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New car: should I choose a leasing or loan plan?
It’s the Autofestival and are you about to buy a new car? Most drivers are so enthusiastic about the idea of buying a new car, they do not realise the impact it will have on their finances. Understanding how a lease or a loan will affect your monthly budget will help you make the right choice.
Lease or vehicle loan: what are we talking about?
Vehicle loan
A vehicle loan is an investment solution that enables you to borrow the money from a bank or lending institution. It makes you the owner of your vehicle. You bear all the related costs: the fuel, the tyres, the maintenance, the insurance policies and the taxes. The financial institution lends you the money, and then you’re on your own if any problems. However, when you’ve paid off the loan, you can sell your car and recover some of your outlay.
Operational lease
A lease is like a long-term rental agreement. In essence, you commit to making payments over a set period of time and at the end you return the car — just as you would if you were hiring a car on holiday. The leasing company rents the car to you with more or less complete coverage of the additional costs. You will have to comply to a kilometre limit and you will pay a penalty for each additional kilometre if you exceed this limit. Additional charges also apply to damage beyond normal wear and tear — just like with a rental car. At the end of the lease, you return your car, as it is not yours unless you have opted for a lease with an option to buy (LOB).
In short, on the one hand you have lent the money, and on the other you have lent a car.
The major differences between a lease and a car loan
At first glance, vehicle loans and leases seem to be very similar propositions. In both cases, you make monthly payments in exchange for being able to drive a car. However, leasing works very differently from other forms of vehicle financing, especially when you consider your options and obligations at the end of the contract.
| Leasing | Vehicle loan | |
| Type of vehicle | New or recent vehicles. | All types of vehicle: new or second-hand. |
| Upfront costs | There are usually no upfront costs, but paying a good deposit is a good way to reduce monthly payments. | You do not have to make a personal contribution. |
| Monthly costs | Monthly payments are generally lower. | Monthly payments are usually higher than lease payments. |
| Maintenance | Leased vehicles are generally covered by a maintenance contract. | As the owner, you are responsible for all maintenance costs. |
| Normal wear and tear | You must keep your car in good condition, and you may be charged extra for excessive wear and tear. | Wear and tear will not affect your loan, but may reduce the overall value of the vehicle. |
| Mileage | Leases have kilometre limits, generally around 20,000 or 25,000 kilometres a year. At the end of the lease, you will have to pay a supplement for every excess kilometre. | You can drive as many kilometres as you like. |
| Car customisation | Customising or changing the appearance of the car may breach the leasing agreement and result in additional charges. | You are free to customise your car as you see fit. |
| Ownership | You do not own the vehicle, but you make payments for its exclusive use during the lease. At the end of the lease, you must return the vehicle unless there is an option to buy, with a residual value to be paid off. | You own the car, and make monthly payments to pay it off. You can of course sell it at any time or pay it off early (usually without penalty) or take a break for unexpected expenses. |
| End of the contract | At the end of the lease, you can return, buy or exchange the vehicle. | At the end of your car loan, you own the vehicle, and can keep it, sell it or exchange it. |
A conclusion that depends on you
Everyone has different priorities — in terms of cars, use and finances. When deciding between leasing and buying with a loan, consider your priorities in these three areas.
You may consider that leasing is primarily intended for motorists who want to regularly change their vehicle, it offers optimal ease of use, you don’t have to worry about anything, however these advantages have a cost that should not be overlooked. Conversely, vehicle loans offer a number of advantages including freedom of use, resale value and tax deductible interest on loans.
