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What is The Difference Between Leasing and Financing a Car

Are you shopping around for a suitable car? You have two basic ways to possess it – leasing or financing. But what is the difference between leasing and financing? Does it matter whether you lease or finance a car? Which of the two is the most convenient and affordable? While leasing is akin to renting a car for a given period, financing involves getting a loan to purchase the vehicle outright. Leasing is appropriate if you do not want to stay with the exact vehicle for long.

On the other hand, financing works when you own the vehicle from the get-go. The purpose of this article is to discuss leasing and financing in greater detail to help you choose the best way to own a car. Keep reading for more information.

What Does It Mean to Lease a Car

Leasing a car means you are hiring it for a specific period, after which you have to return it to the dealership. Within the lease period, you pay for the expected depreciation value and not the total cost of the car. It is impossible to build any equity in the vehicle because of the lease. However, since the car belongs to the dealership, you aren’t liable for repairs and maintenance as long as the warranty is in force.

You might not own a leased vehicle, but it provides the perfect opportunity to drive the latest vehicle every so often. It’s possible to acquire a brand-new car, drive it for a couple of years, and upgrade to a better one through a new lease. The cycle of leases can go on for as long as you’re willing to have a new car. Besides, you do not have to sell the vehicle to upgrade to a new one.

On average, lease terms last for 36 months, even though the period can vary based on the specific contract between the buyer and the seller. In 2022, the average monthly payment for car leases was $450. The actual charge you’ll make depends on the car make, model, year, and leasing company.

Advantages of Leasing a Car

Leasing a car comes with several advantages, which you might want to enjoy. If you’re considering leasing a vehicle, the following are some of the benefits you’ll likely enjoy:

  • Driving a Pristine Car: With leasing, you’ll drive a car when it’s still new and free from trouble. Thus, you can expect the vehicle to function at its maximum, delivering the best possible results.
  • Access to the Latest Models: Did you know that you can lease a new car every few years? It is possible to change to a new car without selling the old one. All you have to do is wait for the lease period’s expiry or terminate the lease prematurely.
  • Maintenance is on the Dealer: A leased vehicle usually comes with a warranty covering any repairs during a given period. You don’t have to worry about spending money on repairs. Besides, the manufacturer takes care of routine maintenance tasks like oil changes.
  • Driving a High-End Vehicle: Leasing makes it possible for you to drive a more expensive, better-equipped vehicle than you can otherwise afford. That’s because the monthly payments are much less than financing.
  • Latest Safety Features: With leasing, you get a vehicle with the latest safety features and technology, including automatic emergency braking, forward collision warning, blind-spot warning, rear cross-traffic warning, lane departure warning, etc.
  • No Worries about Car Trade-In Value Fluctuation: Of course, you will not sell the vehicle. So, why should you worry about changes in its trade-in value? You can move on after returning the car to the dealership.
  • Significant Tax Advantage for Businesses: Businesses leasing cars can enjoy substantial tax advantages. For the lessor’s enjoyment, several tax-deductible items, including maintenance, upkeep, tax, interest, fuel costs, and monthly payments.
  • Easy to Get Rid of a Leased Car: You don’t have to wait until the end of the lease period to return the car. It is possible to return the old vehicle mid-term and replace it with a brand-new one.

Disadvantages of Leasing

Despite its many advantages, leasing also comes with several disadvantages, including the following:

  • Costing More in the Long Run: Did you know that a car depreciates by as much as 20% as soon it moves from the showroom? Yet, the monthly payments depend on the car’s value in the gallery. With a lease, you end up paying much more because it’s within that period that the car depreciates the most.
  • Continuing Monthly Payments: Moving from one leased car to another means you’ll never stop making monthly payments. The monthly payments can go on forever, yet you never get to own the vehicle.
  • Mileage Limits: Lease contracts spell out the mileage limits within which you must stay. Exceeding the mileage limits may attract penalties between 10 cents and 50 cents per extra mile. So, make sure you know how much you plan to drive before leasing a car.
  • Wear and Tear Charges: Failure to maintain the car well attracts wear and tear charges upon turning in the vehicle. You have to be careful not to cause unnecessary dents and dings, resulting in excessive penalties.
  • Lease Termination Fees: At some point, you might decide that you no longer want to continue with the lease. Returning the vehicle before the end of the lease period can result in termination penalties and fees. In some cases, the charges could equal what you would have paid if you continued with the lease to the end.

What Does It Mean Finance a Car

Financing a car means borrowing money to purchase it. It involves making a down payment and regular payments to the lending company. Financing makes it possible for you to be the outright owner of the vehicle.

If you fail to make the payments fully, the bank or car dealership can repossess the vehicle and resell it to recover the amounts you couldn’t pay. Once you finish paying for the car, you become the owner.

