What Is The Difference Between Financing And Leasing A Car?
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Those looking to get behind the wheel of a new vehicle have three ways to proceed; pay cash for the purchase, finance it with a loan, or lease the car. Given that almost 84% of new vehicle transactions involve a loan or a lease, we’ll look at the differences between financing and leasing a car.
There are important distinctions to understand before signing any paperwork. Let’s review how each method works and the respective advantages. For this article, the terms financing and buying mean the same thing. Even if you’re fortunate enough to pay cash for a car, you’ll want to keep ready as many of the benefits of an outright purchase overlap with financing.
Overview: What is the Difference between Financing and Leasing a Car
With leasing accounting for less than 20% of new vehicle transactions, it’s a good place to start because the process may not be familiar to every shopper.
Leasing
A lease is a type of vehicle financing that doesn’t involve ownership (unless the car is bought at the end of the lease term). A monthly payment grants the lessee (the person leasing the vehicle) exclusive use of the car for a set number of months or years. The easiest way to think of a lease is as a long-term car rental with specific conditions, like keeping the vehicle in good condition and within a predetermined mileage allowance.
Leasing usually begins at the dealership and involves the automaker’s financing arm or leasing company (such as Ford Credit or American Honda Finance). The lessee often makes a small down payment and must undergo a credit check. Lease terms involve the length of the agreement (36 months is typical, but longer or shorter periods are available) and the mileage allowance (which can range from 7,500 to 15,000 miles per year).
At the end of the lease, the customer has several options:
- Return the vehicle and walk away
- Return the vehicle and sign a lease on a new car (automakers frequently offer incentives to encourage a new lease)
- Buy the car for a pre-set amount (not all leasing companies offer this option)
Financing
A loan (financing) is how most people buy a new car, as shoppers are unwilling or unable to plunk down $30,000 or $40,000 or more. As with a lease, a buyer will undergo a credit check and make a down payment (usually 10% or 20%). The loan may come through the automaker’s financial arm (with a reduced interest rate) or a third-party bank. Unlike a lease, a loan can be arranged through a buyer’s bank or credit union.
Loan lengths range from 24 to 72 months, but 84-month terms are becoming more common as new cars get more expensive. Once loan details are finalized, the paperwork is signed, and the buyer drives off in their vehicle. The buyer owns the car outright once the loan is paid in full.
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Advantages: What is the Difference between Financing and Leasing a Car
Car Leasing Advantages
Lower Payments
For those keeping an eye on cash flow, leasing involves a lower down payment and reduced monthly payments compared to financing. With a lease, you’re paying for the vehicle’s depreciation, not the vehicle’s entire value.
Greater Selection
Having a lower lease payment translates into a more affordable car. In other words, what you pay for a base model with a loan would cover the lease payment for a loaded vehicle.
Latest Models
Shoppers who want the newest car with the latest style and features gravitate towards leasing. At the end of the lease term, choose another vehicle and start the process again.
Simplicity
There’s no worry about trade-ins or reselling at the end of the lease. At the end of the term, return the vehicle to the dealer and walk away. Assuming the car is in good condition and you haven’t exceeded the mileage allowance, you’ll only be responsible for a modest lease return fee (if applicable).
Flexible Payments
Because of the many variables involved with car leasing, a shopper can adjust the payment (before the lease is signed) by modifying the down payment amount, mileage allowance, and contract length. Remember that you’re committed to these terms once the lease agreement is finalized.
Less Maintenance and Repairs
Most leases involve new cars, so initial maintenance requirements are modest and include things like oil and filter changes and tire rotations. Repair expenses should be non-existent as new vehicles have a minimum three-year warranty. The lease length should not exceed the manufacturer’s original warranty (you don’t want to pay for repairs on a car you don’t own).
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Car Financing Advantages
Easy-To-Understand Terms
Car loan terms are straightforward and involve simple interest rate and time calculations. On the other hand, a lease involves a complex formulation of depreciation and other less-familiar factors.
No Mileage Penalties
A car loan doesn’t have mileage restrictions and penalties; drive it as much as needed without fear of being hit with a per-mile penalty down the road.
No Lease-End Inspections
At the end of a lease, the leasing company will inspect the car for mileage and damage, with the lessee being responsible for any excessive wear. A car loan doesn’t have this requirement.
Ownership
Every car loan payment builds equity and gets you one step closer to owning the vehicle outright. Meanwhile, monthly lease payments involve nothing more than a long-term rental.
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Wrap-Up: What is the Difference between Financing and Leasing a Car
On a monthly payment basis alone, leasing is a stronger choice. It’s ideal for someone who needs a vehicle for a shorter period and prefers to be behind the wheel of something new and shiny.
However, those who want to keep a car for a long time are best served by financing. There are fewer conditions and limitations and lower long-term costs. Plus, if the need arises, it’s easier to get out of a car loan than a lease after a few years.
A shopper should assess if financing or leasing better matches their needs and circumstances.
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