Lease or Buy a New Car

Should you lease or buy a new a car? It depends on how long you like to keep your cars and what your priorities are, but let’s walk through some numbers.


We all understand what it means to buy a car, but leasing is different.

A car lease allows you to basically rent a car and drive it a certain amount of miles for a certain period of time (e.g., 12,000 miles a year for three years). Leasing keeps you in a late-model car with more features for a smaller monthly payment than buying a new car. Maintenance is cheap, since it’s new and covered by warranties.

The downsides are that you’re locked into a limited number of miles, and if you exceed them you pay extra when the lease is done. You also may pay extra for wear and tear on the vehicle when you return it. You’re not buying anything, so leasing requires ongoing monthly payments, and a purchased car has value when you trade it in.

The Toyota Highlander is a popular SUV we can use to compare leasing and buying, and I’ve provided some assumptions in the table below. When leasing, major things to negotiate are listed in the table – purchase price, residual value, and money factor.

Toyota Highlander Example

Buying a new Highlander versus leasing it for either 12,000 or 15,000 miles is more expensive, but not by much when we adjustment some assumptions. The Highlander’s approximate trade-in value is $21,000 after three years, and the maintenance costs below assumed you owned the car for nine years. Therefore, adjusting those costs down, the fair comparison is $27,828 for the purchase versus $21,443 for the 12,000 mile lease and $23,432 for the $15,000 mile lease.

So, if you are going to trade your cars in every few years, the purchase is more expensive, but they are close when you consider the 15,000 mile option. Also, no wear and tear costs were assumed and we used a healthy residual value that lowered the lease cost.

Side note: wondering which lease mileage to target? You can use either your own driving history, or the below statistics broken down by gender and age group.

Average Annual Miles per Driver by Age Group
Source: U.S. Department of Transportation Federal Highway Administration

Back to the lease or buy a new car analysis.

We saw the three year cost above, but what if you keep your cars longer? The average American keeps their car for six years, and the average age of vehicles on the road is eleven years. Let’s use nine years for this comparison.

That means three total leases, higher maintenance costs for the car purchase scenario, and a lower trade-in value at the end.

The new car purchase is much cheaper now. Buying and holding a car for nine years can save you as much as $30,000. Meaningful savings.

$44,328 versus $68,645 for the 12,000 mile lease and $74,482 for the 15,000 lease.

Table of Assumptions

Cost CategoriesNew CarLease 12,000 milesLease 15,000 milesExplanatory Notes
Car Price$40,000$40,000$40,000Good price, less than MSRP
Acquisition Costs/Destination Fee$800$800$800Leases have acquisition costs, purchases have destination fees
Sales Tax$2,500$1,148$1,2656.25% in MA of the total payments for a lease and purchase price for a car
Title and Registration$135$135$135
Maintenance$5,000$150$150Estimates. Lease costs is assuming in the third year of the lease you are responsible for oil changes and minor maintenance.
Document fee$500$500$500
Disposition Fee$350$350Fee charged when you return your leased car
Subtotal of buy versus lease three year costs$52,328$21,443$23,432
Lease Two$22,796$24,365Assuming a car inflation rate of 2.3% per the Bureau of Labor Statistics
Lease Three$24,406$26,685Assuming a car inflation rate of 2.3% per the Bureau of Labor Statistics
Total ownership costs over nine years$52,328$68,645$74,482
Car’s value after depreciation$8,000$0$0Estimate based on average new car depreciation rates
True ownership costs over nine years$44,328$68,645$74,482Reducing the cost of ownership by the trade-in value of your used car
Residual value of lease65%65%What your car is worth after the lease and used to calculate lease cost. Usually around 50%, the higher the better for you.
Interest rate for loan3.25%
Money factor for lease.00135.00135Interest rate for the lease. Translate to normal interest rates by multiplying by 2,400. Negotiable.


Suggested Further Reading

Review: The Millionaire Next Door by Stanley and Danko – The Millionaire Next Door demolished the mythology of who the wealthy are in America and shares research on how you can best emulate them, including spending less on cars.