- This comparison provides an outline that summarizes the major differences between leasing and buying in 14 subject areas, plus a discussion of how to use "Lease vs. Finance Models."
- An expanded version of this summary that contains further information and examples for many of the topics is available to be downloaded and either viewed or printed.
- To print any of the items or the expanded lease vs. finance description, use the Print Materials menu.
This "leasing versus buying" comparison is an educational tool to make general comparisons of these two methods of obtaining a vehicle. It is not an advertisement for and does not describe a particular lease or loan. It does not include all of the terms of a lease or a loan. In many places, the identified costs do not include all fees and taxes. Please refer to the specifics of the lease and loan you are considering for the actual terms. To reduce the complexity of the comparisons, the advantages and disadvantages of purchasing a vehicle for cash are not included. However, most statements applicable to financing a vehicle also apply to purchasing it with cash.
Because of the close working relationship between the Federal Reserve Board (FRB) and the ACVL, there are many similarities between the buying versus leasing information found on each group's web site. We have been very privileged as an Association to have worked so closely with the FRB to help assure the completeness and accuracy of the FRB information.
Table of Contents:
Monthly lease payments are usually lower than monthly finance payments because you are paying only for the vehicle’s depreciation rather than the full purchase price during the lease term, plus rent charges (like interest). Alternatively, you can lease a more expensive vehicle for the same monthly payment as financing.
- Payment components.
- Vehicle
- Amortization of other amounts.
- Rent charge.
- Sales or use tax.
- Other fees.
Monthly finance payments are usually higher than monthly lease payments because you are paying for the entire purchase price of the vehicle, plus interest and other finance charges, and taxes. For the same monthly payment as leasing, you may have to finance a less expensive vehicle.
- Payment components.
- Amount financed.
- Interest.
- Other finance charges.
- Other fees.
You may return the vehicle at lease end, pay any end-of-lease costs and “walk away.”
- End-of-term responsibilities.
- Gain or loss at lease end.
- Where you return the vehicle.
- Other options at lease end.
- End-of-lease costs.
The lessor has the risk of the future market value of the vehicle. You generally have the opportunity to gain any vehicle equity.
- Factors affecting future value.
- Fixed future residual value.
- Depreciation
- Fixed depreciation cost.
- Purchase option opportunity.
- Purchase option costs.
You have the risk of the vehicle’s market value when you trade or sell it. You would also have any vehicle equity.
- Factors affecting future value.
- Unknown future value.
- Depreciation
Up-front costs of leasing a vehicle are usually less than up-front financing costs. They typically include the first month’s payment, a refundable security deposit, registration fees and sometimes local taxes. Up-front costs can include:
- Capitalized cost reduction.
- Taxes
- Other government or lessor charges.
- Optional insurance and services.
- First monthly payment.
- Refundable security deposit.
- Prior lease balance.
- Prior credit balance.
Up-front costs of buying a vehicle are typically greater than up-front leasing costs. They typically include the cash price or a down payment, sales taxes on the full price of the vehicle, registration fees, and other government charges. Up-front costs can include:
- Cash price or down payment.
- Sales tax.
- Other taxes.
- Other government or lender charges.
- Optional insurance and services.
- First monthly payment.
- No refundable security deposit.
- Prior lease balance.
- Prior credit balance.
The total costs of leasing a vehicle for a fixed period are generally less than for financing because of lease savings on depreciation and gap coverage; reduced sales tax; and the time value of money benefits.
- Depreciation
- Gap coverage.
- Sales/Use tax.
- Time value of money.
However, it may be harder to capture any equity in the vehicle when leasing.
The total costs of financing a vehicle for a fixed period are generally more than for leasing because of higher costs of depreciation and gap liability; more sales tax; and the time value of money differences.
- Depreciation.
- Gap coverage.
- Sales tax.
- Time value of money.
