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Understanding Loan vs. Lease: A Comprehensive Guide
Deciding whether to finance a car with a loan or opt for a lease is a significant financial decision. Each option has distinct advantages and disadvantages that cater to different driving habits, financial situations, and preferences. This guide breaks down the core components of each and explains the calculations used in our calculator to help you make an informed choice.
Car Loan Explained
When you finance a car with a loan, you are essentially borrowing money from a lender to purchase the vehicle. You make regular payments over a set period, which include both the principal amount borrowed and interest. Once the loan is fully repaid, you own the car outright. This provides long-term ownership and the freedom to customize or sell the vehicle as you please.
Loan Calculation Breakdown:
The monthly loan payment is calculated using the standard amortization formula:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Where:
M = Monthly Payment
P = Principal Loan Amount (Vehicle Price – Down Payment)
n = Total Number of Payments (Loan Term in Months)
The total cost of the loan includes the sum of all monthly payments plus the down payment. The residual value at the end of the loan term is what you would effectively pay to own the car if you sold it at that point, or it's the value you'd get if you sold it yourself. For simplicity in comparison, we'll consider the total paid over the loan term as the primary cost, assuming the car is sold for its market value at the end. However, a key point is that the total amount paid over the loan term is generally higher than what you'd pay in lease payments, as you're paying off the entire principal.
Car Lease Explained
Leasing a car is similar to renting it for a fixed period, usually 2 to 4 years. You pay for the depreciation of the vehicle during the lease term, plus interest (often expressed as a "money factor") and fees. At the end of the lease, you typically have options: return the car, purchase it for its pre-determined residual value, or lease a new vehicle. Leasing often results in lower monthly payments compared to financing the same car over the same term because you're only paying for the portion of the car's value that you use.
Lease Calculation Breakdown:
The monthly lease payment is a bit more complex and is calculated in several steps:
Depreciation Amount: (Vehicle Price – Down Payment – Residual Value)
Depreciation Cost Per Month: Depreciation Amount / Lease Term in Months
Finance Charge (Interest): (Vehicle Price – Down Payment + Residual Value) * Money Factor (converted to monthly rate)
Finance Charge Per Month: Finance Charge * Money Factor * Lease Term in Months (This is a simplified way to spread the finance charge, a more accurate calculation involves the average balance over the term) A more precise method often used is (Vehicle Price – Down Payment) * Money Factor for a simplified interest charge. For our calculator, we'll use a common approach that factors in the net capitalized cost.
Net Capitalized Cost = Vehicle Price – Down Payment
Interest Portion per Month = (Net Capitalized Cost + Residual Value) * Money Factor * 100 (approximate, actual formulas can vary)
A simplified approach for monthly interest: (Vehicle Price – Down Payment) * (Money Factor * 100)
Total Monthly Payment: Depreciation Cost Per Month + Finance Charge Per Month + Taxes (not included in this basic calculator)
The residual value is determined by the leasing company and is a percentage of the original vehicle price, based on the lease term and mileage allowance. Mileage charges apply if you exceed the agreed-upon mileage allowance at the end of the lease.
Key Differences and Considerations:
Ownership: With a loan, you own the car. With a lease, you don't own it until you buy it out at the end.
Monthly Payments: Leases typically have lower monthly payments than loans for the same car over the same term.
End of Term: Loans result in ownership. Leases require you to return the car, buy it out, or lease a new one.
Wear and Tear: Leases often have strict limits on mileage and may penalize for excessive wear and tear. Loans offer more flexibility.
Customization: You can modify a car you own outright. Lease agreements usually prohibit significant modifications.
Long-Term Cost: While monthly payments are lower with a lease, over many years of continually leasing new cars, the total expenditure can be higher than buying and keeping a car for an extended period.
When to Choose Loan vs. Lease:
Choose a Loan if: You plan to keep your car for a long time, want to customize it, drive many miles, or prefer to own an asset.
Choose a Lease if: You like driving a new car every few years, prefer lower monthly payments, drive a predictable number of miles, and don't mind not owning the vehicle long-term.
Our calculator aims to provide a clear financial picture for both scenarios, helping you determine which path aligns best with your financial goals and driving needs.
function calculateLoanVsLease() {
// Get values from input fields
var vehiclePrice = parseFloat(document.getElementById("vehiclePrice").value);
var downPaymentLoan = parseFloat(document.getElementById("downPaymentLoan").value);
var loanInterestRate = parseFloat(document.getElementById("loanInterestRate").value);
var loanTermMonths = parseInt(document.getElementById("loanTermMonths").value);
var loanResidualValue = parseFloat(document.getElementById("loanResidualValue").value); // This is the buyout price, not directly used in monthly payment calc but for total cost if bought out.
