Should You Buy or Lease a Car? What the Math Actually Says

The car showroom runs on one number: the monthly payment. It is the wrong number. Whether you buy or lease, the real cost is the sum of depreciation, financing, insurance, fuel, maintenance, taxes, fees, and the resale value you do or do not recover, spread across the years you actually keep the car. Once you look at lifetime cost instead of the payment, the buy-versus-lease question gets more interesting than the usual advice admits.

A car is a consumption asset

For a DIY investor, a car is a depreciating, financed, insured, maintained consumption good. AAA estimated the 2025 average cost to own and operate a new vehicle at about $11,577 per year, roughly $965 a month, and identified depreciation as the single largest ownership cost at about $4,334 a year.¹ The right question is not “lease or buy” in the abstract. It is which path gives you the transportation you need at the lowest lifetime cost and risk. The true cost of owning a car guide breaks down all of these ownership costs; this one focuses on the lease-versus-buy decision.

What a lease actually prices

A lease payment is mostly the depreciation the car is expected to suffer during the lease, plus a rent charge that works like interest, plus taxes and fees. Federal Regulation M requires lessors to disclose the gross capitalized cost, any capitalized cost reduction, the adjusted capitalized cost, the residual value, the depreciation amount, the rent charge, and the total of the payments.² Two quirks matter. There is no federal requirement for a lessor to disclose a lease rate or APR, so the financing cost is harder to see than on a loan. And mileage limits exist because the residual value depends on expected mileage, which is why driving more than the contract assumes costs you per-mile fees at lease end.³

So a lease does not make depreciation disappear. It packages it, prices it, and hands the residual-value risk to the leasing company. You give up the upside if the car holds value better than expected, and you avoid the downside if it holds value worse.

The comparison that decides it: how long you keep the car

Most lease-versus-buy debates quietly cheat by comparing different holding periods. The honest comparison holds the period fixed:

• Lease new every three years versus buy new and trade every three years. These are close. Both strategies keep you in the steep early-depreciation years and never let you escape a payment.
• Lease new every three years versus buy and hold for ten. This is where buying pulls away. The buyer absorbs the worst depreciation once, then amortizes it over many more years of use while the loan disappears.

That is the whole math sentence: leasing is competitive against short-cycle ownership and expensive against long-cycle ownership. The calculator below lets you see the crossover for your own numbers.

Run the numbers

This compares three strategies on a present-value basis over the same holding period: lease continuously, buy new and hold, and buy a roughly three-year-old used car and hold. The buy paths net the resale value against any loan still owed at sale. Move the holding-period toggle and watch the lines cross.

With 2026-average defaults, leasing tends to look best at three years, buying used wins across most medium horizons, and buying new overtakes leasing once you keep the car long enough for the loan to end. Your deal will differ, which is the point: the answer depends on the holding period and the specific prices, not on a slogan.

Who carries the residual-value risk

Depreciation is the center of the decision because it is the largest and least visible cost. The Bureau of Labor Statistics estimated that automobiles bought new depreciate about 12.1% a year on average, versus about 10.3% a year for those bought used, with the heaviest loss in the first year and the rate slowing as the car ages.⁴ A new car typically gives up around 40% of its value in the first three years, which is exactly the stretch a three-year lease covers.

When you buy, you carry that depreciation and the uncertainty around it. When you lease, the lessor sets a residual value up front and carries the risk that the car is worth less than that at lease end. Leasing is a form of residual-value insurance: you pay a premium for predictability, and like any insurance it is a good deal only when the premium is fair.

New versus used

Buying used often wins on lifetime cost because someone else already paid for the steep early depreciation. The advantage is not automatic. Used cars carry more repair uncertainty and higher financing costs: in early 2026 the average used-car loan APR was about 10.8%, against about 6.9% for new.⁵ The used market is not cheap right now either, with average listing prices near $26,918 in May 2026.¹³

Used buying also runs into the classic problem George Akerlof described in his “market for lemons” work: sellers usually know more about a car’s condition than buyers, so buyers rationally discount prices and good cars can get crowded out.⁶ The practical answer is process: service records, a pre-purchase inspection, accident and ownership history, reliability data, and certified pre-owned or warranty terms. Used is mathematically attractive and operationally demanding.