Car financing is a popular option for those seeking to own a car, with the average amount for 2020 standing at $35,228 from $33,255 in 2019. On average, car financing deals last between 61 and 72 months, even though others might increase to 84 months.

Advantages of Financing a Car

Compared to leasing, financing a car comes with several advantages you would wish to enjoy. Apart from the opportunity to own the vehicle, the following are the benefits of investing in a car:

  • Ability to Customize: Once you finish making the monthly payments, you automatically become the vehicle owner. That gives you the freedom to adjust parts of the vehicle to what you would like them to be. If you weren’t the owner, it would be difficult for you to change anything on the car.
  • Freedom to Sell: The purpose of financing a car is to own it eventually. Therefore, you can sell it any time you wish. That’s because you have legal rights to do with the vehicle as you want.
  • Possibility to Save More Money: When you opt to finance a car, you become the owner after the one-time payment. You can then use the vehicle to build equity on its value. That’s the ultimate value for money since the money you use to make payments gets converted into cash in the bank.
  • No Mileage Limits: Unlike leasing, car financing doesn’t have mileage limitations. You can drive the car for many miles without worrying about paying penalties. In essence, you are free to use the vehicle as you wish.

Disadvantages of Financing a Car

Despite its many advantages, financing a car comes with several disadvantages. However, nothing should matter if you have an overwhelming desire to own a vehicle. The following are the disadvantages of financing a car:

  • Higher Monthly Payments: Since you’re financing the car’s total value, you’ll end up making considerably higher payments than leasing. The car dealership or lender will likely ask you to put down some money at the start of the payment period. Since the leasing company adds interest to the vehicle’s value, the monthly payments can be very high.
  • Repair Costs: When the warranty period ends, you’ll be obligated to maintain and repair the vehicle yourself. On average, car dealers give a 36,000-mile warranty on a new car and 50,000 miles on the powertrain. Since repair costs can be high, you have to take measures to factor them into your budget.
  • Depreciation Costs: One of the things you have to deal with is the vast depreciation that happens as soon as you drive out of the dealership’s showroom. The car’s value keeps coming down every year, affecting the vehicle’s resale value. Thanks to the depreciation, your equity in the vehicle will diminish with each passing day.

What Are the Differences Between Leasing and Financing a Car

What Is the Difference Between Leasing and Financing a Car

What are the differences between leasing and financing a car from the detailed discussion above? This section outlines the main distinguishing factors between these two ways of having and using a vehicle.

1. Ownership

Leasing involves paying to use the car for a specific period. While you can own the vehicle at the end of the lease, that isn’t the primary purpose of entering into a lease. On the other hand, financing a car makes you its owner. You can use it without mileage restrictions, modification, and customization features.

2. Monthly Payments

Most of the time, monthly payments on a lease are lower than financing. That’s because leasing means you’re only paying for the vehicle’s expected depreciation over the lease period. On the other hand, financing involves paying for the vehicle’s total value.

3. Down Payments

Most lease agreements treat the first monthly payment as a refundable deposit encompassing taxes, registration, and other fees. Some dealerships may require you to make a down payment when financing a car.

4. Vehicle Return

When the lease expires, you can either walk away after returning the vehicle, purchase the car, or lease a new vehicle. It is not possible to return a financed vehicle. The best you can do is sell the car or trade it in.

5. Early Termination

If you choose to end a car lease early, you’ll end up paying an early termination fee. In most cases, the termination fees can be as much as the amount you need to pay to the end of the lease. Getting out of a financing deal means either selling or trading in your vehicle.

6. Depreciation

Your car’s future value does not affect how much you’ll pay in lease payments. Since you have no claim on the future value, you won’t get equity on the vehicle. Financing is a little different because the car depreciates, leaving you with equity on its future value.

7. Distance Restrictions

Leasing agreements include mileage limits restricting you from driving your vehicle too much. If you surpass the mileage limits, the dealership will require you to pay penalties. Since you own a financed car, you can drive it as much as you want.

8. Wear and Tear

Dealerships expect that you’ll return the car as it was before leaving the showroom. Even though it allows a few scratches and knocks, anything beyond the acceptable limits attracts a fee. In the case of a financed car, any wear and tear affect the vehicle’s resale value.

9. Customising

It’s advisable to remember that a leased car doesn’t belong to you. Therefore, you lack the freedom and power to customise it as you may wish. If you carry out any customisation, you have to get rid of it before returning the vehicle. On the other hand, you’re free to customise a financed car since it belongs to you.

The Bottom Line

What is the difference between leasing and financing a car? One of the main points of distinction is that leasing is like hiring to use a vehicle for some time, while financing results in owning the vehicle. Leasing is a good option if you want lower monthly payments, the ability to enjoy the latest vehicles, and ease of returning the car. Financing is the best option if you intend to own the car eventually. Whether you lease or buy a car depends on your needs and how much you can afford.

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