Is leasing or buying cheaper overall?
Over a long enough horizon, buying almost always wins on total cost, because you eventually own an asset with residual value and stop making payments. Leasing wins on monthly cash flow and on flexibility. The crossover usually falls somewhere between years four and six for a vehicle. The honest framing is not which is cheaper in the abstract, but which is cheaper given how long you will actually keep it — and most people overestimate that.
What does a lease payment actually cover?
Three components. Depreciation: the value the asset loses between delivery and return, which is normally the largest part. The finance charge, expressed as a money factor rather than an interest rate — multiply the money factor by 2,400 to get the approximate APR. And tax, applied differently by jurisdiction. You are paying for the portion of the asset's life you consume, not the asset, which is why lease payments are lower than loan payments on the same item.
What is residual value and why does it matter so much?
The residual is what the leasing company forecasts the asset will be worth at the end of the term, and it sets your payment: you finance the gap between price and residual. A high residual means a low payment, which is why the same monthly figure can represent very different deals. It also creates an opportunity — if the market value at lease end exceeds the residual, buying out the lease and reselling can be worth real money.
What costs do people forget when comparing?
On the lease side: mileage overage charges, wear-and-tear assessments at return, disposition fees, and the acquisition fee baked into the start. On the buy side: the opportunity cost of the deposit, higher insurance in some cases, maintenance once warranty expires, and the effort of selling. A comparison that stops at monthly payment versus monthly payment will usually flatter the lease.
Does the tax position change the answer?
Often decisively, for businesses. Lease payments are typically deductible as an operating expense in the period incurred, while a purchase is capitalised and depreciated over years, sometimes with accelerated allowances available in year one. Which is better depends on your profit position and local rules — a business wanting a large immediate deduction may prefer buying with accelerated depreciation, while one wanting smooth predictable expenses may prefer leasing. Worth an accountant's view on any material amount.
When is leasing clearly the right call?
When you genuinely want a new asset every two to three years; when the technology dates quickly; when predictable monthly cost matters more than total cost; when a business needs the asset off its balance sheet or wants the expense treatment; and when you drive or use predictably within the allowance. Leasing is clearly wrong when you keep things a long time, exceed mileage limits, or want to modify the asset.