In addition to buying a car, many customers like to opt for leasing or financing, also known as a car loan. One of the reasons for this is that these forms of financing do not require a high level of liquidity. Both forms are widely used, but their differences and advantages are often unclear. In this article, we explain the differences between leasing and financing and show which option makes sense when.
Leasing - a new car for a limited time
Leasing is basically a long-term rental. You pay for the use of the car, while the vehicle remains the property of the leasing company. The monthly instalments usually cover the financing of the vehicle and its use. Costs such as maintenance, insurance and tyres are additional. At the end of the contract, if the dealer agrees, you have the option of buying the car at an agreed residual value.
Advantages of leasing
A new car on a regular basis: Leasing gives you the opportunity to drive a new car every few years without having to pay the full purchase price.
Lower monthly costs: Leasing instalments are often lower than those of credit financing.
No long-term commitment: At the end of the leasing contract, you can return the car without having to worry about reselling it.
Disadvantages of leasing
No ownership of the vehicle: The car remains the property of the leasing company for the entire term of the leasing contract. Nevertheless, you bear the costs for tyres, service and repairs.
Kilometre restrictions: Leasing contracts often specify a maximum number of kilometres that can be driven per year. If you exceed this limit, you will incur high additional costs.
Compulsory comprehensive insurance: Lessees are usually obliged to take out comprehensive insurance, which increases running costs. However, you need to be careful in the event of a total loss: The insurance company will pay the current value of the vehicle. If this is less than the remaining book value of the lease, you may have to pay the difference.
High costs for premature contract termination: If you want to terminate a leasing contract prematurely, high fees may be incurred.
Financing - a new car on credit
Financing, often referred to as a car loan, is a way to buy your dream car without paying the full amount immediately. You borrow the money from a bank or financial institution and pay off the vehicle over a fixed period of time. From day one, you are the owner of the vehicle.
Advantages of financing
No kilometre restrictions: Unlike leasing, there are no kilometre restrictions. You can drive as much as you like without worrying about additional costs.
Free choice of insurance and garage: As the owner of the car, you have the freedom to choose your own insurance and garage for repairs, which can potentially save you money.
Tax advantages: You can deduct the interest on your car loan from your taxes, as it counts as interest on debt. However, this is not possible for leasing, except for companies.
Disadvantages of financing
Higher interest rates compared to leasing instalments: The interest on a car loan can be higher than the cost of leasing, especially if you have a poorer credit rating.
Resale cost risk : As the owner of the vehicle, you bear the resale risk. This means that the resale value of the car may be lower than expected, especially if the market is saturated or the model is no longer in demand. This can lead to financial losses, especially if the sale price is insufficient to cover the remaining loan amount.
When is leasing suitable?
Leasing is ideal if you prefer lower monthly expenses and would like to drive a new car every few years. It's also a good option if you need a business vehicle, as the leasing instalments are tax-deductible. Financing, on the other hand, is recommended if you want to use your car for the long term and want the freedom to modify or sell the car as you wish.
Car subscription: an alternative to both
A car subscription like the one from Carvolution offers a flexible and often more cost-effective alternative to leasing and financing. All costs, except fuel, are included in the monthly price. This includes insurance, taxes and maintenance, which creates a transparent cost structure. You can find out more about the benefits of a car subscription in this blog article.
Conclusion
The choice between leasing and financing depends heavily on your personal needs and financial means. If you would like to drive a new car regularly and don't want to make a long-term commitment, leasing could be the better option. However, if you prefer more control and long-term ownership, financing is probably more favourable. Either way, a car subscription offers a flexible and often cheaper alternative to both traditional forms of finance.
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