- Leasing a car is essentially renting it from the dealership for a specified period.
- Car financing is taking out a loan to purchase the car outright.
- The critical difference between leasing and financing is that you will eventually own the car when financing, while you will have to give it back to the dealership at the end of the lease agreement.
Choosing between financing and leasing a car is crucial when planning to get a car. Do you want to save money for a down payment and finance the remaining amount to buy your vehicle? Or would renting a car be a better option?
In this blog post, Auffenburg Hyundai of Cape Girardeau will guide you about leasing vs. financing to make the right choice for your requirements.
Car Leasing: Definition
When leasing a vehicle, you pay to use it for an extended period (usually two to four years). The leasing company remains the car’s legal owner during the lease term.
You make monthly payments to the dealership or leasing company during the lease. Since you’re only paying for the car’s depreciation value while you drive it, plus interest and fees, these payments will be cheaper than if you were to finance the purchase of the vehicle.
You’ll have three options at the end of your lease term. You can buy the car outright, lease another vehicle, or turn in the keys and walk away.
Car Financing: Definition
Car financing involves borrowing money from a financial institution to pay for your vehicle. The lender will receive monthly payments from you, with interest and fees. You will have full possession of the car after the loan is repaid.
Differences Between Leasing and Financing:
Difference 01: Ownership
While leasing, you don’t own the vehicle; the leasing company retains the car’s ownership unless you decide to purchase it at the end of the lease. If you choose to buy the vehicle at the end of the lease, you will be responsible for any damage that has occurred during the lease and any additional wear and tear. You will also need to pay any remaining balance on the car loan.
Financing a car gives you ownership of the vehicle once the loan is paid in full. You can sell the car, trade it in, or keep it for as long as you want.
Difference 02: Monthly Payments
Since you only pay for the car’s depreciation during the lease term, along with interest charges (also known as rent charges), taxes, and fees, lease payments are lower than loan payments.
The car loan payments are often larger than lease payments because you pay off the car’s total purchase price, plus interest and other finance charges, taxes, and fees.
Difference 03: Upfront Costs
The upfront cost of leasing a car may comprise the first month’s payment, a refundable security deposit, a down payment (like a capitalized cost reduction), registration charges, taxes, and other expenses due upon lease signing or delivery.
The initial costs of financing a car include the down payment, security deposit, first month’s loan payments, and acquisition fee. The down payment typically equals 10% of the car’s purchase price, and the security deposit usually equals one monthly payment.
Difference 04: Early Termination
Early termination of a car lease may be penalized by a fee. This fee is typically several hundred dollars but can be as high as several thousand dollars. Sometimes, the lessee may be required to pay the remaining lease balance. Early termination fees are designed to discourage lessees from terminating their leases early.
Paying off an auto loan early will save you money in interest. The sooner you repay the loan, the less interest you will pay. Paying off a loan early may also help improve your credit score.
Differences 05: Vehicle Return
When the lease expires, you turn in the keys and walk away unless you exercise your purchase option. If you decide to lease again, you’re back at square one with nothing to show for your previous payments but memories.
If you finance a car, it’s yours to keep, drive until the wheels fall off, or sell whenever you want.
Difference 06: Future Value
The future value of a leased car is essential because it determines how much you’ll pay at the end of your lease if you decide to purchase the vehicle. Lease contracts typically specify an estimated future value for the vehicle, called the residual value.
The future value of a financed car is whatever you can get for it when you sell or trade it in. If you own the car, you can sell it, trade it in, or keep it until it’s no longer drivable.
Difference 07: Mileage Restriction
Most leases include mileage restrictions; these range from 10,000 to 12,000 annually. (You might negotiate for a higher mileage cap.) You’ll pay penalty fees if you go above your limitations.
With finance, there is no mileage limit. You are free to travel as far as you choose. However, remember that increased mileage reduces the car’s trade-in or resale value.
Difference 08: Excessive Wear and Tear
When you lease, you’re responsible for keeping the car in good condition and repairing any damage that exceeds normal wear and tear. This is usually defined in your lease agreement. You might have to pay fees if you turn in the vehicle with excessive damage or missing parts.
With financing, it’s up to you whether or not to repair damage to the vehicle. Of course, you’ll still want to keep it in good condition, so it holds its value, but you won’t be penalized for everyday wear and tear the way you would with a lease.
Difference 09: Customization
You may be restricted in the amount of customization you can do to a leased vehicle. Any alterations or unique components you install must be taken out since the car must be returned in a resalable condition. If there is any remaining damage, you will have to pay to have it or submit an insurance claim, which would require you to pay a deductible.
With a financed car, you can do whatever you want with it! Want to add a spoiler or a new paint job? Go for it! These customizations can even increase the resale value of your vehicle.
Whether you should finance a car or lease one depends on your requirements and preferences. Leasing is generally the best option if you want a reduced monthly payment and don’t mind returning the vehicle. However, financing is probably the better option if you’re looking to build a vehicle’s equity or want more customization freedom. Regardless of the path you take, make sure to shop around to find the greatest value.
The financing experts at Auffenberg Hyundai of Cape Girardeau, serving Tamms, IL., can work with you to create a loan plan that meets your needs, regardless of your credit condition. We can arrange financing for all credit levels because of our expertise in working with various financial institutions.