This is part of a series breaking down all the terms you need to know if you're buying a new or used car from a dealership. Check out the rest of the series at our Car Buyer's Glossary.

Few people pay for a new-car purchase with a 100-percent up-front cash payment, so the two most often-used methods of getting a new car are leasing it, or getting a loan from either a bank or a financing company. Both the lease and the payment plan are structured to last through a certain amount of time, often several months or years. That agreed-upon length is called the term of the lease or the term of the loan.

What's the difference between a lease and a loan term?


Essentially, a lease is paying money over an extended time period to rent a car, while a loan is slowly paying money toward eventually owning the car. All other things being equal, a lease will cost less per month because you're only paying for what you use, and you don't retain ownership in the car after the lease term is over. The term of a lease is usually 24 to 36 months. The average new car loan in the United States now stretches to 70 months.

A payment plan for a loan is completely different, as the customer largely has the say in the length of the loan. The most common loan term is 72 months, but even longer loans are becoming common. These loans offer smaller monthly payments, which are attractive to many shoppers, and usually require smaller down payments.

A lease has certain perks. There will likely be a lower up-front down payment, lower monthly payments, and as the lease will coincide with the vehicle's warranty, maintenance and repair costs will be limited. It also allows for easy turnover to a new vehicle after a short time. However, downsides often include mileage limits, excess wear charges and other fees and conditions that can add hundreds of dollars at the end of the lease. And, of course, you don't get to keep the car (unless you exercise a clause in the lease agreement to purchase it) or make any money back when it's time to return it.

With a loan, you actually own the car at the end of the term. That means you can sell it or trade it in, and extract whatever value is left out of the vehicle. Or you can keep driving it as long as you'd like. There are no mileage limits, of course, but it's not strictly yours until the loan is paid off and you get the title.

What's better: short-term or long-term?


In practical terms, all leases are short-term, lasting two to three years. A lease can occasionally extend up to five years, but it is unusual.

Longer loans tend to be costlier in the long run since you'll be paying more in interest. Those interest rates also tend to be higher. It's also important to note that research has shown buyers tend to tire of cars after about 6.5 years. That's 79 months ... just a few months after a 72-month loan would be paid off.

A shorter loan will mean a higher down payment and larger monthly payments, but will cost less in the long run.

What is a fair term for a customer?


One might think it's better to go with a plan that has cheaper monthly payments, but it's actually best to keep loans short. Less time owing anybody money for anything is always a good move – it usually reduces the interest rate, lowers the total amount of interest paid, and lets you own it outright (and perhaps sell it) sooner. It's therefore best to aim for a 36- to 60-month loan as it should deliver the best overall deal – lower total interest payments, a lower interest rate, and a term that better fits the length of time most people own a car. Frankly, if you can't afford the resulting monthly payment, that car is probably too expensive.

Now, if you think you'll be ready for a different car within a few years, you'll want to do a few things. First, consider a lease. If you're the type of person who likes a new car every two or three years, you're exactly the type of person for whom leasing makes the most financial sense. That said, before choosing a lease, consider if you might have any upcoming life changes. You'd hate to be in year two of a sports car lease when the triplets are born. There are some ways to get out of a lease, but none are ideal or particularly easy.

Yet, even if you're sure you'll keep the car longer than average and get every penny's worth out of it, consider a shorter loan term and the total costs rather than focusing on monthly payments. It'll put what you can actually afford in more realistic terms.

Related Video:

Share This Photo X