This is, perhaps, the most common concern for every customer pondering over a lease agreement. Why lease and not take a loan? Or, why take a loan and not lease? While both are modes of financing, there is a very big difference between leasing a car and taking out a loan to buy one. Let’s first understand how either option works.
The most important aspect to highlight in both is that depreciation is charged exactly the same way. Because many people believe depreciation is calculated differently in both, they fail to make a fair judgment of the financing options. The first difference lies in the payment of depreciation. For a leasing contract, only depreciation makes up the monthly payments while in a loan, the monthly payment includes a faction for depreciation and another one for the principal amount.
Hence, payments on a loan are much higher than a lease because, at the end of the loan period, the customer gets to own the vehicle, unlike in a lease. If at the end of a term, you want to own the vehicle you have leased, you can do so by paying its residual value and taking ownership. While taxes and interest payments are a part of both plans, in a loan, the interest rate is charged in a descending trend, with the first payment being the highest one. On the other hand, a leasing agreement charges the same interest rate throughout the term.
As mentioned previously, a leasing company buys a car from a dealer only because you agree to rent it. To honor this agreement, a contract is signed between you and the leasing company. A lease default is then not a very easy option for you because banks/leasing companies are very particular about owning a depreciated vehicle.
Lastly, there is no right or wrong in the discussion about loans and leasing. Both choices are feasible under different circumstances and can suit people with varying needs. If your need is to own a car and also invest some money in a bond or stock, leasing is a better option for you. However, if you feel at peace owning a vehicle instead, a loan is the best way forward.