Standard Example

• In order to see which option fits best with your situation you need to be comparing a comparable situation. In the following case, the price of the car will be set at $20,000 and the length of the lease or loan will be three years. A down payment of $1,000 will be used, and the interest rate is 6% in both cases.
  
  

Lease Definitions

• The cost of the lease is made up of two pieces. The first is the down payment. This is something that can be set at zero or several thousand dollars, depending upon how you negotiate the terms. Usually the higher the down payment, the lower the monthly lease payment. The second part is the monthly payment. This is a percentage of the cost of the vehicle that is paid each month.
  
  

Lease Costs

• In this case, with a three-year lease, 6% interest rate and $1,000 down payment, the monthly lease payment will be about $350. Over the course of a year, the cost paid towards the car will be $4,200 and over the course of the lease, the cost will total $12,600 plus the down payment. At the end of the lease, you can either purchase the car or turn it back over to the dealer. You do not have any equity in the car.
  
  

Purchase Costs

• Using the same scenario, if you purchase the car with a loan, the monthly payment will be about $625 per month, or $7,500 per year. The total payments over the course of the loan will be $22,500, plus the down payment. At the end of the loan period you will fully own the car.
  
  

Comparison

• Leasing this car will cost about $350 per month and $13,600 over the course of the three-year lease. Purchasing will cost $625 per month and $23,500 over the three-year loan period. The total difference is nearly $10,000, but you will own the car if you purchase it and you won't have any equity if you lease it. Also, most leases have a maximum yearly mileage limit, and if you go over this limit you will pay a per-mile charge. If you purchase the car (from the start or after a lease has ended) there will be no limit. If you plan on driving quite a few miles, then this is something very important to include in your comparison. In the end, if having full ownership of the car at the end of the payment term is important to you, and higher monthly prices are not an issue then purchasing is the better option. If lower payments are your primary concern, and you would prefer to get a new car every three years then leasing is the way to go.