Financing your car: leasing or car loan?
Don’t have the option of paying for a car in cash? There are various ways to finance your car, including leasing or a car loan. Read more about the advantages and disadvantages of these financing solutions here.
1. How much does leasing cost?
Leasing is often a good choice, especially for new cars. The interest rates advertised for lease deals are usually significantly lower than those for personal loans. In addition to interest costs, you should consider other points:
the question of ownership during and after the contract period
insurance costs
mileage
tax aspects
The interest rates for car leasing vary from provider to provider. They are usually between 0.9% and 7% (as of July 2023) — some lessors even offer 0%. Note: with very low interest rates, you are often limited when choosing a garage or have to add certain service packages.
Car loan: calculate costs
With your own car, you are not bound by a contract. However, you must raise the necessary funds for this. As an alternative to leasing, there is the option of a car loan . Advantage of a car loan: the vehicle is yours and you can resell it later.
2. Leasing or loan: which is more expensive?
The interest rates and contractual terms of leases and car loans depend on the provider and the specific deal. In addition, the customer’s creditworthiness plays a central role. In short, there is no definite answer to the question of whether leasing or car loans are more expensive.
The fact is, car insurance for leased cars is usually somewhat more expensive than for non-leased cars. When leasing, you are also required to take out full casco insurance . On the other hand, you often benefit from lower interest rates when leasing a car than with a car loan.
Our tip: calculate interest rates individually. Providers advertise low interest rates on both sides. However, these are subject to certain conditions and in reality are often higher than advertised.
The cheapest way to drive is to buy the car with your own funds. Then you are not bound by long-term contracts, and you don’t pay interest.
3. Leasing and car loans: what do I need to know?
When it comes to car leasing and car loans, you need to think about a few things. In addition to the interest rate, pay attention to the following points:
Car insurance
When leasing, you are also required to take out full casco insurance. With most providers, cheaper partial casco insurance is not an option. In addition, full casco insurance for leased vehicles is more expensive than for purchased vehicles.
Did you finance your car with a car loan? Then you are generally free to choose whichever insurance you want. However, fully comprehensive insurance is generally worthwhile for new cars up to the end of their fourth year of operation.
Ownership
You are not the owner of the car while you lease it. You may not sell the car nor lend it to third parties without restriction. Other restrictions may also apply, such as on driving abroad. If there is no purchase option in your lease contract, you have no guaranteed claim to the car even after the lease has expired.
If you have financed your car with a loan, you can sell it at any time at the market value. Note: new vehicles in particular quickly lose value in the first few years. The possible selling price is therefore often lower than the outstanding loan.
Early termination
If your income or living conditions change, you may have to cancel the leasing contract. This can be expensive, especially it if happens shortly after entering into the contract. You have to pay the vehicle depreciation costs retroactively, which are much higher at the beginning of the lease.
With a car loan, you can repay your debts early at any time. Once the loan has been repaid, you are no longer bound by any contract.
Excess mileage
The lease contract stipulates a maximum number of kilometres that may be driven per year. If you exceed your allowance, you must pay for the additional kilometres. If you drive less than contractually agreed, you are not usually reimbursed for these kilometres.
Did you finance your car with a car loan? Then you can drive as much as you want. However, cars with more miles on the clock are worth less when resold.
Service
Under a lease, you may be contractually obliged to have your car serviced by authorized garages only. This means you cannot always choose the cheapest option. You may also incur considerable additional costs when returning the car after the lease has expired. Is there any damage to the car that goes beyond normal wear and tear? Then you will also be asked to pay.
When it comes to your own car, you are usually free to choose the garage. However, insurance companies often offer benefits if you choose a partner garage. This can be discounts or a lower deductible, for example.
Tax
For private individuals, loan interest is tax-deductible, whereas interest payments for a lease are not. Leasing can make more sense for self-employed people. If the contract goes through your company, you can deduct interest from the profit.
4. Summary: which car financing option is the “best” one?
When working out which car financing option is cheapest, it is important to consider more than just the advertised interest rates. Aspects such as flexibility, the question of ownership and car insurance costs should be considered when making a decision.