Depreciation
Depreciation. When you lease, you pay only for the depreciation expected during the lease term rather than for the full value of the vehicle. There are several reasons why you generally pay less vehicle depreciation when you lease a vehicle than when buying and trading the vehicle:
- The residual value is based on the amount the lessor expects to get for the vehicle when it is sold to the highest auction bidder after professionally reconditioning the vehicle and transporting it to the used car market with the highest demand. This is typically greater than the trade-in value a consumer can negotiate.
- Lessors compete by offering lower monthly payments than their competitors through increasing residual values, which thereby reduces the depreciation you pay.
- Manufacturers often increase the residual value as a special promotion to make lease payments more attractive.
Depreciation. There are several reasons why you generally pay more vehicle depreciation when you purchase a vehicle:
- You take the risk of unexpected depreciation of the vehicle.
- The depreciation is based on the trade-in value or sale price you can negotiate when you trade the vehicle or sell the vehicle. This amount is typically less than the amount for which the leasing company can sell the vehicle through a professionally managed dealer auction process.
- Lenders don’t compete by increasing trade-in Dealer increases in trade-in values (“over-valuing the trade”) are usually offset by higher prices of the new vehicle.
- Manufacturers do not subsidize vehicle trade-in values.
Gap coverage
Gap coverage. Gap coverage is usually included in lease agreements, but if not, it may be purchased. See Gap Coverage for a discussion of its value.
Gap coverage. Gap coverage is usually not included in finance agreements, but it may be purchased
Sales/Use tax. In most states, sales or use tax is paid only on the monthly payments you make, plus any capitalized cost reduction you pay. Thus, you pay less total sales tax and you generally pay it over the term rather than at the beginning, so it has a lower “present value” cost because of the time value of money.
Sales/Use tax. In all states, sales tax is paid when you purchase the vehicle. It is generally paid on the full purchase price, but in most states, if you trade a vehicle, you pay sales tax only on the trade-in price difference. Unless you trade a vehicle with a high trade-in value, you generally pay more total sales tax and you pay it at the beginning.
Time value of money. You generally must make a lower initial payment and lower monthly payment so there are cash flow savings compared to purchasing a vehicle for cash or financing it. You can use those savings to pay down other debts (like higher interest credit cards), make investments or for other needed purposes. The money you save from the reduced debt amount or the return you make on the investment are part of the financial benefits of leasing that must be taken into account when comparing the costs to financing.
Time value of money. You generally must make a higher initial payment and higher monthly payment so there are cash flow disadvantages compared to leasing a vehicle.
Leasing has advantages if you change vehicles frequently.
- Trade-in and warranty advantages.
- Unexpected depreciation advantages.
- Tax effects.
Buying has advantages if you do not change vehicles frequently.
- Cost advantages.
- Tax effects.
Gap coverage is usually included in lease agreements, but if not, it may be purchased.
- Gap coverage.
- Gap amount.
- Reason for gap amount.
- Example of gap coverage.
- Taxes.
- Inclusion in lease agreements.
- Requirement to maintain gap coverage.
- Variations in gap coverage.
- Value of gap coverage.
Gap coverage is usually not included in finance agreements, but it may be purchased.
- Gap coverage.
- Gap amount.
- Reason for gap amount.
- Example of gap coverage.
- Taxes.
- Inclusion in finance agreements.
- Requirement to maintain gap coverage.
- Variations in gap coverage.
- Value of gap coverage.
If you lease a new vehicle for a term of 36 months or less, all vehicle manufacturer warranties will cover the full lease term, subject to the warranty mileage restrictions.
- Warranty expiration.
- Fixed costs of driving.
If you finance a vehicle for a term of 48 months or more, most new vehicle manufacturer warranties will not cover the full finance term.
- Warranty expiration.
- Unknown costs of driving.
You do not own the vehicle. You get to return it at the end of the lease unless you choose to buy it or sell it.
- Achieving full ownership.
- Conditions on vehicle use.
- Right to purchase.
- Duty to return the vehicle.
- Registration and titling.