Why leasing exists, beyond bad math

Leasing is sometimes dismissed as a trap for people who cannot do arithmetic. The research is more interesting. Hendel and Lizzeri modeled leasing as a useful contract in markets with asymmetric information, predicting that leased cars turn over more often and that off-lease used cars are higher quality, both of which match what we observe.⁷ Johnson and Waldman added the maintenance angle: because a lessee does not keep the car, leasing interacts with how well cars get maintained, which helps explain why leasing concentrates among higher-income new-car drivers and why cars leased when new tend to resell for more.⁸ Leasing is a market response to information and residual-value risk, not only a financing gimmick.

When leasing makes sense

Leasing can be the rational choice for:

• Drivers who would buy new and trade every two to four years anyway, for whom leasing can be cleaner than repeated buying and selling.
• People who value warranty certainty and dislike repair surprises.
• Drivers with predictable mileage who stay within the lease limit.
• Households facing near-term uncertainty: a possible relocation, a job change, or a growing family.
• Vehicles whose future value is genuinely hard to price, such as fast-moving technology categories.
• Genuinely subsidized leases, where the manufacturer inflates the residual, lowers the rent charge, or adds lease-only incentives.

One subsidy that used to help is gone. Some electric-vehicle leases were attractive because the leasing company could claim a commercial clean-vehicle credit and pass value through. The IRS says the New, Previously-Owned, and Qualified Commercial Clean Vehicle Credits are not available for vehicles acquired after September 30, 2025, so that lease advantage no longer applies.⁹

When buying makes sense

Buying usually wins for:

• High-mileage drivers, because lease mileage penalties get expensive fast.
• Anyone who keeps cars eight to twelve years, because ownership amortizes the early depreciation over far more years of use.
• Drivers who are hard on cars, have kids or pets, or risk excess-wear charges.
• People who modify vehicles or have unusual use cases.
• DIY investors optimizing their savings rate, because escaping a perpetual car payment frees up cash that compounds.

The strongest version of the buy case is not simply buying. It is buying the right car at a fair price and keeping it.

Car payments in 2026 are big enough to matter

Auto affordability is strained, which raises the stakes on this decision. Edmunds reported a record average amount financed for new vehicles of about $43,899 in the first quarter of 2026, an average new-car payment of about $773, one in five financed buyers paying $1,000 or more a month, and 84-month-or-longer loans reaching a record 22.9% of financed new purchases.⁵ Experian put the average new-vehicle loan near $43,925 with terms around 69 months.¹⁰ Total auto-loan balances reached about $1.685 trillion, with the flow into serious delinquency around 2.97%.¹¹ With the average new car transacting near $49,220, a car decision now moves a household’s savings rate and debt fragility, not just its monthly budget.¹²

There is a behavioral reason the payment dominates shopping. People tend to underweight the costs that are less visible than the payment: fuel, maintenance, insurance, and resale value. The academic evidence on whether buyers fully value future operating costs is mixed. Busse, Knittel, and Zettelmeyer found little evidence of myopia, with car prices implying discount rates close to the interest rates buyers actually pay, while Allcott and Wozny estimated that prices move as if a dollar of future gasoline cost is worth only about 76 cents today.¹⁴¹⁵ Either way, a calculator that surfaces the full cost beats shopping on the payment alone.

A DIY investor’s hierarchy

For most people, the cost-minimizing order looks like this:

1. Best for most: buy a reliable used or modest new car and keep it a long time.
2. Often reasonable: buy new if you will keep it eight to twelve years and value the known history and warranty.
3. Sometimes rational: lease if the deal is genuinely subsidized, your mileage is predictable, flexibility is worth a premium, or the residual value is unusually hard to price.
4. Usually worst: rolling from one expensive payment to the next, especially with long loans, negative equity, and short holding periods.

