When in the market for a new car, the question always arises: Is it better to buy or lease? The answer, as with many decisions in life, isn’t one-size-fits-all. While opting for a used car can often be a prudent choice, let’s explore buying vs leasing a new car.

Buying & Financing a New Car

Let’s say you found the car you wanted to purchase for $50,000. After closing costs like sales tax and dealer fees, the total financed amount is $50,000 after a $5,000 downpayment. If your rate is 5%, and your term is 4 years, your payment will be $1,151.46.

Leasing & Financing a New Car

Instead of purchasing the car, you go the route of leasing it.  After closing costs like sales tax and dealer fees, the total financed amount is $25,000 after a $2,500 downpayment. If your rate is 5%, and your lease term is 4 years, your payment will be $575.73.

Which Route is Better?

The reason lease payments are less is that you don’t own the vehicle at the end of the term. You and the dealer agree on the value of the vehicle at the end of the term and finance the difference. Essentially, you are financing the depreciation of the vehicle, and this decision is made at the time of purchase.

Usually, your lease will include a purchase option. The purchase option price is determined at the beginning of your loan term. Let’s say that this amount was the residual value calculated earlier of $25,000.  If you used the purchase option, your payment on the lease would be the same $575.73 for another 4 years.

By using the purchase option, you have the same total interest on the loan, but end up paying it over 8 years instead of 4.  What’s even stranger is if you decided to finance the total $50,000 over 8 years at 5%, your payment is $633 / month which adds an extra interest over the life of the loan of $5,497.32.


In our opinion, if you end up purchasing a used car, buying it tends to be the prudent option.  If you are looking for a new car, leasing it tends to by more favorable, especially if there is a purchase option.  As allows, each situation is different, so we encourage you to run these numbers independently. 

Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser

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