Head-to-head
Car Lease vs Auto Loan
A lease and a loan put the same car in your driveway for the same three years, and they are priced on entirely different things. A loan amortises the whole price of the car. A lease finances only the part of it you are expected to use up. That single difference explains why the two payments are nowhere near each other, and why the smaller payment is not automatically the smaller cost.
Last updated
The lease payment has two halves. Depreciation is the gap between what the car is worth today and what the lender thinks it will be worth at the end, spread across the term. Rent is a finance charge on the money still tied up in the car, which is why the money factor is applied to the cap cost plus the residual rather than to the depreciation alone. A money factor of 0.00125 is an APR of about 3%, because the industry convention is to multiply by 2,400.
The loan payment has one half: interest on a balance that reaches zero in the final month. Nothing is left to negotiate afterwards, because you own the car outright — and what that ownership is worth is whatever the car actually sells for, which may be more or less than the residual the lease assumed.
So the comparison only becomes honest once you put a value on the car at the end. Compare total cash out and subtract what you still hold. Otherwise you are comparing one payment with another payment and calling the difference a cost.
Lease
How To Calculate A Car Lease Payment
A lease payment is the interest on the whole car plus the depreciation you consume while you drive it. Both halves are set by the price, the residual value and the money factor, so a small change in any of them moves the monthly figure.
Loan
How To Calculate Auto Loan Payment
A car loan is an amortizing loan like any other: a fixed payment retires the balance over the term. The car-specific wrinkle is the trade-off between payment size and total cost, and the effect of a trade-in and sales tax on the amount actually financed.
How They Differ
| Attribute | Lease | Loan |
|---|---|---|
| What you finance | Depreciation plus rent on the residual | The whole price, minus the down payment |
| Monthly payment | Lower, because only part of the car is financed | Higher, because all of it is |
| Cash due at signing | First payment, acquisition fee, sometimes a cap reduction | Down payment, first payment and fees |
| What you own at the end | Nothing — you hand the keys back | The car, with no lien on it |
| Mileage | Capped, typically 10,000 to 15,000 a year, excess charged per mile | Unlimited |
| Wear and tear | Charged at return if it exceeds the wear standard | Your problem, but you keep the value |
| Leaving early | Expensive: remaining payments or an early-termination charge | Sell the car and settle the balance |
| Sales tax | Charged on each monthly payment in most states | Charged on the whole price up front |
| Modifications | Restricted by the contract | Anything you like |
| Best when | You want the lowest cash outflow and a new car every three years | You keep cars for years or drive a lot |
The Same Numbers, Both Ways
A $35,000 car with $3,000 down over 36 months, a 55% residual and a 0.00125 money factor, against a 6.5% loan on the same $32,000 balance.
- Vehicle price
- $35,000
- Down payment
- $3,000
- Term
- 36 months
- Residual
- 55% of sticker
- Money factor
- 0.00125
- Loan APR
- 6.5%
| Line | Lease | Loan |
|---|---|---|
| Monthly payment | $418.23 | $980.77 |
| Depreciation portion | $354.17 | Principal and interest |
| Finance charge portion | $64.06 | $91.88 |
| Cash out over the term | $18,056.25 | $38,307.65 |
| What you still hold | $0.00 | $19,250.00 |
| Net cost after that | $18,056.25 | $19,057.65 |
The lease costs $418.23 a month and $18,056.25 over three years, and you hand the car back. The loan costs $980.77 a month and $38,307.65, and leaves you holding a car the contract values at $19,250.00 — a net $19,057.65. That is $1,001.40 more than leasing, which is the price of owning the car outright instead of renting it for three years.
When To Use Each
Lease
- You want a new car every few years and care more about the monthly outflow than about owning anything.
- You drive well under the mileage cap and keep the car in good condition, so wear charges never appear.
- You can deduct part of the payment as a business expense and would rather not carry the depreciation risk.
Loan
- You keep cars for eight to ten years, where the lease-versus-buy gap turns heavily in favour of buying.
- You drive more than 15,000 miles a year, which makes excess-mileage charges a near certainty.
- You want no mileage limit and no return inspection, and you value being able to sell whenever you like.
Common Questions
Is a lease always cheaper per month?
Yes, almost always, and that is the trap. You are financing roughly half the car instead of all of it, so the payment is smaller by construction. The real question is what the extra money buys: on a loan it buys an asset, on a lease it buys the use of one.
What is a money factor?
The lease industry's way of quoting an interest rate. Multiply it by 2,400 to get the APR, so 0.00125 is 3.0%. It is applied to the cap cost plus the residual rather than to the depreciation alone, which is why leases are more rate-sensitive than they first appear.
What if the car is worth more than the residual at the end?
On a closed-end lease you can buy it at the residual and keep the difference. That equity is real, and it is the main reason a lease can beat its own total payments — but only if you exercise the purchase option instead of handing the keys back.
Can I end a lease early?
Usually at a cost. Most contracts charge the remaining payments discounted to today plus a disposition fee, and some add an early-termination penalty. An early exit is normally the most expensive way out of a car, which is why the term should match how long you actually intend to keep it.
Does a lease help or hurt my credit?
It reports as an instalment account with a balance equal to the sum of the remaining payments, so it affects utilisation and payment history the same way an auto loan does. A lease does not build credit faster, and a default damages it just as much.
More Comparisons
- Refinance vs Paying Extra
On a $320,000 balance at 6.5%, refinancing to 5.25% with $4,500 of costs saves $216.10 a month and $69,331 of interest. Paying $300 extra instead saves $93,024 and clears the loan in 226 months. The bigger saving is the one nobody advertises.
- APR vs APY
APR is the nominal annual rate; APY includes compounding. At 6% compounded monthly the gap is 0.17 points — $16.78 a year on $10,000, and $488 over five years.
- Simple Interest vs Compound Interest
Simple interest charges the principal only; compound interest charges the balance. On $10,000 at 5% over 10 years that gap is $1,288.95 — here is where it comes from.
Sources
- Consumer Leasing Act — lease cost disclosures — Federal Trade Commission
- Auto loans — understand the costs before you sign — Consumer Financial Protection Bureau
- Lease residuals and money factors explained — Edmunds
Both methods sit in Finance.