Leasing a car is cheaper month to month, but financing is cheaper over the long run. In 2025, the average monthly lease payment ran about $596, compared with roughly $748 for a financed new car. The gap disappears once you factor in what happens after the loan is paid off: a financed vehicle eventually becomes yours free and clear, while leasing means you keep making payments and never build equity. Which side of the leasing vs financing a car question wins for you depends on your time horizon, how many miles you drive, and whether you’d rather protect cash flow now or total spending over the next decade.
Why Lease Payments Run Lower
A lease payment covers only the slice of the car’s value you actually use during the term. Lease a $40,000 vehicle with a projected residual value of $24,000 after three years, and your payments are calculated on the $16,000 difference, plus interest and fees. A loan finances the full $40,000, which produces a higher monthly payment even at the same rate.
The interest piece of a lease is quoted as a “money factor” rather than an APR. Multiply the money factor by 2,400 to get the equivalent annual rate. A money factor of 0.00125 works out to 3.0% APR. Compare that against loan rates before assuming the lease is the cheaper financing. Dealers don’t always volunteer the money factor, but federal law requires lessors to disclose how the monthly payment is calculated before you sign.
Cash Due at Signing
Both paths ask for money up front, but the amounts and their purposes differ. Lease drive-off costs typically include the first month’s payment, a refundable security deposit, a capitalized cost reduction (essentially a down payment), registration, taxes, and an acquisition fee generally between $595 and $1,095 depending on the manufacturer.
Financing a purchase usually calls for a down payment of at least 20% on a new car to secure decent loan terms and avoid being upside down from day one. On a $40,000 vehicle, that’s $8,000, compared with lease drive-off costs that often total $2,000 to $4,000. The lease requires less cash, but every dollar of drive-off money is spent. The financing down payment immediately becomes equity in the vehicle.
Long-Term Cost: Equity Versus Endless Payments
This is where financing pulls ahead. A new car loses roughly 60% of its value in the first five years. That sounds punishing, but a buyer who finances over five years and keeps the car another five spends half the ownership period making no payments at all. The remaining 40% of the car’s value is a real asset that can be sold or traded toward the next one.
A driver who leases back-to-back three-year terms pays for the steepest depreciation on every car and never has anything to show for it. After ten years, that driver has made roughly 120 monthly payments and owns nothing. A buyer who financed over five years made 60 payments, then drove payment-free for five years on a car that still had functional value. The longer the ownership period, the more lopsided the math.
The catch is repair risk. Leased cars are almost always under factory warranty. Owned cars eventually leave that window. A typical bumper-to-bumper warranty covers 3 years or 36,000 miles, whichever comes first.1Chevrolet. Chevrolet Owners Warranty Information After that, every repair comes out of your pocket. Even so, for most vehicles, the cumulative repair costs between years five and ten don’t come close to the lease payments you’d make over that same span.
Mileage Caps and Wear Charges
Leases limit how far you can drive, most often 12,000 or 15,000 miles per year. Go over and you’ll owe a per-mile penalty at return, generally $0.10 to $0.25 per mile, with higher rates on pricier vehicles.2Federal Reserve. Vehicle Leasing – More Information about Excess Mileage Charges Exceed a 36,000-mile cap by 5,000 miles at $0.20 each and you’re looking at a $1,000 bill you probably didn’t budget for.
The car’s condition matters too. At lease-end, an inspector checks for anything beyond “normal” wear. Dented panels, cuts or burns in upholstery, cracked glass, and worn tires can each trigger charges.3Federal Reserve. Vehicle Leasing – More Information About Excessive Wear-and-Tear Charges A short scratch on a bumper might pass; a deep gouge probably won’t.
Financed cars face the same wear from real life, but the owner decides when and whether to fix it. High mileage hurts resale value, but no one hands you a surprise bill for driving your own car.
What Happens When a Lease Ends
At the end of a lease you have three choices: return the car, buy it, or roll into a new lease. Each has its own costs, and knowing them ahead of time prevents ugly surprises.
Returning the Car
Hand back the keys and you’ll owe a disposition fee, typically $300 to $400, plus any excess mileage or wear charges from the inspection. The fee covers the lessor’s cost of remarketing the used vehicle. You leave with no car and no equity, but no further obligation either.
