Lease vs buy a car: an honest comparison
Lease vs buy a car? It comes down to how long you keep a car and how many miles you drive.
The same car, leased or bought
Three years favors the lease. Six years favors owning. In this example.
Nothing down. Tax is charged on the payments only: $2,576. You hand the car back.
A 60-month loan. Sales tax is charged on the full price: $5,000.
Six years, assuming the second lease costs the same as the first.
About $61,970 in loan payments, minus a car still worth $20,000. Tires, brakes and repairs narrow the gap.
Made-up numbers: a $50,000 car worth $30,000 after three years, 10% tax, the same cost of money both ways, fees left out. Not an offer.
Key takeaways
If you want a new car every two to four years and your mileage fits a standard allowance, leasing is often the cheaper way to do that in California, partly because a lease is taxed only on what you pay while a purchase is taxed on the full price. If you drive a lot or keep cars for six years or more, buying usually costs less overall.
What you pay for in each
Lease: the car's loss in value during the lease, a rent charge on the lender's money, tax and fees. You own nothing at the end unless you buy the car.
Loan (financing): the whole price plus interest, tax and fees. Payments are higher, but each one builds ownership, and they stop when the loan is paid off.
Cash: no interest, but the money is tied up in a car that keeps losing value.
Lease vs buy a car: the cost over three years
Compare both ways over the same period, and count what you spend minus what you still own at the end.
Example (made-up round numbers): a $50,000 car that's worth $30,000 after three years, a 10% tax rate chosen for easy math, and the same cost of money both ways: a lease money factor of 0.00200 and a loan rate of 4.8%. Fees are left out of both.
Lease for 36 months with nothing down: $20,000 of depreciation, $5,760 of rent charges and $2,576 of tax on the payments. About $28,340 in total, and you hand the car back.
Buy with a 60-month loan and sell after 36 months: $20,000 of depreciation, about $5,780 of interest and $5,000 of sales tax on the full price. About $30,780 in total, once the sale pays off the rest of the loan.
In the example, the finance costs are nearly equal. The gap is tax: the buyer paid tax on the whole $50,000, including the $30,000 of car they sold on, while the lessee paid tax only on the payments.
Lease vs buy over the long run
Same made-up example, stretched to six years: two back-to-back leases cost about $56,670, assuming the second costs the same as the first. Buying the car and keeping it costs about $61,970 in loan payments; if it's worth $20,000 at six years (another made-up figure), the net cost is about $41,970. Owning wins by a wide margin because the steepest drop in value happens in the first years, and the owner pays for it only once.
The owner also pays for tires, brakes and any repairs after the warranty ends, which narrows the gap. The longer you keep a reliable car, the further ahead owning gets.
Lease vs buy in California: the tax rules
A purchase is taxed on the full price, trade-in or not. California doesn't let a trade-in allowance reduce the taxable amount. If you buy and trade every few years, you pay tax on the full price of every car.
A lease is taxed as you pay. Each payment is taxed, along with taxable amounts at signing such as a cash down payment. The residual is never taxed unless you buy the car.
A buyout is taxed as a sale. Lease first and buy later, and you pay tax on the payments, including the rent charge, and then on the buyout price. That's slightly more than buying at the start, because interest on a car loan isn't subject to sales tax.
DMV fees are similar either way. The yearly vehicle license fee is 0.65% of the car's value, whether you lease or own it.
Details in California sales tax on a car lease.
What you pay for in each
It comes down to years and miles. How long you keep a car, how far you drive.
Lease
The car's loss in value, a rent charge, tax and fees. You own nothing at the end unless you buy the car.
Best whenyou'd replace the car within two to four years and your miles fit an allowance
Loan
The whole price plus interest, tax and fees. Payments are higher, but they stop when the loan is paid off.
Best whenyou keep cars six years or longer, or drive well beyond a typical allowance
Cash
No interest, but the money is tied up in a car that keeps losing value.
Leasing is often cheaper for a short stay in California, partly because a lease is taxed only on what you pay. Buying usually costs less long term.
When leasing makes sense
You'd replace the car within two to four years anyway.
Your yearly miles fit an allowance comfortably; most leases allow 10,000 to 15,000 a year.
You want to stay within the factory warranty for as long as you have the car.
You'd rather not sell or trade a used car yourself.
The lease on the car you want has a high residual or a low money factor, which can make it cheaper than a loan on the same car.
You use the car for business. The tax treatment differs, so see leasing a car through your business and ask your CPA.
When buying makes sense
You drive well beyond a typical allowance.
You keep cars six years or longer.
You want to modify the car, or it will take hard use.
You might need to get out of the car early, since ending a lease early is expensive.
You want to stop making car payments at some point.
Lease vs finance: what's the difference?
Both are usually arranged at the dealership and paid monthly to a lender. Financing is a loan for the whole price: you own the car, can sell it anytime, and the payments stop when the loan is paid off. A lease covers only the value you use plus a rent charge, so the payment is lower for the same car and term, but you accept mileage and wear limits and either return the car or buy it at the end. The mechanics are in how a car lease works, and the end-of-lease choices in buying out your lease and getting out of a car lease early.
Questions to answer before you choose
How many miles did you drive in each of the last three years?
How long did you keep your last two cars?
For the same car, what's the total cost of the lease over its term, and what would a loan cost over the same period once you subtract the car's value?
Would a large down payment on a loan leave you short of cash for other things?
Could your plans change in a way that would force you out of a lease early?
The residual value on a lease quote is a useful guide to what the lender thinks the car will be worth at the end of that term.
How 021 helps
021 Auto Leasing is a California-licensed auto broker for leases, financing or cash purchases on any make and model, from everyday cars to exotics. Several dealers quote the same car, and you get one written quote with the payment, drive-off, term, miles, taxes, fees and our fee before you agree to anything.
Before you choose
Five questions to answer first.
Compare the total cost over the time you'll really keep the car, not the monthly payment.
- Your milesHow many miles did you drive in each of the last three years?
- Your last two carsHow long did you keep each one?
- Total cost, same carThe lease over its term, against a loan over the same period minus the car's value.
- Cash left overWould a large down payment on a loan leave you short for other things?
- Plans that could changeCould they force you out of a lease early? Ending a lease early is expensive.
Common questions
Is it better to lease or buy a car in California?
What is the biggest downside to leasing a car?
Is it financially smarter to lease or finance a car?
Do you pay sales tax twice if you lease and then buy the car?
Can you buy a car at the end of a lease?
Are lease payments lower than loan payments?
021 Auto Leasing is a licensed California autobroker (license #82402). All new cars arranged for sale are subject to price and availability from the selling franchised new car dealer.