Differences between a Lease and Finance Loan?

Let’s break down the difference between a purchase loan and a lease:

With a lease, instead of borrowing the full purchase price of the car, you are only borrowing the amount the car will depreciate over the term of the lease. With a three-year lease, and the expected market value of $15,000 in three years based on regular wear and tear (known as the “residual value”), then you only have to finance the difference between the purchase price and the residual value. Financing $15,000 is going to have a lower monthly payment than financing $30,000; even with a shorter lease term. This is the basic reason lease payments are lower than loan payments.

So with leasing, you have peace of mind. You also have the upgrade factor: Since leases are generally between two and four years, the vehicles are almost always going to be fully covered by warranties and driving them should be problem-free. These are the best years of a car’s life. Once the lease is up, you get to trade in your car for the latest model. You can keep up with the Joneses.

So, as usual, there is a tradeoff: With leasing, you will pay a premium over your lifetime in exchange for a lower monthly payment and very few concerns about reliability. With an outright purchase, you’re going to come out ahead if you can commit to proper maintenance and resist the urge to constantly upgrade.