What is the Difference between Finance and Leasing?

When it comes to purchasing a new car, many tend to confuse Finance and Leasing but there is a clear difference between the two.

Acquiring a vehicle can be such a significant investment, most times born out of necessity. So, you’ll do well to want to explore not just all of your financial options before signing the papers but also your budget, make and model of the car you can afford etc.

Purchasing a new car short of an all-cash payment requires two other options: Leasing and Financing. 

And after figuring out and deciding on which option to go for, the question of payment options pops up, either through financing or leasing.

Both are great but each alternative has its upsides and downsides that may better suit you, depending on your needs and financial situation.

So, one may be more appropriate for you than the other.

What is finance?

Financing is a process where one makes monthly payments in order to purchase and own a relatively high-priced article.

People usually finance cars, houses, computers, etc.

Leasing definition

Leasing is a process of borrowing. Here, not you but the leasing company or dealership buys the article you want and allows you to use it for a fixed timeline maybe for a year or two. You get to use your commodity for the fixed lease time until the contract expires.

What is the difference between finance and leasing? 

The difference between finance and leasing are:

1). Ownership:

The primary difference between leasing and financing is in ownership.

In financing, the lender holds a lien to the article till your total payment is done.

In leasing, you must return the article to the lender when your lease ends, making it similar to a rental property.

Note: in the financing, every finance payment you make builds equity in the article and takes you one step closer to outright ownership of a paid-off asset.

While, in leasing, you do often have the ability to buy and own the article at the end of your lease, the total cost will usually be higher than if you financed the article from the beginning.

2). Monthly payment

In financing, loan payments are usually higher than leasing, this is because you’re paying for the entire value of that commodity.

In leasing, the lease payment is always often lower than a loan (financing), this is because, you’re only paying for the depreciation of the article during the time of lease plus interest, rent charges, taxes, and fees.

3). Down payment

In financing a commodity, you are expected to make a down payment which helps in decreasing the monthly interest and payment, although some people make zero down payments. The remaining amount is then paid back monthly along with the incremental interest. The commodity would then be yours as soon as the last payment has been made.

In leasing, a lesser amount is used to determine the incremental interest. Then the remaining amount is called the ‘residual’, which if the customer pays off, he can then own the commodity.

But note, to own the item, you are leasing, you must pay the residual amount, at the end of the lease, or else you have to return the item to the dealer. Some people choose to refinance in order to purchase and own the commodity.

4). Customization 

In financing, you could customize and make modifications to the commodity because at the end of the payment, you own the item.

In leasing, modifications and customizations are almost zero-allowed as the lender will want the item to be in optimal conditions to re-sell, in case you choose not to buy it yourself once the lease is up.

5). Early termination terms

In financing, if you do not want to continue with the contract, you can sell or trade the item and the money you make can be used towards paying off the loan.

In leasing, If you want to end the leasing contract early, you will have to pay a fee known as an ‘early termination fee, which most times can cost as much as sticking with the rest of the lease’s term.

Summarily, in financing, you loan some money to buy an article, but in leasing, somebody else buys the article and lets you use it.

Also, the difference in financial calculations especially in terms of tax payments is apparent and in the end, financing gives the entitlement of the article to the owner, but with a lease, you have to pay more to claim the ownership.

Financing and leasing can be said to be the two opposite sides of a coin.

What’s the difference between PCP finance and leasing

There are many options available if you want a new car.

Both leasing and PCP finance can be cost-effective routes to low monthly payments. They may sound similar but are not the same at all.

a. Definition

1. PCP- Personal Contract Purchase is a car finance method that enables the borrower to have the option of owning that car.

With leasing, it is renting. This means you rent your choice of car for a fixed length of time. At the end of the contract, you return the car.

b. Monthly installment

With PCP,  monthly installments are mandatory and then you have the option to buy the car when your agreement has finished for an additional cost which would be fairly affordable over the term of your contract, as you aren’t paying for the total amount of the car. 

c. With leasing, your interest rate is low.

On the other hand with PCP, you will be charged an interest fee because you are borrowing the full value of the car over an extended period– it is like taking out a loan. So, your payments will be directly linked to the interest rate offered by the finance company.

d. Early termination of the contract 

When you lease an item, its payment is based on its predicted value for the duration it is being rented. That is to say, leasing tends to be a cheaper option compared to PCP, which entails paying for the price of the item, plus interest, over the full course of the agreement.

As a result, you cannot return a leased item to the company before the end of the contract. If you have a change of mind or your circumstances change and you decide not to continue with the lease, then you will be required to pay an early termination fee.

It is good to thoroughly think through before deciding on which method to opt for, and how each option will affect your budget and plans. We’ve put together the main things to consider when looking at a lease purchase vs PCP.

What’s the difference between finance and leasing a car

Financing a vehicle is where you borrow the money to buy it. You then pay regularly to the lending company till the payment is completed and the ownership of the car is now yours.
Leasing a vehicle on the other hand is where you borrow the vehicle and pay regular payments to the company lending it to you for the duration of your usage which ultimately runs from 24-48 months.

The differences between finance and leasing a car are:

Ownership variation

With financing, there is the end result of you owning the car except if circumstances change and you cannot make the payments anymore, then the lending company will repossess the car to try and sell it and recoup what they couldn’t collect from you.

