Which is better: buy a new car or lease a new car? It depends on what you mean by “better”. However, if you narrow “better” to mean “the better financial decision”, the answer is quite clear: buy the car.
There are numerous variables to buying and leasing, and how those variables react will be personal to you. The best way to explore this is through an example. The following table assumes the MSRP price of a base model of a very popular, mid-sized sedan sold in the U.S. at $29,495 in April of 2024. The APR used is 9.86% for buying the car. The lease assumes you’ll lease 2 cars in 6 years. Most leases last 3 years and the typical payment schedule for buying a car is 6 years. The down payment to buy the car is the recommended 20%.
Buy | Lease | |
Down payment | $5,899 | $1,500 |
Monthly payment | $426 | $455 |
Maintenance | $0 | $0 |
Insurance | $Z | $Z |
Year 1 Total | $11,011 + $Z | $6,960 + $Z |
Monthly payment | $426 | $455 |
Maintenance | $0 | $0 |
Insurance | $Z - $L | $Z - $L |
Year 2 Total | $5,112 + $Z - $L | $5,460 + $Z - $L |
Monthly payment | $426 | $455 |
Maintenance | $0 | $0 |
Insurance | $Z - $L | $Z - $L |
Year 3 Total | $5,112 + $Z - $L | $5,460 + $Z - $L |
Down payment | $0 | $1,500 |
Monthly payment | $426 | $455 |
Maintenance | $0 | $0 |
Insurance | $Z - $L | $Z |
Excess Mileage | $0 | $Y |
Excess Wear & Tear | $0 | $K |
Year 4 Total | $5,112 + $Z - $L | $6,960 + $Z |
Monthly payment | $426 | $455 |
Maintenance | $0 | $0 |
Insurance | $Z - $L | $Z - $L |
Year 5 Total | $5,112 + $Z - $L | $5,460 + $Z - $L |
Monthly payment | $426 | $455 |
Maintenance | $0 | $0 |
Insurance | $Z - $L | $Z - $L |
Excess Mileage | $0 | $Y |
Excess Wear & Tear | $0 | $K |
Year 6 Total | $5,112 + $Z - $L | $5,460 + $Z - $L |
Total Over 6 Years | $36,571 + 6$Z - 5$L | $35,760 + 6$Z - 4$L + 2$Y + 2$K |
Equity | $10,000 | $0 |
Table: Inflation unadjusted schedule of payments for six years.
There are variables on both sides. However, there are more variables on the lease and at least one variable, insurance ($Z), will be more expensive on the lease since you’re insuring a newer car in years 4-6. This table understates how much more insurance you’ll pay because in year five you'll be paying insurance on a five year-old car on the buy side while paying for a 2 year-old on the lease side. Even if you assume the $Y and $K to be zero on the lease side and $X to be non-zero on the buy side, it is better to buy the car. That’s because you own the car in six years and that car you own is worth about $10K. You can use that to buy a new car or keep driving with no more car payments.
It seems surprising that the monthly lease payments are actually higher in this example than the buy monthly payments. Two reasons that some people find leasing a car more attractive than buying is that both the down payment and monthly payment are lower than they would be if you were buying. A 2022 Experian’s State of the Automotive Finance Market showed that lease payments on average are about 20% cheaper than buying monthly payments ($578 to $716). If you made the buy monthly payments 20% more expensive than its leasing counterpart in this example, you’d spend $43,771 on total buy payments vs. the same $35,760 on lease payments. It’d still make more financial sense to buy the car due to the equity and the increased insurance payments on the lease. Furthermore, on the buy side you’ll have the option of not having to make car payments for a few years as you accelerate your savings for other goals.
The downside of buying a car is the much higher down payment. In this situation you can go for a cheaper new car, in this case maybe a compact sedan, or go for the same model car but buy it 2-3 years used. That way, the warranty should still be intact and some of the depreciation on the car is paid for by someone else.