Key differences at a glance
Leasing vs Financing Comparison
| Factor | Leasing | Financing |
|---|---|---|
| Ownership | No - return at end | Yes - build equity |
| Monthly payment | Lower | Higher |
| Mileage limits | 10-15K/year + fees | Unlimited |
| Wear & tear | Charged for excess | Your problem |
| Modifications | Not allowed | Fully allowed |
| Early exit | Expensive penalties | Sell anytime |
How lease payments are calculated
The Three Key Numbers
Capitalized Cost (Cap Cost): The negotiated price of the car (like purchase price)
Residual Value: What the car will be worth at lease end (set by manufacturer)
Money Factor: The interest rate (multiply by 2,400 to get equivalent APR)
Formula: You pay for depreciation (Cap Cost - Residual) + interest over the term
Lease Payment Breakdown Example
Car Details
- • MSRP: $35,000
- • Negotiated price: $32,000
- • 36-month lease
- • Residual: 60% ($21,000)
- • Money factor: 0.00125 (3% APR)
Payment Calculation
- • Depreciation: $32,000 - $21,000 = $11,000
- • Monthly depreciation: $11,000 ÷ 36 = $306
- • Monthly interest: $53,000 × 0.00125 = $66
- • Base payment: $306 + $66 = $372
- • Plus tax and fees
When leasing can be cheaper
High Residual Values + Low Money Factor
Luxury cars: Mercedes, BMW, Lexus often have 60%+ residuals
Brand subsidies: Manufacturers offer promotional money factors (0.5-1%)
Model popularity: High-demand cars retain value better
New releases: First-year models often have aggressive lease terms
Business Tax Write-offs
Section 179: Up to 100% deduction for business vehicles over 6,000 lbs
Standard method: $0.67/mile for business use (2024)
Actual expense: Deduct percentage of lease payment for business use
Luxury limit: $19,200 annual deduction cap for cars under 6,000 lbs
Always Want Latest Features
Tech upgrades: New safety features, infotainment systems every 3 years
Warranty coverage: Always under manufacturer warranty
No repair surprises: Most major issues covered during lease term
Predictable costs: No unexpected maintenance or depreciation hits
When buying wins
Long-term Ownership Plans
Keep cars 6+ years: Financing almost always wins on total cost
Drive them into ground: 10+ year ownership maximizes value per dollar
Reliability priority: Honda, Toyota, Mazda hold up well long-term
No payment period: Years 5-10 with no monthly payment build wealth
High Mileage or Hard Use
Over 15K miles/year: Excess mileage fees ($0.20-0.30/mile) add up fast
Rough conditions: Construction, frequent road trips, pets, kids
Modification needs: Towing packages, lift kits, performance upgrades
Freedom to sell: Can sell anytime without lease-end penalties
Example math: $32k vehicle comparison
Toyota Camry XLE: 6-Year Total Cost
Leasing Path (2 consecutive 3-year leases)
- • Down payment: $2,000 (each lease)
- • Monthly payment: $349
- • 72 months of payments: $25,128
- • Total down payments: $4,000
- • Total cost: $29,128
- • Asset value: $0
Financing Path (5-year loan + 1 year owned)
- • Down payment: $6,400 (20%)
- • Monthly payment: $481 (60 months)
- • 60 months of payments: $28,860
- • Insurance/maintenance: $3,600
- • Total cost: $38,860
- • Asset value: ~$15,000
Net Cost Comparison
Leasing net cost: $29,128 (no asset)
Financing net cost: $38,860 - $15,000 = $23,860
Winner: Financing saves $5,268
Plus you own an asset worth $15,000
Decision checklist
Choose Leasing If...
- □ You want a new car every 2-3 years
- □ You drive less than 12,000 miles per year
- □ You take good care of vehicles
- □ You can write off the expense for business
- □ You get a high residual value (55%+) and low money factor
- □ You prioritize lower monthly payments over ownership
Choose Financing If...
- □ You plan to keep the car 5+ years
- □ You drive more than 15,000 miles per year
- □ You want to modify or customize the vehicle
- □ You're hard on cars (kids, pets, rough use)
- □ You want to build equity and own an asset
- □ You want the freedom to sell anytime
Advanced lease strategies
Multiple Security Deposit (MSD)
Put down extra security deposits to reduce money factor
Example: 9 MSDs ($4,500) might reduce money factor from 0.00200 to 0.00050, saving $50+/month
Lease Transfer/Assumption
Take over someone else's lease to avoid down payment
Websites: SwapALease, LeaseTrader — inspect vehicle carefully before assuming
Lease-End Buy Option
Purchase at residual value if market value is higher
If residual is $18K but car is worth $22K, buy and immediately sell for $4K profit
Frequently Asked Questions
What is a money factor and how do I convert it to APR?
Money factor is the lease interest rate in decimal form. Multiply by 2,400 to get the equivalent APR. Example: 0.00125 money factor = 3.0% APR.
Can I negotiate a lease like a purchase?
Yes! You can negotiate the cap cost (sale price), but residual value and money factor are usually set by the manufacturer. Focus on getting the lowest cap cost.
What happens if I exceed mileage?
You pay excess mileage charges, typically $0.20-0.30 per mile. Going over by 5,000 miles could cost $1,000-1,500. Buy extra miles upfront if you're close to the limit.
Is leasing good for business owners?
Often yes, due to tax benefits. You can deduct the business percentage of lease payments, and luxury vehicle deduction limits are less restrictive than purchase depreciation limits.