With leasing, the dealership/ lending company owns the vehicle, and at the end of the leasing period, you return the vehicle to the company but if within the duration period, you could no longer make payments, the dealership will repossess the car.

Depreciation variation

With financing, the equity is yours even if the vehicle depreciates in value, you can do as you want with it. 

With leasing, the future value of the car does not affect you but you also do not get any equity from the car.

Affordability variations

With financing, you can’t be behind the wheel of the newest cars every now and then. With leasing, you have the advantage of driving very expensive, new, up-to-tech cars, you can even change your cars every three years and if you enjoy or get attached to the car you are driving, you might then consider financing. 

Warranty difference 

With financing, your maintenance costs are often higher as you’ll own the car outside the warranty period.

Leasing, because most car manufacturers offer up to 3 years of warranty protection, which typically coincides with the length of a lease term, is better and more situational appropriate.

The main difference between financing and leasing a car is who owns the car. Because this affects the whole process, procedures, and usage of the car like how you drive the car, the interest rate, taxation, mileage restrictions, and what happens to the car at the end of the loan period.

Read also: What is Lending Credit? How to Calculate Lender Credit 

Lease vs finance calculator

Trying to decide whether to lease or finance a new car? Leasing a vehicle is renting a car for a set period of time. Financing a car means you own it outright after paying off your loan.

To help your decision on which option may be best for you, our lease vs. finance calculator can help you run the numbers to see which might make better financial sense for your situation.

So, get a better idea of how much money leasing a car versus financing one could save you — or cost you.

Simply study the process below:

Enter vehicle information: this entails 

• Negotiated finance price (sales price)
• The expected sales tax rate
• Car down payment 
• Estimated auto loan interest rate
• Loan term
• Preferred loan term
• Acquisition fee
• Lease term

Pros and cons of leasing a car

There is no golden rule when it comes to deciding which option is best for you either finance or lease rather it takes some reflection on your driving habits and budget.

Leasing a car tends to cost less on a monthly basis as seen in the illustration above and offers you the chance to get behind the wheel of a nicer and newer vehicle every now and then. But it does have its downturns with its upsides.

Pros of leasing a car:

• Lower monthly payments: the monthly and down payment on a leased car is generally less as compared to financing.
• Upgrade often: by leasing, you get to drive the newest and latest-in-tech cars now and then.
• Worry free-maintenance and repair: Many newly leased cars offer a warranty by the manufacturer that lasts at least three years. Under this coverage, the manufacturer or dealer may perform some repairs.

This can potentially eliminate some significant, unforeseen expenses.

• Purchase option: you do not have to worry about resale except of course you decide to keep the car after the end of your contract or if the vehicle is worth more than the purchase option price, buying the car may be an option.

Cons of leasing a car:

• No equity: Just like owning a home, owning a car gives you control over your new asset, which can be beneficial to you either through continuous usage or as a trade-in, or as an asset to sell for cash. But in leasing a car, you have no claim of ownership unless you exercise the purchase option.  
• Mileage restriction and fees: the mileage limit on a leased vehicle usually ranges from 10,000-15,000 miles, exceeding the limit attracts a fee between $0.10-$0.50 for every extra mile. So, going for extra 100 miles, could cost you as much as $50 and of course, many lease agreements do not do balances for unused miles. This is not evident for a purchased car.
• Lack of full control: the restrictions of a leased car can impede how much and how far and what modifications you can put on the car, you can’t sell or trade in the car. You lack control over certain aspects of the vehicle.
• Penalty fees and other costs: excess wear and use could cost you when you lease a car. Standard wear and use are expected but when it is now deemed excessive, you may be required to pay extra fees. There’s also the acquisition fee and the early termination fee if you decide to end the contract early.

Ultimately, it’s more on the high side to leasing cars for the long term instead of buying one and using it for years.

10 Reasons Not To Lease A Car

Take a look at the top 10 reasons you may consider not leasing a car

• 1). You spend so much on a car that doesn’t belong to you
• 2). You are limited on miles, usage, and modifications
• 3). You pay termination fees if you end the contract early.
• 4). You have to keep the car in mint condition else you’ll pay for maintenance and repairs
• 5). Your lease terms remain the same even if you’re in an accident except of course, you have GAP insurance 
• 6). You can’t customize or modify a leased car without attracting fees
• 7). You can’t sell the car to finance a new one
  8). You pay more interest on a lease than on a purchase
• 9). You walk away with nothing after the lease
• 10). The registration and insurance fees are more expensive.

Check out 15 Cheapest Car Insurance For Young Drivers

FAQs on the Difference between finance and leasing

Conclusion

Financing in itself might be taken into account as a capital expenditure, while leasing might be considered an operating expense. This is because in leasing one gets to use the choice commodity that he/she wants and pay a fixed amount like rent every month. At the end of the lease, you don’t own the asset, which is owned by the dealer.

References

• http://www.differencebetween.net
• https://www.humberviewgroup.com/guide/leasing-vs-financing/
• https://www.leasingoptions.co.uk
• https://www.buyacar.co.uk
• https://www.leasefetcher.co.uk
• https://www.investopedia.com/articles
• https://www.edmunds.com/calculators/lease-vs-buy-calculator/
• https://findandfundmycar.com/articles/car-leasing-explained

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