When You Sell the Car Three Years Into a Five-Year Loan

Equity is what you own minus what you still owe

Most lease-versus-buy comparisons quietly assume the loan is finished when the comparison is. This one is not, and the gap between those two assumptions is where a great many car decisions go wrong.

Sell the car at the end of this horizon and you do not receive its value. You receive its value minus whatever is left on the loan, because the lender is paid before you are. That subtraction is the whole subject of this page. A $36,000 car worth $21,000 three years later sounds like a comfortable position, right up until the remaining balance on a five-year loan is taken out of it, and an amortising loan retires principal slowly at the start. Early payments are weighted toward interest, so a loan that is three fifths through its term is nowhere near three fifths paid off.

The calculator handles this by carrying both paths all the way to the month you entered rather than to their own natural ends. The buying column counts every payment actually made by that month, adds the cash put down at the start, and then subtracts the car's value at the horizon net of the balance still owed. What is left is the real out-of-pocket cost of those three years of driving, and it is a larger number than the payments alone suggest in one direction and a smaller one in the other. The comparison table shows the pieces separately so you can see which of them is moving.

This is also the scenario in which a longer loan term reveals its price. Stretching a loan lowers the monthly payment, which is what makes it attractive at the desk, but it slows the rate at which the balance falls and leaves more of it standing at any moment you might want out. The payment you feel every month and the position you are in if your plans change are two different things, and the term is the input that trades one for the other. Change the loan term here, leave everything else alone, and the equity row will tell you the exchange rate.

None of this is an argument against financing. It is an argument for measuring the decision at the month you actually expect to make it, which is what the horizon input is for.

One lease, ended cleanly, and why that makes this comparison unusually honest

The other half of this scenario is what the leasing column is not doing. The lease term and the horizon are the same length, so the calculation does not assume a second lease at all. Exactly one contract runs from the first month to the last, one amount is due at signing, and the disposition fee is charged once when the car goes back.

That matters more than it sounds. Whenever the horizon outlives a lease, the comparison has to guess at a renewal, and a guess about a quote years away is the softest number on the page. Here there is no guess. Every figure in the leasing column is something a quote in front of you today already states, which makes this one of the few configurations where the lease side of the comparison is fully known in advance.

So the two columns are honest in different ways, and the difference is instructive. The leasing total is close to fixed: the payments are contractual, the disposition fee is contractual, and the end of the term is a date rather than a market. The buying total is not. It depends on what a three-year-old car is worth on the day you sell, and that is the one number on this page nobody can hand you — not a dealer, not a pricing guide, and not this calculator. It is an input because it is genuinely yours to estimate.

That asymmetry is worth carrying into the decision rather than resolving with a shrug. If you are the sort of person who wants to know the number before signing, leasing gives you that and charges you for it. If you are willing to hold uncertainty about the resale market in exchange for the chance that it goes your way, buying gives you that instead. Run this page twice, once with the value at the horizon you actually expect and once with a value several thousand lower, and the width of the gap between the two answers is the size of the bet you are being asked to place.

The costs that never appear on the quote

The monthly payment is the number the dealership wants you to compare, and it is the number that leaves the most out. The costs people are surprised by later are almost all on the leasing side, and they share a family resemblance: none of them are charged while you are driving, and all of them arrive at once when you hand the car back.

Mileage is the first. A lease sets an annual allowance, and every mile beyond it carries a per-mile charge that is agreed at signing and collected at the end. The rate looks trivial written down. It stops looking trivial when it is multiplied by a few thousand miles across a three-year term, and it is charged whether or not the extra driving affected what the car is actually worth. Before you sign anything, look up how far you genuinely drove last year rather than how far you think you drive. If you are close to the limit, buying the extra miles in advance is normally cheaper than paying the overage, and if you are far above it, the real comparison is not the one on the quote.

Wear and tear is the second, and it is more subjective. Returned cars are inspected against a standard for what counts as normal, and kerbed alloys, a windscreen chip, a scuff on a bumper or a stain on a seat can each become a line item. None of these would cost you anything on a car you own, because you would simply live with them or fix them when convenient. On a lease they are converted into cash at the moment of return, alongside the disposition fee that is charged for the privilege of taking the car back at all. This calculator includes the disposition fee explicitly, once for each lease you actually complete within the horizon, so a horizon that spans two leases carries two of them.

There is one more asymmetry worth naming, which is what happens when your circumstances change. Getting out of a lease early is generally expensive and awkward, because the contract is written around a fixed term. Selling a car you own is neither: you list it, you take the price, you pay off whatever remains on the loan. Neither this nor the wear-and-tear risk is modelled in the numbers above — they cannot be, without inventing figures. They belong on the leasing side of the ledger anyway, and you should weigh them there.

The answer mostly depends on how long you keep cars

Strip away the fees and the jargon and one variable does most of the work: how long you keep a car before you replace it.

If you replace your car every three years without fail, leasing and buying converge, and leasing can genuinely come out ahead. You are paying for the steepest part of the depreciation curve either way, and the lease at least spares you the trouble and uncertainty of selling. If you keep cars for eight or ten years, buying wins and it is not close. The loan ends, the payments stop entirely, and every year after that you drive a car that costs you nothing but fuel, insurance and maintenance while a leaseholder is still writing a cheque every month, forever. Push the horizon on this page out past your loan term and you will watch that effect appear in the numbers.

So set the horizon to the truth about yourself rather than to the term of the quote in front of you. Be honest about it. Someone who has traded every car at three years is unlikely to hold the next one for a decade, and someone who drives cars into the ground should not be modelling a five-year comparison. That single input moves the verdict more than any fee discussed on this page.

And when the numbers come out close, take that seriously as an answer in itself. Two figures within a few hundred dollars of each other, built on a resale value that is a guess, are not distinguishable. At that point decide on the things the arithmetic cannot hold: whether you want to own something at the end, whether an unpredictable repair bill would be a problem, whether you drive far enough to make a mileage cap a constant irritation, and whether you would rather have a newer car more often or no payment at all in year six.