Auto Loans vs Leasing: Which is Better?

Here’s How to Choose Between Auto Loans vs. Leasing

Buying a car is one of the biggest financial steps in many people’s lives. After all, choosing between financing, paying cash or even renting (via leasing) can make a big difference to your pocket in the long run.

If you’re thinking of buying a car, you’ve probably come across two fairly common options: car loans and leasing. Both have their advantages and disadvantages, but which one is the most advantageous for you? Let’s explore the differences and find out which is the best choice for you.

What is a car loan?

Car loans are exactly what the name suggests: a loan you take out to buy a car. Basically, you borrow money from a financial institution and pay it back in monthly installments, which include the principal amount of the loan and interest.

The most important thing here is that, at the end of the payment, the car is yours and you can use it however you want.

The main advantage of the loan is that once all the installments have been paid off, the vehicle becomes 100% yours. What’s more, depending on your contract, you can choose the amount of the down payment, the term and even renegotiate the payment terms, if necessary.

What is leasing?

Leasing, on the other hand, is a form of long-term rental, but with an option to buy at the end of the contract. In this case, you pay monthly installments for the use of the car over a set period, but at the end of the contract you have the option of buying the vehicle for a residual value, which is already stipulated at the beginning.

The big difference with a loan is that during the time you are paying the leasing installments, the car remains the property of the leasing company. You don’t own the vehicle until you choose to buy it at the end of the contract (and if you want to).

This type of contract can be interesting for those looking for a more affordable form of payment at the beginning, but without the obligation to buy the car at the end.

What are the advantages of each? Comparing benefits

1. Vehicle ownership

The main difference between loans and leasing lies in who owns the car. With a loan, as soon as you pay the last installments, the car becomes completely yours.

With leasing, you don’t own the car until you decide to buy it at the end of the contract. In other words, if your goal is to have full ownership of the vehicle from the start, a loan is the most suitable option.

2. Initial costs

Generally, leasing requires a smaller down payment or even no down payment at all, depending on the contract. The installments also tend to be lower compared to financing, which can make budgeting easier in the short term.

In the case of a loan, the installments tend to be higher, since you are buying the car outright. However, the amount of the down payment is your choice, and you can pay less up front by adjusting the amount of the installments according to your financial capacity.

3. Flexibility and personalization

Loans tend to offer more flexibility when it comes to personalizing your payment. You can choose the amount of the down payment, the term and even renegotiate the debt in some cases. This allows for financial planning that is more tailored to your profile.

What’s more, the car is yours, so you have complete freedom to make modifications or sell the vehicle at any time.

Leasing, on the other hand, gives you less flexibility. As you don’t own the car, you can’t customize it or sell it until the end of the contract. However, leasing can be interesting for those who don’t want to worry about maintenance.

4. Option to buy at the end

Leasing usually offers the option to buy at the end of the contract for a residual value, which may be lower than the vehicle’s market value. This is an interesting option for those who want to use the car for a few years and then decide whether it’s worth buying or not. If, for some reason, you don’t want to buy the car, you can simply return the vehicle and close the contract.

With a loan, the car is yours as soon as you pay the last installment, and you can do whatever you want with it from then on, without having to make any additional decisions.

Disadvantages

Car loans:

• Higher installments: installments tend to be more expensive at first, especially if you make a smaller down payment;
• Full responsibility: you are responsible for all additional costs, such as maintenance, insurance and taxes.

Leasing:

• Ownership of the vehicle: the car is not yours until the end of the contract (if you decide to buy).
• Restricted use: you cannot customize or sell the car while the contract is in force;
• More expensive in the long term: if you decide to buy the vehicle, the final cost may be higher than that of a conventional loan.

Which is the best option to choose?

There is no single answer, as it depends a lot on your needs and your financial planning. If you want to own the car outright and can afford to pay higher installments, a car loan is probably the best option. It guarantees ownership of the vehicle and gives you more freedom of choice over time.

If you prefer to have lower monthly costs and don’t mind not owning the car for the duration of the contract, leasing can be an interesting choice. Also, if you’re not sure whether you want to keep the car in the long term, leasing allows you to return the vehicle at the end of the contract or buy it for a residual value.

Ultimately, the choice between borrowing and leasing depends on your objectives, your financial situation and how much you are willing to spend on the car in the future. Both have their advantages, and it’s best to analyze which one best suits your needs!

Written by

Juliana Raquel