Buying the Car
Most closed-end leases include a purchase option. The price is usually a fixed amount set at signing (often the residual value) or the car’s fair market value at term-end, based on an independent used-car pricing guide.4Federal Reserve. Vehicle Leasing – End-of-Lease Purchase Option Expect a purchase-option fee, sales tax on the buyout price, and title and registration costs on top.
The buyout makes sense when the car’s market value beats the option price. If used car prices have climbed since you signed, you may get the vehicle for less than it’s worth. If the buyout is higher than market, you’re overpaying. One useful side effect: buying out the lease eliminates any excess mileage or wear charges you’d otherwise owe.4Federal Reserve. Vehicle Leasing – End-of-Lease Purchase Option
Ending a Lease Early
Walking away before the term is up is expensive. The early termination charge is the difference between the remaining lease balance and the credit you get for the car’s current value. If the payoff is $16,000 and the realized value is $14,000, you owe $2,000 on top of surrendering the car.5Federal Reserve. Vehicle Leasing – End-of-Lease Costs Early in the term, when the payoff is still high and the car hasn’t depreciated much, the penalty is at its worst. That’s one of the biggest hidden risks of leasing, and it catches people who change jobs, move, or simply realize the car doesn’t fit their life anymore.
Insurance and GAP Coverage
Lessors protect their financial interest by requiring more coverage than most states mandate or most lenders demand. Liability minimums on leased cars are typically higher than on financed ones, though the exact figures vary by lessor and vehicle.
Many lessors also require GAP insurance, which covers the difference between the car’s actual cash value and the remaining lease balance if the vehicle is totaled or stolen. Because lease balances often exceed the car’s depreciated value early on, GAP protection keeps you from owing thousands on a car that no longer exists. Some manufacturers include GAP at no extra charge. Others require a separate policy, adding $20 to $50 per month. When financing, GAP is optional but worth considering if your down payment was small.
How Sales Tax Applies
Sales tax treatment varies significantly by state. In many states, you pay tax only on each monthly lease payment rather than on the full vehicle price. On a $40,000 car with a 6% tax rate, that can save a lessee thousands compared with a buyer who pays tax on the entire price at signing. Other states tax the full capitalized cost of the lease upfront, erasing any advantage. Check your state’s rule before assuming leasing offers a tax break.
Credit Score Thresholds
Leasing generally demands stronger credit than financing. The average credit score for someone leasing a new car in late 2025 was 753, compared with 691 for someone financing a used one. A score of 700 or above opens the door to competitive lease offers with room to negotiate terms like zero down in exchange for higher monthly payments. Below 700, approvals get harder, and the rates offered often eat up the monthly savings that make leasing attractive in the first place.
Financing is available across a wider credit range, though lower scores pay substantially higher interest. The practical effect: if your credit is excellent, leasing gives you more flexibility. If it’s average, financing a moderately priced car may be the only realistic path, and it happens to be the option that builds equity anyway.
Federal Disclosures That Let You Compare
Two federal laws make sure you can compare costs before signing, one for each path.
For financing, the Truth in Lending Act requires lenders to clearly disclose the annual percentage rate and total finance charge before you commit. The APR and finance charge must be displayed more prominently than other terms in the loan documents.6Office of the Law Revision Counsel. 15 USC Chapter 41 Subchapter I – Consumer Credit Cost Disclosure
For leasing, the Consumer Leasing Act requires written disclosures before you sign. The lessor must tell you the total amount due at signing, the number and amount of every payment, the total of all periodic payments, any end-of-term liabilities, the purchase-option price and conditions, a description of required insurance, and the penalty formula for early termination.7Office of the Law Revision Counsel. 15 USC 1667a – Consumer Lease Disclosures Regulation M, the implementing rule, goes further and requires lessors to show how the monthly payment was calculated, including gross capitalized cost, residual value, and depreciation amount.8eCFR. 12 CFR Part 1013 – Consumer Leasing (Regulation M)
These disclosures are your sharpest tool for comparing the two options on equal footing. When a dealer offers you both a lease and a finance deal, ask for the federal disclosure forms for each and put the total-cost figures next to each other. The monthly payment tells you about cash flow. The total-of-payments figure tells you what the car actually costs.