Leasing or Buying a Car: Which Costs More?

If you consider only upfront costs and monthly payments, leasing a new car seems like a slam dunk. But when you look at the big picture — car ownership over the years — you realize leasing's true cost.

There are two main reasons leasing is more expensive over the long haul:

1. You always have a car payment, although it's typically lower than a purchase payment. Someone who buys a car and pays off the loan can enjoy years of payment-free driving.

2. As you pay off a car loan, you're building equity, which is value you can use. With leasing, you make three years of payments and then return the car to the dealer.

Two financial scenarios: leasing and buying

It might still be hard to believe that leasing is more expensive than buying. After all, some monthly lease payments are much lower than monthly purchase payments for the same car.

To prove the point, let's look at two different consumers over a six-year span: one who decides to lease an average, mid-size sedan for $24,500 and one who decides to buy the same car. We've rounded the numbers off.

Leasing

This consumer would make $300 per month in lease payments and pay two $1,000 drive-off fees, a combination of costs such as a security deposit and an acquisition fee. Because most people lease for three years, six years equals two leasing cycles.

Six-year out-of-pocket leasing costs: $23,600 ($300 x 72 months + $2,000 drive off fees)

Buying

This consumer makes a down payment of $4,000 and takes out a five-year loan at 3% for the rest. He or she has a monthly payment of $380 for five years and one year of making no payments at all.

Six-year out-of-pocket buying costs: $26,800 ($380 x 60 months + $4,000 down payment)

At this point, leasing is looking really good. It beats buying's out-of-pocket costs by $3,200.

But the person who bought the car now owns a 6-year-old vehicle worth about $9,500. He or she can sell the car or continue to drive it without making a car payment. And if the car buyer sold the vehicle and added this money back into the formula, the results would look very different. Buying would become $6,300 less expensive than leasing over the six-year time period.

In a strictly financial sense, leasing is more expensive. But that’s only the dollars-and-cents side of the story.