Which is Better: A Car Lease or a Car Loan?

It is an often debated case, to lease a car or buy a car? This article will explain the basics of both to help you make a better decision when deciding whether to lease your car or get a car loan from a car loan company.

Car leases and car loans are simply two different methods of financing your car. A car lease finances the usage of your car, while a car loan finances the purchase of it.

With a car loan you pay for the entire cost of a vehicle. The way it works is you make a down payment, pay sales tax and pay a interest until your car loan is paid off.

With a car lease you pay for only a part of the cost of the car but you must return the car after a pre-determined period of time.

Example: Buying a car vs. Leasing a car

If you lease a car that costs $25,000 that will have an estimated value of $15,000 after 2 years, you pay for the $10,000 difference (depreciation). When you buy a car you pay the entire $25,000.

Car lease payments are made up of two parts: a depreciation fee and the finance fee. The depreciation part of each monthly payment compensates the leasing company for the portion of the vehicle's value that's lost during the time of your lease. The finance part is interest on the money the leasing company has tied up in the car while you're driving it.

Car loan payments also have two parts: a principal fee and a finance fee, similar to lease payments. The principal pays off the cars' purchase price while the finance fee is the loan interest.

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