What’s the Difference Between Financing and Leasing a Car?
So, you are looking to lease a car, but you are not sure what the difference between financing and leasing is. In this guide, we are going to dive deep into what financing and leasing a car entails, we discuss the benefits of each, and go through the things you may need to consider, before deciding whether financing or leasing is the best option for you.
The first thing to ask yourself when choosing between financing and leasing your car is, do I want my car for a short period of time, or will I keep this car for 7 years and more? This may help direct your decision between financing vs leasing a car.
Car Finance Explained
The main difference between financing vs leasing a car is that when you finance a car, you are making payments on the total purchase price of the car. Once you have paid off the total for the car, you will then own it.
An example of car financing would be if your dream car costs £35,000 and you want to finance it for 3 years. The cost of the car, along with a variety of other aspects such as maintenance repairs, insurance, etc would be factored into the monthly cost. After the 3 years, you will have full ownership of the car.
If you are searching for a specific model, don’t want to change your car often, and want to purchase it once the lease term has ended, then financing may be the best option for you.
Benefits of Financing a Car
Financing your car rather than leasing can offer a variety of benefits, more specifically if you are looking to keep the vehicle for a longer period. These benefits include:
Spread the cost of buying a car
Maintain monthly budget
Improve credit score
No worries of depreciation
Types of Car Financing
Personal Lease
The personal lease financing option simply allows you to finance your vehicle for a fixed monthly cost, without the option of purchasing the vehicle at the end of the contract.
Personal Contract Purchase (PCP)
An example of PCP would be, if you are looking to buy a car for £45,000 for 48 months (not taking other factors such as interest rate into consideration). You would be required to put down a deposit say a 10% deposit which would be £4,500, and then pay a monthly fee of £500. You tend to have three options at the end of the deal which would be; returning the car, requesting a new loan, or trade the car in.
Hire Purchase (HP)
Hire Purchase financing is simply where you borrow the money, the security is the car, and once you have finished the financing term, you are then the owner of the car or vehicle.
Car Leasing Explained
Unlike financing, if you are looking to lease a car, you will be paying a portion of the total car cost. You will need to pay an initial rental, which is a non-refundable deposit, and then chose whether you want a 12, 36, or 48 month lease.
If you are someone who likes to change their car every few years, the latest technology and advanced features, then leasing a car is the best option for you.
<h3> Benefits of Leasing a Car </h3>
Latest Technology: You may consider leasing your vehicle if you are someone who is looking to upgrade their car every few years. Either you seek for the newest technology, and higher specification car. If so, leasing is the option for you.
Business Benefits: Leasing a car over financing can be ideal for businesses, for money saving aspects. A business has the ability to deduct the car costs as a business expense. If you want to find out more about leasing a car through your business, read our news blog ‘How to Lease a Car Through a Business’.
Luxury Cars: Although both, leasing and financing a car can be more affordable than purchasing outright. Luxury cars are known to come with expensive repairs out of warranty, and drop in value in 4-5 years, therefore if you are wanting to keep the costs low, leasing is the option for you.
Things to Consider When Leasing a Car
Mileage Limit: When discussing your leasing deal, you will agree a mileage limit (up to 20,000 miles per year) on the vehicle. If you go over this limit, the dealership may charge.
Car Condition: You will need to make sure that you have looked after the car throughout your lease. If you have you have damaged, or the car needs repairs, the dealership may provide an additional cost.
Commitment: If you decide to break the lease early, there can be additional costs.
What is Better? Financing VS Leasing
Unfortunately, there is not one single answer to the much-asked question, what is better, financing or leasing? As every driver is different, they have unique needs, preferences, and financial situations. Therefore, we have outlined a few points below for you to read over, decided what resonates with you and then set you up on the road for leasing or financing your next vehicle.
Ownership: If you are leasing a car, although your name will be on the documents, you do not own the car. Whereas, you have the ability to own your car at the end of a financing term.
Upfront Costs: You will find that the upfront costs are cheaper for leasing a car than financing as it includes the first monthly payment, deposits, and other costs.
Monthly Payments: Typically, lease payments are lower than financing payments.
Returning the Car: When your leasing agreement is over, you have the option to return the car or start a new lease agreement. When you finance a car, you can decide when you sell or exchange the vehicle.
Mileage: As previously mentioned, you will have a mileage limit on a lease vehicle of up to 20,000 miles per year. However, you will not have to worry about this if you were to choose to finance your vehicle.