var leaseDownPayment = parseFloat(document.getElementById("leaseDownPayment").value);
var leaseMoneyFactor = parseFloat(document.getElementById("leaseMoneyFactor").value);
var leaseTermMonths = parseInt(document.getElementById("leaseTermMonths").value);
var leaseResidualPercentage = parseFloat(document.getElementById("leaseResidualPercentage").value);
var leaseMileageAllowance = parseInt(document.getElementById("leaseMileageAllowance").value);
var mileageCharge = parseFloat(document.getElementById("mileageCharge").value);
// Input validation
if (isNaN(vehiclePrice) || vehiclePrice <= 0 ||
isNaN(downPaymentLoan) || downPaymentLoan vehiclePrice ||
isNaN(loanInterestRate) || loanInterestRate < 0 ||
isNaN(loanTermMonths) || loanTermMonths <= 0 ||
isNaN(loanResidualValue) || loanResidualValue < 0 ||
isNaN(leaseDownPayment) || leaseDownPayment < 0 ||
isNaN(leaseMoneyFactor) || leaseMoneyFactor <= 0 ||
isNaN(leaseTermMonths) || leaseTermMonths <= 0 ||
isNaN(leaseResidualPercentage) || leaseResidualPercentage = 100 ||
isNaN(leaseMileageAllowance) || leaseMileageAllowance < 0 ||
isNaN(mileageCharge) || mileageCharge 0) {
loanMonthlyPayment = loanPrincipal * (monthlyInterestRateLoan * Math.pow(1 + monthlyInterestRateLoan, loanTermMonths)) / (Math.pow(1 + monthlyInterestRateLoan, loanTermMonths) – 1);
} else {
loanMonthlyPayment = loanPrincipal / loanTermMonths; // Simple division if interest is 0
}
var totalLoanPayments = loanMonthlyPayment * loanTermMonths;
var totalLoanCost = totalLoanPayments + downPaymentLoan; // This is the total amount paid out over the loan term.
// — Lease Calculations —
var leaseResidualValue = (vehiclePrice * leaseResidualPercentage) / 100;
var netCapitalizedCost = vehiclePrice – leaseDownPayment; // This is the price after down payment, before interest.
// Approximate monthly interest calculation for lease
// A common simplified method is to use the money factor on the average balance,
// or directly on the Net Capitalized Cost for simplicity in many online calculators.
// A more accurate method: ((Net Capitalized Cost + Residual Value) / 2) * (Money Factor * 100)
var monthlyInterestLease = ((netCapitalizedCost + leaseResidualValue) / 2) * (leaseMoneyFactor * 100);
var depreciationAmount = netCapitalizedCost – leaseResidualValue;
var monthlyDepreciation = depreciationAmount / leaseTermMonths;
var monthlyLeasePayment = monthlyDepreciation + monthlyInterestLease;
// In a real scenario, taxes and fees would be added here.
var totalLeasePayments = monthlyLeasePayment * leaseTermMonths;
var totalLeaseCost = totalLeasePayments + leaseDownPayment;
// — Comparison —
var difference = totalLoanCost – totalLeaseCost;
var loanAdvantage = difference 0;
// — Display Results —
var resultsHtml = "";
resultsHtml += "Loan Scenario:";
resultsHtml += "Principal Loan Amount: $" + loanPrincipal.toFixed(2) + "";
resultsHtml += "Monthly Loan Payment: $" + loanMonthlyPayment.toFixed(2) + "";
resultsHtml += "Total Paid (Loan): $" + totalLoanCost.toFixed(2) + "";
resultsHtml += "(This is the total amount paid over the term. You will own the vehicle at the end.)";
resultsHtml += "";
resultsHtml += "Lease Scenario:";
resultsHtml += "Net Capitalized Cost: $" + netCapitalizedCost.toFixed(2) + "";
resultsHtml += "Estimated Residual Value: $" + leaseResidualValue.toFixed(2) + "";
resultsHtml += "Monthly Lease Payment: $" + monthlyLeasePayment.toFixed(2) + "";
resultsHtml += "Total Paid (Lease): $" + totalLeaseCost.toFixed(2) + "";
resultsHtml += "(This is the total amount paid over the lease term. You return the vehicle unless you buy it out.)";
resultsHtml += "";
if (loanAdvantage) {
resultsHtml += "Leasing appears more affordable by $" + Math.abs(difference).toFixed(2) + " over the " + leaseTermMonths + "-month term.";
} else if (leaseAdvantage) {
resultsHtml += "Financing with a loan appears more affordable by $" + Math.abs(difference).toFixed(2) + " over the " + loanTermMonths + "-month term.";
} else {
resultsHtml += "The total costs are approximately equal over the respective terms.";
}
resultsHtml += "Note: This calculator provides an estimate. Actual payments may vary due to taxes, fees, dealer charges, and specific lender/lessor terms. Lease calculations do not include potential excess mileage or wear and tear charges.";
document.getElementById("results").innerHTML = resultsHtml;
}