Car loan and car lease are two popular funding options for those that don’t have the money to buy a car outright. But just which is the better solution?
This post aims to clear up some of the differences between a car loan and a car lease, so that you can determine which is the better choice for you.
Why choose a car loan?
A car loan involves borrowing money to buy a vehicle. You then pay the total amount of the vehicle back in installments. Most car loans come with interest fees that can vary depending on the lender you choose. You can shop for specific car loans, or you can take out a general personal loan to buy a car. Car dealerships can also connect you with lenders to help set up car finance plans. The benefits of a car loan include:
Ownership
While there are some exceptions like PCP finance, most car loans grant you full ownership of the car as soon as you buy it. Just be wary that your car may be used as collateral if you fail to keep up with payments.
Freedom to modify
Full ownership of your car means that you can modify it however you want. Lease cars typically cannot be modified in any permanent way because you do not own them.
Freedom to sell
Full ownership also allows you to sell the vehicle at any point. You will usually still have to pay off any remaining amount of your loan, however you may be able to pay some of this off using any money you make from selling your vehicle. Leased cars cannot be sold because you don’t own them.
No mileage restrictions
PCP finance aside, there are no mileage restrictions when you buy a car with a loan, allowing you to travel as far and wide as you wish. With a leased car, you may have to pay a penalty if you exceed the annual mileage limit.
Why choose a car lease?
A car lease involves renting a car for an agreed period (usually three years). You pay monthly installments like a car loan, but do not own the vehicle. At the end of three years, you have the choice to buy the vehicle, return it or sign up to a new lease. The benefits of a car lease include:
Lower monthly payments
Leasing a vehicle costs less per month than your average car loan lasting the same period. This is because you are not paying off the entire value of the vehicle.
Warranty coverage
A warranty covers many car leases for the entire length of the lease – which can help pay for certain repairs and maintenance. While a car dealership may provide a warranty when buying a car with a car loan, such warranties rarely last more than 6 months.
Tax deductible
If you’re leasing a car for business purposes, your monthly lease payments are eligible for tax deductions. Car loan payments may not be eligible for such deductions (only loan interest).
End of lease options
You have multiple options once your lease ends, providing you have kept up with payments. You can return the car and not have to pay anything else. You can set up a new lease and drive a new vehicle (or a newer model of the same vehicle). Or you may have the option to buy the car if you want to keep it and own it (but, of course, this may require taking out a loan if you don’t have the funds to buy it outright).
Which should you choose?
If you want full ownership of the vehicle and don’t want to deal with modification restrictions and mileage restrictions, it’s better to take out a loan. Just be sure that you can pay the higher monthly repayments.
If you’re looking for an affordable option and you don’t mind returning the car after three years, consider a lease. But be prepared to deal with the restrictions that come with leasing.
