How is leasing different to buying?
You’ve found the perfect car. But should you buy or should you lease it? There are some stark differences between the two; some affecting how much you pay, and when, others affecting your options when you want to change vehicle.
Here are the key differences between the two:
Owning the car
The primary difference between buying and leasing a car is ownership. If you buy the car, you own it outright and have complete control over how it is used and how long you keep it. When leasing a car, you are essentially renting the vehicle from the funding house over an agreed term with a set mileage limit. You will therefore not have the opportunity to own the vehicle.
If you are buying the car you will need the funds available in full at the point of purchase. If you choose to buy the car and finance it by another means you are also likely to need a bigger upfront payment than you would with a lease.
Leasing gives you the option to drive away a car with far less investment at the offset. This initial payment can be as little as one monthly payment or as many as twelve. You’ll have the choice of these monthly payment multipliers for your initial payment: 1, 3, 6, 9 or 12.
With a lease the amount you owe will be roughly the same over the course of the term. Having a larger initial payment will therefore reduce your monthly payments and vice versa with a smaller one. A larger initial payment could also mean you save on the overall cost of the lease as some funders will reduce their fee as you are effectively borrowing less money. If you’d like to drive a newer, better car than you could afford if buying outright, leasing is a great option to consider.
If you buy your car outright, one big benefit is that you will not be tied in to any further monthly payments. You settle the amount at the point of purchase and that is it!
Where a lease is concerned you will have agreed to pay a set monthly fee for your car over a set term. The cost you are covering with a lease is the depreciation of the vehicle you have chosen plus a fee applied to the finance amount you haven’t covered with your initial payment.
If you have bought your vehicle it is yours to use as you wish and therefore also yours to change as you wish. You can change vehicles whenever you choose to do so, but it is also your responsibility to sell it on, including any time and costs involved in doing so.
With a lease it is not financially viable to exit the lease before the agreed term, although it can be possible. When you reach the end of your term the vehicle is collected from your address and you can easily swap into another. It is as simple as that.
As the old adage goes, “buy appreciating assets, lease depreciating assets”. What this refers to is the financial benefit of purchasing assets that will increase in value, compared to that of a depreciating asset. One example of an appreciating asset is a house, or a piece of cult memorabilia. Contrarily, it is an annoying but nonetheless unavoidable reality that cars depreciate in value from the moment they are driven off the forecourt.
As a car is very rarely going to be worth more when you come to sell it as it was when you bought it, the perceived benefit of the original asset can be misleading. With a lease, this depreciation is set at the outset of the agreement and it is therefore at the funder’s risk.
Leases are restricted by a mileage limit that is agreed at the outset of the agreement. As you are paying for the depreciation of the vehicle and mileage is closely linked to this, the higher the mileage you choose the more you are likely to pay. If you exceed this mileage limit you will be charged a fee to cover that extra depreciation. This fee will be highlighted at the beginning of your agreement and ranges from 3 – 24p per mile.
Not having a mileage limit is one of the major benefits of buying a car. You can use the car exactly how you choose to do so, without any restrictions. However, the higher miles you travel, the less your car will be worth when you come to sell it.
Wear and tear/maintenance
Along with mileage expectations, leases come with an understanding that the car will be returned at the end of the term in reasonable condition. The premise is that undue damage will increase the depreciation of the car so you will be expected to cover these repairs. All leases are bound by the BVRLA’s fair wear and tear guide which highlights the acceptable condition in which to return a lease vehicle. This considers reasonable everyday use and therefore minor scratches or chips can be acceptable.
When you own a vehicle there are no additional fees restricting you on the condition of your car. However, as with mileage, damage will lower the value of the car so you are losing money through its resale value if your intention is to sell it on. Nevertheless, if the intended use of your vehicle is likely to cause damage, buying outright may be the most cost effective option.
If you own your car outright you can make any and all the changes you want without repercussions. With a lease, any changes you make will need to be reversed when you hand the car back so as not to incur extra charges.
To buy a car you will need the funds required to do so. If this is the case you need not worry about your credit history as lenders will not need to assess the viability of lending you money. The opposite is true of a lease. To lease a car you will be required to submit a finance application, part of which is submitting details for a credit check in your name. You will not be successful in your application if your credit rating is not healthy. And in this case buying would be the only option available to you.
To conclude, the biggest differences between leasing a car and buying one lie really in the freedom you’ll have, the hassle involved and the funds required. If you can’t be sure on your mileage for the upcoming few years or that you will be able to look after the vehicle’s condition, buying is likely to be the most cost effective option for you. However, if you are looking for an easy and simple way to enjoy driving a new car for a smaller initial (and often overall) investment, leasing may be the better choice.
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