lease. It is often added to the capitalized cost, which means you also pay rent charge on it.