Car loan vs. lease: the math behind the monthly payment

This guide explains the arithmetic of each; it is not financial advice. The numbers that decide a real choice are the price, rate, residual value and money factor on the offers in front of you.

A car loan is repaid in equal monthly payments. Regulation Z, the Truth in Lending rule, computes the annual percentage rate by what it calls the actuarial method: each month the unpaid balance grows by the finance charge earned and falls by the payment. The level payment that brings the balance to zero at the last payment is

payment = A × r ÷ (1 − (1 + r)^−n)

where A is the amount financed, n the number of monthly payments, and r the monthly rate: the annual percentage rate divided by 12. The formula is checked here against the regulation’s own examples: $5,000 repaid in 24 monthly payments of $230 is an APR of 9.69%, and $1,000 in 36 payments of $33.61 is 12.83%.

The APR is Regulation Z’s measure of the cost of credit as a yearly rate. It is built from the finance charge, not only the interest rate, so, as the FTC notes, credit insurance a dealer requires must be counted in it. The table applies the formula to $30,000 financed at 7.47%, the Federal Reserve’s figure for “48-month new-car loan, commercial banks”, May 2026. The Federal Reserve reports it as an APR under Regulation Z, averaging the most common rate each reporting bank charged in the first week of the middle month of each quarter; it is a national average, not a quote (source).

Payments rounded to the cent; totals use the rounded payment. The same rate is applied to every term so that only the term changes; in practice, the FTC notes, longer loans may carry higher rates.

Stretching the loan from 36 to 72 months cuts the payment by $414.50 a month and adds $3,736 of interest. It also slows the payoff: three years into the 72-month loan, $16,669 is still owed. The FTC warns that with longer-term financing you could end up owing more than the car is worth.

A lease payment is built from the car’s expected loss of value and a rent charge. Regulation M, which carries out the Consumer Leasing Act, requires a vehicle lease to show the calculation step by step, and defines the pieces:

• Gross capitalized cost: the agreed value of the vehicle plus anything else paid for over the term, such as a service contract, insurance or an old balance rolled in.
• Capitalized cost reduction: any rebate, net trade-in allowance, noncash credit or cash that reduces it.
• Adjusted capitalized cost: the difference, and the amount the payment is calculated on.
• Residual value: the vehicle’s value at the end of the lease, as estimated or set by the lessor at signing.
• Depreciation: adjusted capitalized cost minus residual value.
• Rent charge: the amount charged on top of depreciation, similar to interest on a loan.

Most lessors set the rent charge with a money factor. The Federal Reserve’s leasing guide gives the average monthly rent charge as the money factor times the sum of the adjusted capitalized cost and the residual value. Taxes and fees come on top, and states differ on whether they collect tax at the start of the lease or through the payments. Here is an illustrative 36-month lease, laid out in the order the federal disclosure uses:

Illustrative figures, not a quote. No acquisition fee or other capitalized items are included; the order follows the payment calculation in 12 CFR 1013.4(f).

The gap from the loan table is structural. Repaying $30,000 over 36 months takes $833.33 a month before any interest; the lease repays only the $12,000 the car is expected to lose, $333.33 a month.

The Federal Reserve’s leasing guide describes the money factor as a decimal used to set the rent charge, notes that it typically is not disclosed, and warns that it is not a lease rate and cannot be turned into one by moving the decimal point. Federal law has no formula for a lease rate at all. If a lessor does state a percentage, Regulation M requires the notice “this percentage may not measure the overall cost of financing this lease” and forbids calling it an annual percentage rate.

A rough conversion follows from the Federal Reserve’s formula. The rent charge is the money factor times the sum of the starting and ending balances, which is twice their average. So the money factor is about half the monthly rate on the average balance: multiply by 2 for the monthly rate, by 12 for the year and by 100 for a percentage, 2,400 in all. A money factor of 0.00250 is about 6.00% a year.

It is an approximation. In the example above, the yearly rate at which $453.33 a month for 36 months, with the $18,000 residual left at the end, exactly repays the $30,000 adjusted capitalized cost is 5.92%, counting each payment at the end of its month. The shortcut says 6.00%: close enough to compare offers, not exact. The CFPB lists the money factor among the lease terms that are negotiable.

