Car Loan vs. Leasing: Which Costs Less?
Compare buying with a car loan to leasing, with a worked example, the key terms to know, and who each option tends to suit.
The short version
With a car loan, you borrow money to buy the car and, once the loan is paid off, you own it. With a lease, you pay to use the car for a set period, usually two to four years, and then return it or buy it. Leases typically have lower monthly payments, but you build no ownership. Loans cost more each month, but the car is yours at the end.
A worked example
Consider a $35,000 car. These numbers are illustrative; real offers vary by lender, credit, location and taxes.
Buying with a loan
A 60-month loan at 7% APR has a monthly payment of about $693. Over five years you would pay roughly $41,600, including about $6,600 in interest, and then own the car outright. After 36 payments you would still owe about $15,500. If the car were then worth $21,000, you would have around $5,500 in equity.
Leasing
Suppose a 36-month lease where the car's expected value at the end (the residual value) is 60%, or $21,000, with a money factor of 0.0029 (roughly equal to a 7% APR). The payment has two parts:
- Depreciation charge: ($35,000 − $21,000) / 36 = $388.89 per month.
- Finance charge: ($35,000 + $21,000) × 0.0029 = $162.40 per month.
That gives a monthly payment of about $551 before taxes and fees, or roughly $19,800 over three years, and at the end you own nothing unless you choose to buy the car.
Key lease terms
- Residual value: what the car is expected to be worth at the end. A higher residual means lower payments.
- Money factor: the lease's interest rate. Multiply it by 2,400 to get an approximate APR.
- Mileage limit: commonly 10,000 to 15,000 miles per year, with a per-mile charge for going over.
- Wear and tear: you may be charged for damage beyond normal use.
- Early termination: ending a lease early can be expensive.
When a loan may fit better
- You drive a lot or want no mileage restrictions.
- You plan to keep the car for many years after the loan ends, when you have no payment at all.
- You want to customize the car.
When a lease may fit better
- You prefer a lower monthly payment and a newer car every few years.
- You drive a predictable, moderate number of miles.
- You want the car under warranty for most of the time you have it.
Compare the total cost, not only the payment
A lower monthly payment does not always mean a lower cost. If you lease repeatedly, you are always making payments. If you buy and keep a car for ten years, the years without a payment can make the average annual cost much lower. Also include insurance, maintenance, registration and fees in your comparison.
Frequently asked questions
Can I buy the car at the end of a lease?
Often yes, at the residual price stated in your contract, plus any fees. Compare that price with the car's actual market value before deciding.
Is a bigger down payment a good idea on a lease?
Many advisers caution against large payments upfront on a lease, because if the car is stolen or totaled, that money may not be recoverable. Ask the dealer how the situation would be handled.
Does my credit score matter?
Yes, for both. A higher score generally qualifies you for a lower interest rate or money factor.
Try it yourself
Use our car loan calculator to see the monthly payment and total interest for your own price, rate and term, then compare it with a lease quote.
This guide is for educational purposes only and is not financial, tax, or legal advice.