Difference between Lease and Loan Payments

Leasing a car and taking a car loan in order to buy a car are two different ways of car financing. There is a difference between the two not only in the way they work, but also in the way the car payments are formed.

Lease payments consist of two charges:

• depreciation charge
• finance charge

The first part of the monthly lease payments serves as compensation to the company offering the car lease for the depreciation of the car's value during the lease term.

The second part of the monthly lease payments is the interest you are charged on the car lease. Simply said the lease company has bought the car from a dealer and while you are driving this car you repay portions of that money through your monthly payments. The rest of the money is repaid when you return or buy the car at the end of the lease term.

Loan payments consist of two charges too:

• principal charge
• finance charge

The first part of the monthly car loan payments pays off the full car purchase price (this is the money you borrow to finance your car purchase). Basically, the car loan principal payment goes toward equity.

The second part of the monthly car loan payments is the interest charged on your car loan.

Lease and Loan Payments Similarities

As you know all cars, both leased and purchased, depreciate in value. Thus, part of the principle charge of car loan payments can be considered as a depreciation charge. In other words, just like with leasing you pay for something that you will never get back. Even if you sell the car you will still have lost money for which you haven't received anything. And again, just like with leasing, you will never get back the amount of money you have paid for your car.

As you can see, whether you lease a car or take a car loan to buy it, depreciation always takes its toll and this reflects on your car payments.

The information and interactive car payment calculators that are provided on this site are made available as general assistant guidance in regards to car loans and payments. We do not guarantee that any information or calculations will be accurate or applicable to your personal financial situation, circumstances, or objectives. Accordingly, before making any final decisions we encourage you to consult a qualified professional and get personalized advice.

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