Methodology: the complete lease-vs-buy model

What this site calculates — and why you can check it

Every calculator on this site is a thin interface over a single calculation engine: a pure, framework-free TypeScript module with no UI code in it. Each formula documented on this page is implemented exactly once in that engine and covered by automated tests that assert the worked example below, digit for digit. If the code and this page ever disagreed, the test suite would fail and the site would not build.

The numbers on this page are not typed in by hand, either — they are computed by that same engine when the page is built, then formatted for display. What you read here is, mechanically, what the Lease vs Buy Calculator computes. None of it is live market data: every default is an editable estimate documented below with its rationale.

The lease payment model

We model the standard US closed-end lease — the structure whose required disclosures are defined by Regulation M, the federal Consumer Leasing rule. Four formulas produce the payment:

• Adjusted capitalized cost = negotiated price + capitalized fees − cap cost reduction
• Residual value = residual percentage × MSRP
• Depreciation fee = (adjusted capitalized cost − residual value) ÷ term in months
• Rent charge (finance fee) = (adjusted capitalized cost + residual value) × money factor

The pre-tax payment is the depreciation fee plus the rent charge. The money factor converts to a familiar rate as APR % = money factor × 2400 (0.00250 ≈ 6% APR). For tax, most US states tax each monthly payment (our default basis); a few tax the vehicle price upfront instead, and the engine supports both. Most US states tax each monthly lease payment; a few tax the full price upfront. Set the basis to match your state.

Worked example — the exact numbers our tests assert

With the site defaults ($45,000 MSRP, $42,500 negotiated, $2,000 cap cost reduction, 36-month term, 57% residual, 0.00250 money factor, $695 capitalized acquisition fee, 7% tax on the payment):

So the default lease costs $640.84 per month with $2,640.84 due at signing (the first payment plus the $2,000 cap cost reduction; the acquisition fee is capitalized, so it is paid inside the monthly payment rather than at signing). At lease end there is a $395 disposition fee, plus $0.25/mile for any miles over the 12,000 miles-per-year allowance.

The buy model

Buying finances the taxed price minus your down payment: amount financed = negotiated price × (1 + tax rate) + upfront fees − down payment. With the defaults: $42,500 × (1 + 7%) + $500 − $2,000 = $43,975. A standard amortizing loan at 7% APR over 60 months gives a payment of $870.76/month, using the usual formula P × r ÷ (1 − (1 + r)⁻ⁿ) with r = APR ÷ 12 and n = the term in months.

• Depreciation: a smooth two-stage exponential — the vehicle loses 20% of its value across year one, then 15% of the remaining value each subsequent year, interpolated smoothly for fractional years. Value at t years = price × (1 − 20%)^{min(t, 1)} × (1 − 15%)^{max(t − 1, 0)}.
• Equity: at any month, equity = resale value − remaining loan balance. The remaining balance follows the standard amortization schedule.
• Payment-free months: when your holding horizon outlasts the loan — the default 6 years horizon against a 60-month loan leaves 12 months with no payment at all — the buy path's monthly outflow drops to maintenance only. Those months are a large part of why long holders favor buying.

The apples-to-apples comparison

Comparing one lease payment to one loan payment is the classic mistake — the loan builds equity and eventually ends, the lease does neither. As the FTC's guide to financing or leasing a car notes, the two are different products; comparing them takes a model. Ours has four parts:

• Serial leasing. If you lease, you will lease again — so the lease path starts a new, identical lease every term for as long as you keep driving, paying every due at signing, disposition fee and excess-mileage charge along the way. A final lease cut short by your horizon pays the disposition fee plus prorated excess mileage (a documented simplification — see below).
• Buy and hold. One purchase, loan payments until the loan ends, age-based maintenance, and resale equity recovered at the horizon.
• Invest the difference. Each month, whichever path spends less invests the gap at your assumed return (6%/yr by default), compounded monthly at rate ÷ 12 — the same convention as the SEC's Investor.gov compound interest calculator. This makes both paths deploy identical total cash, which is the only honest way to weigh a cheaper payment against equity.
• Net position. At the horizon, net position = assets (vehicle equity + side investments) − total cash deployed, and net cost = −net position. The break-even point is the first month from which buying stays ahead of leasing all the way through your horizon.

What the defaults produce

In words: over 6 years, buying comes out ahead by roughly $7,200, the buy path pulls permanently ahead around month 43, and the owned car is still worth about $15,086 at the end. Shorten the horizon below the break-even point and leasing becomes competitive — which is exactly the point of modeling your horizon instead of arguing in general. See why the break-even horizon dominates the decision.

Every default and its rationale

Every default is an editable estimate — never live market data — and unless a rationale says otherwise, it is an editorial assumption chosen to be typical and internally consistent. Confirm every figure with your dealer or lender before signing anything.

Known simplifications

Every model simplifies. These are ours, stated plainly so you can judge when they matter:

• Identical serial leases. Each re-lease uses the same price, money factor, residual and fees — no vehicle-price inflation or rate changes between leases. Over long horizons this tends to flatter the lease path slightly.
• Horizon-shortened leases. A lease cut short by your horizon is charged the disposition fee plus prorated excess mileage. Real early terminations usually cost more than that — so if you genuinely expect to exit a lease early, treat the lease path as optimistic.
• Month-boundary cash flows. Lease payments are modeled in advance, loan payments in arrears, and all flows land exactly on month boundaries.
• Age-based maintenance on both paths. The same schedule applies to both paths by vehicle age; each new lease resets the age (and therefore the maintenance cost) to zero.
• The investment return is your assumption. The 6%/yr default is not a forecast; it compounds monthly at rate ÷ 12 and you should test your own number.
• Taxes vary by state. We model the two common bases — tax on each payment (most states) and tax on the price upfront — but local rules on trade-in credits, fee taxation and caps differ.
• Per-path attribution under equal deployment. Because both paths deploy the same total cash each month (the cheaper path invests the gap), a small timing cost like the refundable security deposit's lost interest can show up as a change to the other path's side-investment balance rather than its own line. The lease-vs-buy difference — the verdict, savings and break-even — is unaffected; only the per-path attribution of a few dollars of time value can shift.
• Insurance is assumed equal by default. The model accepts a monthly insurance delta for the lease path, but it defaults to zero.

Drive it by URL or API

Every input to the model is a documented URL parameter, so any scenario is a shareable, reproducible link — and the same engine is callable programmatically. Parameter names, ranges and examples live on the URL parameters & API page. Terms used on this page are defined in the glossary.