We’ve already discussed the pros and cons of leasing a car compared to buying. But we haven’t looked at the math of leasing versus buying with a loan.
Simply stated, car lease payments are about half of loan payments for the same car, assuming the same 3-year term. The reason is simple. It’s because with leasing you only finance the portion of a car’s value that you’ll use up during the lease term, not the entire value as you would if you purchased with cash or with a loan.
Lease vs Buy – The Math
The amount you finance with a lease is the difference between the price you negotiate and the lease-end residual value. It’s called depreciation.
All cars depreciate in value whether they are leased or purchased. When you lease, you only pay for that depreciation (plus finance charges), whereas you pay for the entire value of a vehicle when you purchase.
An average vehicle’s value depreciates about 50% over 3 years, which means you finance only 50% of the amount that you would finance with a purchase loan for the same car.
Let’s take a look at how lease and loan payments compare for a $30,000 car, over 3 years, at a finance rate of 3.0% and assuming a lease-end residual value of $15,000 (50% of the original value).
We’ll use our Lease Payment Calculator to calculate the monthly payments for the lease. To keep things simple, we’ll assume no down payment or trade-in, and no sales tax. For the loan payments, we’ll use an online Auto Loan Calculator.
Lease payment = $472.92 for 36 months
(total of all payments = $17,025)
Loan Payment = $872.44 for 36 months
(total of all payments = $31,408)
At end of the lease, the customer can return the car, or purchase it for the remaining $15,000 value and drive it for as long as he/she wants.
At the end of the loan, the customer can sell or trade the car for the remaining $15,000 value, or keep it and continue driving it for as long as he/she wants.