Unlike a house, a car is a depreciating asset from the day you drive it off the lot, so "buy vs lease" is a different kind of question than "buy vs rent." Neither choice builds wealth; the question is which one costs you less for the use you get. Our Buy vs Lease calculator walks through the tradeoff; here's the reasoning behind it.
Depreciation is the real cost of owning a car
When you buy a car, your cost isn't the purchase price, it's the purchase price minus what you can sell or trade it in for later. That difference is depreciation, and it's steepest in the first few years, especially the first year. A car that loses 20% of its value in year one is effectively costing you that 20% whether you keep it or not; you just don't feel it until you sell.
What a lease actually is
A lease is, financially, a way of renting exactly the depreciation you'll cause, for exactly the term you specify, plus a financing charge (the "money factor") and the dealer's margin. Your monthly payment is calculated from the gap between the car's price now and its predicted value at lease-end, spread over the lease term. That's why leasing a car that holds its value well tends to be relatively cheap, and leasing one that depreciates fast is relatively expensive.
The tradeoffs that don't show up in the payment
- Mileage limits. Most leases cap you at 10,000-15,000 miles a year, with a per-mile penalty above that. If you drive a lot, a lease can get expensive fast in ways the sticker payment doesn't show.
- No equity. At the end of a lease you have nothing, by design, you've paid for usage, not an asset. At the end of a loan, you own a car, even if it's worth less than you paid.
- Flexibility to upgrade. A new lease every few years means always being under warranty and never facing a big repair bill. That convenience has a price, but it's a real preference for some people, not just a financial error.
- Wear-and-tear charges. Leases can charge you at turn-in for damage a buyer would have just lived with.
Which one wins, financially
If you keep a bought car for a long time, past when the loan is paid off and repairs are still cheaper than a new payment, buying almost always wins financially, because you stop paying for depreciation once you own the car outright and keep driving it. Leasing wins when you value predictable payments, always having a new car, and not thinking about resale, and are willing to pay for that.
Use the Buy vs Lease calculator to compare your specific numbers, purchase price, expected resale value, lease payment, and how long you'd actually keep the car, instead of relying on the rule of thumb.