The better question to carry into a dealership is not “lease or buy?” It is: am I paying for transportation, flexibility, status, warranty certainty, or a hidden financing structure, and is that trade worth the compounding I am giving up?

Frequently asked questions

Is leasing always a bad financial deal?

No. Leasing is a contract that prices depreciation and financing, and it can be competitive when you would trade cars every few years anyway, when a lease is genuinely subsidized, or when you place real value on warranty coverage and flexibility. It tends to lose against buying and holding a car for many years, because the lease keeps you paying through the car’s cheaper, later years.

Should I buy new or used?

Used often wins on lifetime cost because the first owner absorbed the steepest depreciation, but used cars carry higher financing rates and more repair uncertainty, so the edge depends on buying carefully. Buying new makes more sense when you plan to keep the car a long time and value the known history and full warranty.

Does leasing ever beat buying outright?

Yes, mainly at short holding periods and on subsidized deals. If you compare leasing against buying new and trading on the same short cycle, the two are close, and a well-subsidized lease can come out ahead. The advantage fades the longer you would otherwise keep a purchased car.

How long should I keep a car to make buying worthwhile?

There is no single number, but the buy-and-hold advantage grows the longer you keep the car past the loan payoff. Keeping a car well beyond the loan term, often eight years or more, is usually where buying clearly beats a continuous lease. The calculator above shows the crossover for your inputs.

Sources

1. AAA. Your Driving Costs 2025. New-vehicle ownership about $11,577/yr; depreciation the largest cost at about $4,334/yr.
2. Consumer Financial Protection Bureau. Regulation M, 12 CFR 1013.4 (Content of disclosures). Required vehicle-lease disclosures.
3. Federal Reserve. Vehicle Leasing: Frequently Asked Questions. No federal lease-rate disclosure requirement; mileage limits tied to residual value.
4. U.S. Bureau of Labor Statistics. A consumption measure for automobiles. New autos depreciate about 12.1%/yr, used about 10.3%/yr; heaviest in year one.
5. Edmunds. Q1 2026 financing report. Record $43,899 financed; $773 average new payment; 22.9% of new loans 84+ months; used APR ~10.8% vs new ~6.9%.
6. Akerlof, G. A. (1970). The Market for “Lemons”. Quarterly Journal of Economics, 84(3), 488–500.
7. Hendel, I., & Lizzeri, A. (2002). The Role of Leasing under Adverse Selection. Journal of Political Economy, 110(1), 113–143.
8. Johnson, J. P., & Waldman, M. (2010). Leasing, Lemons, and Moral Hazard. Journal of Law and Economics, 53(2), 307–328.
9. Internal Revenue Service. Clean vehicle tax credits. Credits not available for vehicles acquired after September 30, 2025.
10. Experian. State of the Automotive Finance Market, Q1 2026. Average new loan ~$43,925; terms ~69 months.
11. Federal Reserve Bank of New York. Household Debt and Credit, Q1 2026. Auto balances ~$1.685 trillion; serious delinquency flow ~2.97%.
12. Cox Automotive / Kelley Blue Book. New-vehicle average transaction price, May 2026. About $49,220.
13. Cox Automotive. Used-vehicle prices, May 2026. Average listing price about $26,918, up ~6% year over year.
14. Busse, M. R., Knittel, C. R., & Zettelmeyer, F. (2013). Are Consumers Myopic? Evidence from New and Used Car Purchases. American Economic Review, 103(1), 220–256.
15. Allcott, H., & Wozny, N. (2014). Gasoline Prices, Fuel Economy, and the Energy Paradox. Review of Economics and Statistics, 96(5), 779–795.

Related guides

• The True Cost of Owning a Car breaks down depreciation, fuel, maintenance, and cost per mile.
• Rent vs. Buy a Home applies the same holding-period and opportunity-cost math to housing.
• Savings Rate vs. Investment Returns shows why a freed-up car payment can matter more than portfolio tweaks.
• Debt Avalanche vs. Snowball helps if an auto loan is part of a larger debt picture.