Should you buy or lease a car based on math

Jason Chan
September 14, 2022

If you’re here just to use the free calculator, click here. The blog below explains how the calculator works and what inputs you need to use it.

Getting a car is a big financial decision that should not be taken lightly. Outside of a house, a car is probably the largest single expense for most Americans. Similar to a house, you can buy a car in cash, finance it, or rent/lease it. But figuring out which is best for your situation can be challenging, which is why it helps to see your payments for each option in a spreadsheet.

From a financial standpoint, you can figure out whether you should lease or buy a car with a spreadsheet. Admittedly, these calculations won’t take into account other things that you may consider, such as convenience of leasing a car or being able to trade in a leased car for the newest model. But it will give you a visual of the investment involved.

How to build a buy versus lease calculator for a car in a spreadsheet

The first step is to list all of the known variables of the car lease. For our simplified calculator, all you need to know is the:

  1. Price of the car (There is a list price and often a negotiated price, which can be different, so we have included both)
  2. Date you plan on purchasing (this is so you can see your monthly payments should you lease)
  3. Lease Period
  4. Payoff (this just means how much you have to pay at the end of the lease to keep the car)
  5. Interest Rate (treat this as the amount you would accrue if that money was sitting in a savings account instead of being used to buy the car — you are foregoing those funds by leasing)
  6. Sales Tax
  7. Annual Property Tax (only applicable if you buy)
  8. Your Monthly Lease Payment

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With all of these variables, you can go on to build a calculator like this, which will tell you which option is better: buying or leasing and by how much.

This calculator is simple. It calculates the total cost you will pay for leasing a car by adding up all of the individual future payments you will pay. When you lease a car, you have to make payments monthly for the car for a set period of time. Usually at the end of the lease, you can convert it into another lease for a new car or you can buy the car. Because we’re trying to compare to purchasing a car, it only makes sense to assume you will buy the car after the lease period is over in the calculation.

After you figure out all of the different monthly payments, you need to figure out the present value of all the payments and compare it to the cost you will be paying if you buy the car in cash today. Obviously, you want to pick the option where you’re paying less money.

The general idea of the present value of cash flows comes from the concept called the Time Value of Money, which states that “a dollar today is worth more than a dollar tomorrow.” Said another way, you’d rather have $100 today versus $100 in 10 years, because the $100 today can be invested and will likely grow to be more than $100 in 10 years. This is applied in the lease payments because most of the monthly payments are actually made in the future, and it’s accounted for in the “Interest Rate” line.

Figuring out whether you should buy a car or lease it can feel complicated and confusing, but it’s actually quite easy to break down the financials in a spreadsheet! To get started, use our free buy vs. lease car calculator.

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