Calculate your monthly car loan payment and total financing cost.
Car Loan vs Leasing – What to Choose?
Buying a car is one of the bigger financial decisions in life. The choice between a car loan and leasing depends on your financial situation, preferences, and future plans. Both options have their pros and cons that are worth analyzing carefully before making a decision.
Car Loan – Ownership from Day One
When you take a car loan, you become the owner from the moment of purchase. You can sell it at any time, but keep in mind that a car is value decreases over time – a new car loses about 20-30% of its value in the first year. A loan is especially good if you plan to keep the car long-term.
Leasing – Lower Payments but Restrictions
Leasing usually offers lower monthly payments than a loan, but at the end of the contract, you must return the car or buy it at a set price. This is a good option for people who like to change cars frequently and do not want to worry about reselling it. However, remember the mileage limits and mandatory inspections.
Total Cost – What to Look For
When comparing offers, pay attention not only to the monthly payment amount but also to the total loan cost (sum of interest), required down payment, and additional costs (insurance, commissions). A longer loan term means lower payments but higher total interest. Always read the contract carefully and ask about any unclear points before signing.
Car finance: the term is the expensive decision
Dealers negotiate on the monthly payment because it is the number buyers react to, and it can be lowered indefinitely by stretching the term. What that hides is the total interest, and a second problem: for most of a long loan you owe more than the car is worth.
How it works
- Applies the standard annuity formula to give a fixed monthly payment over the chosen term.
- Totals the interest, so the cost of a longer term is visible rather than spread invisibly.
- Lets you compare terms directly, which is where the real decision sits.
M = P × r / (1 − (1 + r)^−n) P = amount borrowed after deposit r = monthly rate = annual rate ÷ 12 n = months total interest = (M × n) − P
Worked example
Borrowing 20,000 at 7% annual, compared across three, five and seven-year terms.
- 3 years (36): 617.54 a month, 2,232 interest
- 5 years (60): 396.02 a month, 3,761 interest
- 7 years (84): 301.85 a month, 5,356 interest
- the payment falls 51% from three years to seven
- the interest rises 140% over the same change
Stretching from three years to seven halves the monthly payment and more than doubles the interest — 5,356 instead of 2,232. The advert quotes the first number and never the second.
Reading the result
- Negative equity is the trap longer terms set. A 25,000 car depreciating 20% a year is worth about 12,800 after three years, while a five-year loan still has 8,845 outstanding — that one is fine. Stretch to seven years and the balance stays above the value for most of the term, so you cannot sell without finding cash.
- Depreciation dwarfs interest on a new car. Losing 20% of 25,000 in year one is 5,000 — more than the entire interest bill of the three-year loan. Buying a car two or three years old avoids the steepest part of that curve.
- PCP and lease deals are not the same as a loan and are not comparable on monthly payment alone. Check the balloon payment, the mileage cap and the condition charges before treating the monthly figure as the cost.
- Compare the APR rather than the flat or nominal rate, and check whether the dealer's finance is subsidised in exchange for a higher purchase price. The cheapest finance on the worst price is not a saving.
Common questions
- Is a longer term ever the right choice?
- Only if the shorter payment genuinely does not fit and the alternative is a worse form of credit. It is not cheaper — the same debt costs more the longer you hold it. If cash flow is the constraint, take the longer term and overpay when you can, provided there is no early-settlement penalty.
- How much deposit should I put down?
- Enough that you are not in negative equity from day one, which usually means at least covering the first year's depreciation — often 20% or more on a new car. Beyond that, extra deposit simply avoids interest at whatever rate the loan charges.