When it comes to financing a car, customers have to make the most important decision: Should they choose to lease or take on a loan? Though each has their own benefits, let us first shed light on the difference between the two financing options to aid you to make an informed decision when choosing between leasing and loan.
Ownership
Lease: You don’t own the leased vehicle as you are only paying for the right to use it for a fixed period. When the lease expires, you either have to return the car or buy it.
Loan: You take out the loan to purchase the car and get to keep it for as long as you want and use it how you want. More importantly, you have the liberty to make any modifications or add any customization you want.
Down Payment
Lease: This normally comprises first month’s payment, down payment, a refundable security deposit, registration fees, taxes, and other possible fees.
Loan: Normally this includes a down payment or cash price, registration fees, taxes, and some other possible charges.
Monthly Installments
Lease: In most cases, monthly lease payments are lower than loan or financing payments as you are only liable to pay for the depreciation of the car, plus rent charges, interest, taxes, and other fees throughout the time lease is in force.
Loan: In general, loan payments are higher than leasing because you are liable to pay for the entire value of the car along with interest in this type of financing. You will make these payments to the financial institution or bank that provided you with the financing.
Mileage Restriction
Lease: Mileage restrictions come into play when you lease a vehicle. Because leasing companies want you to keep the vehicle in optimal condition. As a result, when you go over your mileage limit, lease firms charge you extra fees for it. That said, you can negotiate an annual limit on how much you can drive a vehicle.
Loan: You are free to drive as much as you want, but bear in mind the more kilometers you drive the more maintenance your car will require, which can result in a low resale value.
Depreciation
Lease: Since you are just paying for the depreciation, the residual or future value of the car doesn’t affect you as a lessee. But, you won’t get any equity from the vehicle.
Loan:Of course, the car will depreciate in value, but the equity is yours and you can use it the way you like it.
Note: When people compare lease with a loan they assume that deprecation—a major cost of the lease payment—is different in both processes. Unfortunately, it’s a false assumption. The depreciation is exactly the same in both instances. Thus, it’s essential for folks, who have an intent to acquire financing, to develop an understanding of depreciation. Why?
It is here the real difference between a lease and a loan come into play. When you opt for a lease, you only pay for the depreciation of the vehicle throughout the tenure of the lease. In contrast, when you acquire a car loan not only you are paying the depreciation, but you are also required to pay additional principle for the five-year or whatever term you choose.
And make no mistake, in both instances, you need to pay the interest and taxes along with depreciation.
Maintenance/Repair
Lease: Throughout the lease, you are required to keep the vehicle in first class condition. Else, it will undergo excessive wear and tear and your leasing firm can charge you to fix it.
Loan: Sure, you own the car and are not bound keep it in first class condition on a regular basis. Still, one shouldn’t forget that excessive wear and tear can affect the resale value of their car.
Customization
Lease: Typically, the institution or company leasing you the vehicle will want the vehicle to be in topnotch condition to re-sell, so if you choose not to buy it yourself after the lease tenure, they won’t face any problem in selling the vehicle to someone else. Therefore, you are required to remove any customizations when the lease expires and bear the charges for any permanent alterations or damages that were caused by the modifications.
Loan: Since you own the vehicle you don’t need to worry about this. You can do whatever you want to with it. But, keep in mind modification or customization can affect the resale value of your vehicle.
Early Exit
Lease: If for any reason you want to break the lease early you will have to bear early termination charges. Typically, it can cost you as much as paying off your remaining lease payments.
Loan: You have the option to sell or trade in your car if your circumstances suddenly change. The money you will make by selling the vehicle can be used to pay off the loan.
Vehicle Return
Lease: When the contract expires, you are required to return the car and walk away after fulfilling any lease-end obligations.
Loan: At the end of your agreement, you are not required to return the car. It’s yours and you are responsible to sell or trade-in the vehicle whenever you decide to buy another car or no matter what.
