The short answer
Lease when you like a new car every two or three years, drive a steady number of miles and want the lower monthly payment. Finance when you keep a car for many years, drive a lot, or want to change it without asking anyone.
What each payment pays for
A lease payment covers the value the car loses over the term, the difference between its price and its residual (what the lender expects it to be worth at the end), plus a finance charge set by the money factor, plus tax.
A loan payment covers the whole price of the car plus interest. It is higher every month, but each payment buys you more of a car you will own.
How California taxes each one
On a lease, California charges sales tax on each monthly payment, and on anything you pay at signing to lower the price, at the rate where the car is registered. You only pay tax on the part of the car you use.
On a purchase, the tax is on the full price of the car, paid at signing or rolled into the loan. California does not take a trade-in off the price before working out the tax.
Miles, wear and the end of the term
A lease has a yearly mileage allowance and a charge for each mile over it, both written in the contract, and the car goes back in the condition the lender's wear rules describe. At the end you return it, buy it for the residual in your contract, or lease a new one.
A financed car has no mileage limit and no turn-in inspection. When the loan is paid off it is yours to keep, sell or trade.
| Lease | Finance | |
|---|---|---|
| Monthly payment | Usually lower | Usually higher |
| Due at signing | First payment, fees and any down payment | Down payment, tax and fees |
| Sales tax in California | On each payment | On the full price |
| Miles | A yearly allowance | No limit |
| At the end | Return it, buy it or lease again | You own it |
