Lease Vs. Loan: Understanding Their Differences

Understanding the differences of a lease vs loan is important if you're considering auto finance to get a new car. Car loans differ from car leases in many ways-leasing a car is not the same as taking a loan on a car-and both are worth considering if you need to have access to an automobile. Both involve car finance and both will allow you to drive a new car, but there the similarities end. The main difference between leasing a car and taking a loan on a car is that leasing a car costs less, but is more of a rental than a purchase. There are advantages to both leasing and loaning.

With a lease, you are essentially renting the car and paying for its devaluation over time-for instance, if a car is expected to devalue by $5000 over the course of 3 years, you can expect to pay a little over $5000 during a 3 year lease. When you are finished leasing a vehicle, you return it to the dealership and either purchase it or get a new vehicle. When you purchase rather than lease a car, the car is yours to keep unless you decide to resell it.

Under most lease agreements, any repair costs are covered. All you pay for a lease is a down payment, a set monthly payment, and gas. If you own a car, you'll be responsible for the repair bills unless your warranty covers it.

Leases generally have a limit of 15,000 miles per year. If you go over 15,000 miles (or whatever the limit is for your specific lease) you will be charged per mile, similarly to going over your allowed minutes on your cell phone. You can purchase extra miles ahead of time, however. Obviously, if you purchase a car, it's nobody's business but your own how many miles you drive in a year.

As previously stated, a lease means that you are paying only for the devaluation of the vehicle and not the worth of the vehicle itself. Because of this, leases are much cheaper than the loan to purchase the same car would be.

The difference between leases and loans is basically in ownership of and responsibility for the vehicle. With leases, the car is not yours and service and maintenance costs are covered. With loans, the car is yours, but so are any problems which may arise from it. The costs of leases and loans reflect these differences. Whether a lease or a loan is right for you depends on your financial situation and what you intend to do with the car. Both have clear advantages and disadvantages for you to consider before making a decision.