Car prices are increasing on a bi-weekly basis, and it’s not easy for the majority to buy a new car. Many are left with only two options: lease or finance a car.
In Pakistan, people use the terms lease and finance interchangeably, whereas both terms are poles apart. Knowing the difference between leasing and financing a car is essential to pick a better option that suits your lifestyle and budget.
Let’s start with defining car lease and car finance to help you understand them better.
What is a Car Lease?
The basic definition of a lease is, “It’s a contractual agreement to pay the owner a certain amount of money in exchange for an asset.” In the case of a car lease, the lessee (a person who leases the car) rents the vehicle from the owner (bank/dealership) or lessor for a certain amount of time and money.
Following are the features of a car lease that make it different from car finance:
- The bank/dealership owns the car
- Lessee only uses the car on a rent basis
- At the end of the contractual period, the lessee has to return the car in reasonable condition.
What is meant by Financing a Car?
In car finance, the bank/dealership offers the car to customers in installments and earns interest. Unlike lease, the installments break down the total car price into monthly payments and the interest. You are the car owner from the first day of financing it.
Like a lease, car finance is also based on a contract having specified the time duration, amount, and the number of installments.
Here are the standard features of car finance.
- Borrower is the owner of the car
- Monthly payments in car finance are the total value of the car and the interest divided over monthly installments
- Upon completing the contractual period, the owner gets to keep the car.
Lease v Finance: Pros and Cons
1. Ownership
One of the major concerns of anyone paying a chunk of money in the name of monthly installments is if they really own a car in their name.
In case you lease a car, the bank owns the car. Lessee is just renting the car from a bank for a specific period and amount according to the nature of your contract. At the end of the agreement, you either have to return the car or buy it from the bank.
Whereas in the financing, you own the car, and you are paying against the price of the vehicle to the bank. Simply, you own the car, and you are paying installments to the bank against it.
2. Down Payment
Usually, when leasing a car, there is no down payment involved. Any eligible person can lease a vehicle by paying the first month’s payment, a security deposit, an additional fee like tax, a processing fee, etc.
There has to be a downpayment against the vehicle when financing a car. The amount of downpayment determines the number of installments paid across the years. It also has additional fees like taxes, processing fees, registration fees in case of a brand new car, etc.
Pro tip: Make a large down payment, if you can. This will decrease your monthly installments.
3. Installments
Usually, monthly installments for leased cars cost less as compared to if you’ve financed a car. The installment of leased cars includes depreciation of the vehicle during the lease period, interest, and additional fees.
When financing a car, you are breaking down the value of a vehicle into monthly payments. So it will be much higher than a leased payment.
4. Repair and Maintenance
A leased car is a bank-owned car. Like any regular rented car, the owner pays for the regular wear and tear. However, in case of excessive repair and maintenance, the bank can put a penalty fee on the lessee.
The person who finances the car is totally responsible for the wear and tear of the vehicle.
5. Early Termination
Whether you decide to lease or finance, at the end of the day, both are contract-based arrangements. The amount of monthly installments and the duration is written on the contract. In case of early termination of the agreement, banks can charge termination fees. This fee usually costs as much as going with the original monthly payments.
In the case of a financed car, the bank only needs monthly payments from you. You can sell your vehicle anytime and keep paying the periodic payments or terminate the contract by paying the remaining amount to the bank.
6. Modification
Leased cars may require permission from the bank to modify the vehicle. If you want any further modifications, it can be a problem.
In financing, this is not an issue since you’re the owner. You can modify or customize anything you want in the vehicle.
Should you Lease or Finance a Car?
In the end, it’s all about freedom. Which you need to pay for. Financing allows you a lot more freedom than leasing, which is cheaper.
An important deciding factor is that if you’re going to drive a car for the short term, it’s better to lease it from the bank. However, financing makes more sense if you intend to keep the car for a longer duration.
Lease or finance, which one do you think works best for you? Let us know in the comments below.
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