Leasing and financing – they are both smart means of getting to the car of one’s dream. Though both these means of buying cars require owners to churn out monthly payments in time, there are some important differences that need due consideration to make a wise choice. Here's all you need to know about Leasing Vs Financing and the differences between them.
Say you have decided to purchase a Tata Indigo eCSA at Rs 6.00 Lacs approximately (Ex-showroom Price) in Jaipur. A financed vehicle’s value will depreciate in future, but its cash value will be yours to use as you desire. A leased car’s FV and will not affect you financially, but then, you will not gain any equity in it.
Up-Front Costs / Down payment
The down payment for financing a new car would depend on the make/model of the vehicle, your credit history and negotiation skills, and purchase timing in the year. Typically, you will be paying a higher down payment when buying a vehicle than when leasing it. Also, for a new Tata Indigo eCSA (say) you need to pay RTO tax of INR 66755, insurance premium of INR 24113, and other miscellaneous costs (extended warranty, AMC charges, standard accessory charges, etc. ) to the tune of INR 16808. Thus, your on-road cost would effectively be INR 687891. In case you lease a Tata Indigo eCSA, the ancillary costs will be taken care by the immediate owner.
Total Costs and Monthly Payments
In most cases, lease payments tend to be cheaper than their finance counterparts. The latter covers the vehicle’s depreciation, so once it is returned, you have covered the value lost by its dealer. In other words, by financing your car, you are buying equity in the car purchased by you and also paying off its depreciation, thus making your EMIs higher. However, there are no extra costs after a finance contract ends. On the other hand, a lease agreement that continues after its term goes on attracting payments.
You can modify or customize a financed car as you like. However, in case of a leased vehicle, as the dealer would want his car back in a sellable condition, all custom parts and modifications will have to be removed at the end of the lease term – all residual damages have to be paid by you too.
You may trade in or sell your financed car any time and use the cash generated from the proceeds to pay off your loan balance. In case a lease is ended early, you will have to pay early-termination charges that can be as costly as sticking to the contract.
Most leases underline a mileage restriction. Upon driving additional miles, extra amount will be payable to the dealer at the end of the lease term. This is because you have accelerated the depreciation pertaining to the car – such is not the case with financing your vehicle. Continuing the above example, contrary to a leased one, a financed Tata Indigo eCSA, which would give a mileage of 25 kmpl on an average, would not affect your overall financing costs in any major way.
If you own a financed car, you'll have to work out how to sell or trade it in if you desire to use another one. In case of a leased vehicle, at the time of its lease-end, all that you need to do is pay up the end-of-lease costs and go for another vehicle. For instance, if you decide to sell a financed Tata Indigo eCSA after running it for 3.5 years, you can expect to get about 3-3.5 lacs for the same after considering depreciation; this is not possible in a leased car.
In auto financing, the maintenance costs end up being higher as you will be operating the car even outside its term of depreciation; in other words, your car inflicts expensive wear and tear costs as it ages. On the other hand, by taking a lease for your car you always enjoy a ‘newer’ car at all times.
There are better warranty protection options to be gained through leasing rather than financing your car. In general, car manufacturers offer adequate warranty protection covering the first three years of any car's life; this period usually coincides with the term of a lease. If you choose to finance a car, you may end up owning it beyond the warranty period.
Whether you choose to lease or buy your car, the above mentioned differences will help you understand your position as a payer and owner. Prior to jumping the gun, you may want to compare other considerations like your car’s objective market value, true market value, etc.
So, which way will you go? Will you lease or finance your next car?