Car Lease vs. Buy Guide: Financial Formulas, Money Factors & Depreciation
Complete guide to auto leasing vs buying: converting money factor to APR, understanding residual value, calculating drive-off fees, and total ownership costs.
Leasing an automobile finances only the vehicle depreciation during your 24 to 36-month possession period, plus a monthly rent charge (finance fee) and sales tax. Purchasing a car with an auto loan finances the full vehicle purchase price, building equity as the loan amortizes. If you drive under 12,000 miles per year and upgrade vehicles every 3 years, leasing provides lower monthly cash outlays; if you keep vehicles for 5 to 10 years, buying is mathematically superior.
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Input MSRP, negotiated selling price, money factor, and residual percentage to model your exact lease payment and drive-off costs.
1. The Anatomy of an Auto Lease Auto leases split every monthly payment into two distinct financial engines: 1. **Depreciation Fee**: The difference between the adjusted capitalized cost and the projected residual value divided across the lease term. 2. **Monthly Rent Charge**: The finance charge earned by the lessor, calculated as: $$\mathbf{\text{Rent Charge}} = (\text{Net Cap Cost} + \text{Residual Value}) \times \text{Money Factor}$$
2. The Golden Rule of Leasing Never put down more than the mandatory first month payment and license fees at signing. Keep down payments at $0 to protect your liquidity.
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