Achieving full ownership. You must exercise your purchase option at either early termination or end-of-term in order to become the owner of the leased vehicle. Until then, the title is in the lessor’s name, although you may be listed as the driver or registered owner depending on the state. Under the lease agreement, you typically have all of the same operational responsibilities of insuring, maintaining and registering the vehicle as you would if you owned it.
You own the vehicle and get to keep it at the end of the financing term unless you choose to sell it.
- Achieving full ownership.
- Conditions on vehicle use.
- Loan options.
- Registration and titling.
Achieving full ownership. When buying a vehicle with cash, you immediately become the vehicle owner. When purchasing a vehicle with an installment sales contract or loan, you pay down the finance balance and eventually build equity in the vehicle. You receive full ownership only after you make your final payment. Until then, the finance company has a lien on the vehicle title.
Reasons for mileage limits. Vehicle leases include a mileage limit because the residual value is based on the expected mileage. Driving more miles reduces the value of the vehicle. Excess mileage charges are the way lessors recover the expected decrease in value from the additional use.
You may drive as many miles as you want, but higher mileage will reduce the vehicle’s trade-in value or resale value.
- Effect of more miles.
- Effect of less miles.
Effect of more miles. If you drive more miles than you expect, there is no excess mileage charge owed to the creditor, but the vehicle will be worth less when you trade or sell it.
Some lease agreements restrict you from moving with the vehicle to another state and usually restrict you from moving to another country.
- Right to move the vehicle.
- Retirees, Canadians, and military.
- Notification if you move.
- Taxes.
Finance agreements generally do not restrict you from moving with the vehicle out of state but usually restrict you from moving to another country.
- Right to move the vehicle.
- Canadians and military.
- Notification if you move.
- Taxes.
Federal law does not require a uniform calculation and disclosure of a lease rate.
- No federal rate standard.
- Problems in defining a lease rate.
No federal rate standard. In leasing, there is no federal requirement for lessors to disclose a lease rate. There is also no mandatory federal formula for calculating a lease rate. Standardizing the lease rate calculation would be extremely complex. It would also involve use of certain estimates that can vary among lessors. Because of various limitations, a lease rate is not a reliable measure of the total lease cost. Therefore, Regulation M does not permit lessors to advertise or disclose a percentage lease rate.
Federal law requires a uniform calculation and disclosure of an Annual Percentage Rate (APR) for credit.
- Reliable federal rate standard.
Reliable federal rate standard. In credit transactions, such as vehicle loans, federal law requires disclosure of the annual percentage rate (APR). The APR is an annualized rate that reflects the total cost of credit, including interest and certain other charges. Federal law requires the use of a specific formula when calculating the APR.
End-of-Term / Disposition at the end of the lease (typically 2-4 years), you usually have four options: (1) return the vehicle, (2)trade or sell the vehicle, (3)purchase the vehicle, or (4) arrange for a third party to purchase it.
- Options at end of term.
- Cash needs.
- Monthly payments.
- Achieving full ownership.
- Comparison to buying.
At the end of the finance term (typically 4-6 years), you have two options: (1)trade or sell the vehicle or (2) keep the vehicle.
- Options at end of term.
- Cash needs.
- Monthly payments.
- Achieving full ownership.
Leases limit the amount of wear to the vehicle. You will likely have to pay extra charges if you exceed those limits and return the vehicle.
- Excess wear and tear standards.
- Example of excess wear and tear.
- Maintenance requirements.
There are no limits or charges for excessive wear to the vehicle, but excessive wear will lower the vehicle’s trade-in or resale value.
- Effect of excess wear and tear.
- Maintenance requirements.
Information about leasing versus buying vehicles often includes a comparison of costs and features of these options (“lease versus buy models” or “models”). These models may be helpful as a starting point in deciding whether to lease or buy. However, they usually have three major limitations. They may:
- Exclude your personal preferences (subjective factors)
- Exclude some important factors and thus may be incomplete and simplistic
- Include factors that are complex and difficult to specify with accuracy
