Differences Between Financing and Leasing a Vehicle

Apart from all-cash purchases, the two chief options for getting a new vehicle are financing it and leasing it. In both cases, one gets to walk into a vehicle lot, agree on making monthly payments, and drive off with their vehicle. However, the nitty-gritty of the two payment systems are very different. Depending on one’s financial situation, one will find that one of the systems will be more suited than the other.

Essentially, the chief difference between finance vs. car leasing is that with a lease, one never owns the vehicle and is required to give it back to the dealer when the lease period has elapsed. When it comes to financing a vehicle, payments are made until the vehicle is paid off. Once that happens, one gets to keep the vehicle. Listed below are the chief differences between finance vs. car leasing:

1. Ownership
The main difference between finance vs. car leasing is in the ownership of the vehicle. When one finances the vehicle, the lender holds a lien against the vehicle. At the end of the payment term, the person who has financed the vehicle owns it, free and clear. Every finance payment one makes ends up building equity in the vehicle and takes the person a step closer to owning the paid-off asset outright. With leasing, one must return the vehicle to the dealer when the lease ends, making every lease payment akin to a rent payment. Even if one wishes to buy the vehicle at the end of the lease, the cost is generally higher than if the vehicle had been financed in the first place.

2. Associated costs
Lease payments are cheaper than financing payments in case of most vehicles. Lease payments essentially cover the depreciation of the vehicle so, theoretically, when the vehicle is returned to the dealer, one has paid the value that the dealer has lost. Hence, most leases have mileage restrictions and extra miles driven are charged. Finance payments not only build equity in the vehicle but also pay off its depreciation, usually making the monthly payments higher. However, additional costs need to be occurred at the end of the contract.

3. Affordability differences
One of the main advantages of leasing a vehicle is that one can typically afford a more expensive, luxurious vehicle by leasing than they could have if they had gone for financing. The characteristically cheaper monthly payouts allow one to lease vehicles which might be too expensive for them to finance. What’s more, one can obtain a new vehicle every time the lease expires, which is usually around three years.

4. Warranty protection
When it comes to warranty protection, leasing the vehicle is always better as opposed to financing. Most vehicle manufacturers offer substantial warranty protection for the first three years of the life of a vehicle, which characteristically also overlaps with the lease’s length. Maintenance costs are often higher in financing vehicles since the vehicles will be owned outside the warranty period too.