A lease has a second set of costs that arrive when it ends. Regulation M requires each to be disclosed at signing.

• Mileage. Leases set an allowance, often an average of 12,000 or 15,000 miles a year, because the residual value assumes it. The disclosure must state the excess-mileage charge or how it is worked out. At an illustrative $0.25 a mile, driving 40,500 miles on a 36,000-mile allowance costs 4,500 × $0.25 = $1,125. The Federal Reserve’s guide notes that a higher allowance agreed at the start often costs less than paying for the extra miles at the end.
• Wear and use. The lease must state the lessor’s standard for excessive wear, which must be reasonable. The Federal Reserve’s examples include broken or missing parts, dented body panels, torn or stained upholstery, excessively worn tires and cracked glass.
• Disposition fee. A charge some lessors collect when the car is turned in. Like other charges expected in the normal course of the lease, it must be disclosed.
• Purchase option. The lease must say whether you can buy the car and, at the end of the term, for how much. If the car is worth more than that, the difference is equity you capture only by buying it or by negotiating a transfer of the option.
• Ending early. Every vehicle lease must warn that ending it early may cost a substantial charge, up to several thousand dollars, and that the earlier you end it the greater the charge is likely to be.
• Open-end leases. In an open-end lease you owe the difference if the car is worth less than the residual at the end. Regulation M presumes the residual unreasonable to the extent it exceeds the car’s realized value by more than three times the base monthly payment, unless the gap comes from excessive wear or use.

Both kinds of deal come with standardized federal disclosures, and each shows a figure the other lacks.

• Loan, under Regulation Z: the amount financed; the finance charge, “the dollar amount the credit will cost you”; the annual percentage rate, which counts as accurate within one-eighth of a percentage point on a regular loan; the payment schedule; the total of payments; and, when the dealer extends the credit, the total sale price including your down payment.
• Lease, under Regulation M: the amount due at signing, itemized; the payment schedule and total of periodic payments; other charges; the total of payments, “the amount you will have paid by the end of the lease”; the payment calculation shown above; and the terms for early termination, wear and mileage, the purchase option, official fees and taxes, insurance and warranties.

The rules have limits. Both cover deals made primarily for personal, family or household purposes. Regulation Z does not apply to a car loan in which the credit extended exceeds an inflation-adjusted threshold, and Regulation M covers leases longer than four months whose total obligation does not exceed the same figure: $73,400 for 2026.

Over the same three years, each deal costs two things: the car’s loss of value and a finance charge. A closed-end lease fixes the loss of value in advance, at the residual the lessor sets. A loan leaves it to the market, and you find out what it was when you sell. That turns the comparison into arithmetic.

The lease example costs the $14,000 drop from $32,000 to the $18,000 residual plus the $4,320 rent charge: $18,320 over 36 months, before tax. Buy the same $32,000 car with $2,000 down and the $30,000 loan above, and after 36 payments your cost is $32,000 minus what the car is then worth, plus the interest paid so far. The value at which the two come out even:

Loan at 7.47%; lease as in the example above. Ignores sales tax and fees, which states treat differently for leases and purchases, the timing of payments, and end-of-lease charges such as excess mileage or a disposition fee.

If the car is worth more than the break-even figure after three years, buying cost less over those three years; if it is worth less, the lease did, because in a closed-end lease the shortfall between the residual and the car’s real value is not yours to pay. A longer loan raises the bar, because more of its early payments go to interest. And the comparison stops at 36 months: a buyer who keeps the car past the last loan payment makes no further payments on it, while a lessee who wants to keep driving signs another lease or uses the purchase option.

• 12 CFR Part 1026 — Regulation Z (Truth in Lending): §§ 1026.3, 1026.18 and 1026.22
• 12 CFR Part 1026, Appendix J — Annual percentage rate computations for closed-end credit
• 12 CFR Part 1013 — Regulation M (Consumer Leasing), with official interpretations
• Federal Reserve Board — Keys to Vehicle Leasing: more information about the rent charge
• Federal Reserve Board — Keys to Vehicle Leasing: frequently asked questions
• Consumer Financial Protection Bureau — What should I know about leasing versus buying a car?
• Federal Trade Commission — Financing or Leasing a Car
• Federal Reserve Board — G.19 Consumer Credit: terms of credit