Differences Between Financing and Leasing a Car

It has become increasingly difficult to decide between financing and leasing a car. Financing involves a higher monthly cost, but by the end you own the car outright. On the other hand, leasing a vehicle requires lower monthly payments, but that will continue until you switch to a new car. More than anything, it is a choice that you must make based on your financial situation.

Both finance and lease involves monthly payments. And in both situations, an outside party holds a stake in your vehicle.

1. What is car finance?
Finance is an arrangement through which a financial institution such as a bank helps you to buy your car. It’s primarily a loan agreement with the financial institution to pay the car price. In the finance model, to buy a car, you usually need to pay a certain percentage of the car’s value as a down payment. The remaining amount you need to pay back in the form of Equated Monthly Installments (EMIs) as per the agreed interest rates. In the Equated Monthly Installment process, you do not need to pay the amount at a stretch. Post completion of Equated Monthly Installments, you become the rightful owner of the asset.

2. What is a car lease?
The lease is primarily a contractual arrangement. In this process, one party owns the car, whereas the other party gets the right to use the car for a certain period as specified in the lease agreement. In general, lease agreements are done based on a periodic rental basis. Such rental charges decided based on the requirement of asset use and the period of the agreement. The rental amount is the income of the owner or the lessor.

In the lease agreement, the duration of the lease case is short or long term which can be mutually decided. In the case of a car lease, both parties need to sign a car lease agreement where all terms and conditions are specified.

3. Car finance vs car lease
There are a few fundamental differences between car finance and car lease. If you are planning to finance or lease a car, it is important to make a note of the following points:

  • In the lease agreement, the lessor or the owner to purchase the car and allows the lessee to use it on rentals. On the other hand, car finance is a loan agreement you do with a financial institution to buy your car. The financial institution pays the price of the car based on the loan agreement on behalf of you. In a car finance model, the buyer becomes indebted toward the financial institution.
  • A car lease agreement only allows you to use the car for a specific period. On the other hand, car finance allows you to own the car
  • The consideration made for any lease agreement is known as lease rental. On the other hand, while buying through car finance, you need to make a down payment and rest amount in form of Equated Monthly Installments
  • In a car lease, the installment amount is the cost of using it. On the other hand, in the case of car finance, the installment amount consists of the principal amount of the car’s value and the interest payment made by the financial institution on behalf of you while buying your car
  • In the case of a car lease, the monthly installment of the rental will be at a lower side if you compare it with car finance
  • In the case of a car finance model, you will own the car, but in the case of a car lease, you have to return it to the lessor at the end of the lease agreement