If you're cross-shopping a loan quote against a lease offer on the same vehicle, the sticker payments alone don't tell you much — a lease payment and a loan payment are built from completely different math. Here's how each one is actually calculated, with a worked example you can adapt to your own numbers.
How a car loan payment is actually built
Quick answerA loan payment comes from the standard amortization formula: Payment = P × [r(1+r)ⁿ] ÷ [(1+r)ⁿ − 1], where P is the amount financed (vehicle price minus down payment and trade-in value), r is the monthly interest rate (APR ÷ 12 ÷ 100), and n is the number of monthly payments. A $30,000 amount financed at 6% APR for 60 months works out to about $579.98/month.
Every dollar of that payment is split between interest and principal, and the split shifts every month — early payments are interest-heavy, later ones are mostly principal, which is why paying a loan off early saves more interest the sooner you do it. The amount financed itself is simply the vehicle price with your down payment and trade-in value subtracted (plus sales tax, if your state taxes the full purchase price rather than just the monthly payment).
Amortization, in plain terms: a fixed monthly payment calculated so that, after the last scheduled payment, both the interest owed and the principal balance reach exactly zero — the term (36 to 84 months is typical for auto loans) and the APR are the two levers that decide how large that fixed payment needs to be.
How a car lease payment is actually built
Quick answerA lease payment adds two pieces together: depreciation — (adjusted capitalized cost − residual value) ÷ lease term — plus a rent charge — money factor × (adjusted capitalized cost + residual value). On a $35,000 vehicle with a $2,000 down payment, a 55% residual, a 0.00125 money factor, and a 36-month term, that's roughly $447/month (about $382 depreciation + $65 rent charge, as an example).
The money factor is how US lease contracts express the finance charge instead of an APR — usually a small decimal like 0.00125. A rough rule of thumb converts it to an APR-equivalent by multiplying by 2,400 (so 0.00125 × 2,400 = 3% APR), which is handy for sanity-checking a dealer's lease quote against a loan APR you've been offered. Residual value — the vehicle's projected worth at lease-end, usually 40-65% of MSRP — is the other half of the equation: the higher it is, the less "depreciation" you're paying for, and the lower the payment.
Comparing loan and lease payments side by side
Because a lease payment only covers depreciation over a shorter term (often 24-39 months) instead of the full vehicle price over a longer loan term (often 36-84 months), lease payments are usually lower for the same vehicle — but they come with mileage limits and no ownership at the end. Here's an illustrative comparison for a similarly priced vehicle under each structure (example numbers, not a quote):
Example only: same ~$33-35k vehicle, loan vs. lease
| Structure | Term | Est. monthly | What you get at the end |
|---|
| Loan ($30,000 financed, 6% APR) | 60 mo | ~$579.98 | You own the vehicle |
| Lease ($33,000 cap cost, 0.00125 MF) | 36 mo | ~$447.26 | Return it, or buy at residual value |
The lease payment above is lower, but it only covers 36 months and leaves you with no equity — you'd need a new lease (and a new payment) to keep driving. The loan payment is higher but ends with you owning an asset you can keep, sell, or trade in. Which is "cheaper" really depends on how long you keep the vehicle and how you value ownership versus flexibility.
⚠ Worth noting: loan term length changes total interest a lot more than it changes the monthly payment ratio suggests. On a $30,000 loan at 6% APR, total interest is roughly $2,856 over 36 months versus roughly $6,814 over 84 months — nearly 2.4× as much interest for a payment that's only about half as large per month.
How down payment and trade-in change each option
Quick answerA down payment or trade-in value is subtracted from the vehicle price in both a loan (reducing the amount financed) and a lease (reducing the adjusted capitalized cost) — the mechanics are the same, but the payoff differs because a loan spreads that reduction's benefit over a longer term than a typical lease does.
If you're trading in a vehicle you still owe money on, only the equity — trade-in value minus any remaining loan payoff — actually reduces what you're financing or capitalizing next; the rest of the trade-in value just pays off the old loan. It's worth working through both an amount-financed scenario and a lease scenario with your actual down payment and trade-in numbers before deciding, since the "better deal" can flip depending on the specific APR, money factor, and residual value you're quoted.
Frequently asked questions
How do you calculate a car loan payment?
A car loan payment is calculated with the standard amortization formula: Payment = P x [r(1+r)^n] / [(1+r)^n - 1], where P is the amount financed (vehicle price minus down payment and trade-in value), r is the monthly interest rate (APR / 12 / 100), and n is the loan term in months. For example, a $30,000 loan at 6% APR for 60 months comes to about $579.98 per month.
What is a money factor, and how do I compare it to an APR?
A money factor is how lease finance charges are expressed in the US instead of an APR, usually written as a small decimal such as 0.00125. To estimate the equivalent APR, multiply the money factor by 2,400: 0.00125 x 2,400 = 3% APR. This is a widely used approximation for comparing lease offers.
Does a bigger down payment help more with a loan or a lease?
A down payment reduces the amount financed on a loan and the adjusted capitalized cost on a lease in the same dollar-for-dollar way, but the effect on the monthly payment differs: on a loan it lowers both principal and the interest charged on that principal over the full term, while on a lease it only lowers the depreciation and rent-charge portion for the shorter lease term, so the same down payment tends to produce a smaller percentage change in a lease payment than in a loan payment.
Is it cheaper to lease or buy a car?
Leasing usually has a lower monthly payment because you are only paying for the vehicle's depreciation during the lease term, not its full value, but you do not build any equity and typically face mileage limits. Buying and financing costs more per month but builds ownership; over the long run (keeping a vehicle past the loan term), financing is usually the lower-cost option, while leasing can suit drivers who prefer a new vehicle every few years.
How does loan term length change the total interest paid?
A longer loan term lowers the monthly payment but increases total interest paid, because interest accrues for more months and the balance declines more slowly. For example, a $30,000 loan at 6% APR costs about $2,856 in total interest over 36 months but about $6,814 over 84 months, even though the monthly payment is much lower at 84 months.