Loan vs Lease: Key Differences Explained
Compare buying with a loan versus leasing to decide the best financing option for your next car or equipment purchase.
Quick Answer
Loan to own the asset long-term; lease for lower payments and frequent upgrades.
| Feature | Loan (Buy) | Lease |
|---|---|---|
| You own the asset at the end | You return the asset at the end | |
| Higher monthly payments | Lower monthly payments | |
| No mileage restrictions | Mileage limits apply | |
| You pay for all depreciation | You only pay for depreciation during the lease term | |
| Build equity in the vehicle | No equity — you are essentially renting |
Taking a loan to buy means you own the vehicle once it is paid off. Monthly payments are higher because you are financing the full price, but you build equity and can drive it as long as you want with no restrictions.
Leasing lets you drive a new vehicle for lower monthly payments since you only pay for the depreciation during the lease term. However, you must return the car, face mileage penalties, and never build ownership equity.
When to Use Loan (Buy)
- You plan to keep the vehicle for many years
- You drive more than 12,000-15,000 miles per year
- You want to build equity and eventually have no payment
When to Use Lease
- You want a new car every 2-3 years
- You want the lowest possible monthly payment
- You drive within typical mileage limits
Worked Example
A $35,000 car: 60-month loan at 5% vs 36-month lease with $3,000 due at signing.
Loan (Buy)
Loan: $660/month for 60 months, then you own a car worth ~$15,000.
Lease
Lease: $350/month for 36 months, then you return the car with nothing.
The loan costs more monthly but yields an asset; the lease is cheaper but builds no equity.
Related Comparisons
Frequently Asked Questions
Can I buy the car at the end of a lease?
Yes, most leases include a purchase option at a predetermined residual value.
What happens if I exceed mileage on a lease?
You pay a per-mile penalty, typically $0.15-$0.25 per excess mile.
Which is better for business?
Leasing can offer tax advantages for business use since payments may be fully deductible.