Financing your car

Paying for your car in cash is definitely the cheapest option. However, there are times when you may need additional funds to make the purchase. In this case, you need to know which makes the most financial sense – a lease or a loan?

At first glance, leasing may appear the more favourable option. But bear in mind that there is more to leasing than just the annual interest charges. You need to consider that factors such as ownership, insurance costs, mileage, taxes and contract duration also affect the total cost of a vehicle over its entire useful life.

 

 

Example: Lease vs. loan

	Lease 4.9%	Loan 7.9%
Purchase price of car	30,000	30,000
Residual value	12,000
Financing amount	18,000
Duration in months	48	48
Interest rate	4.90%	7.90%
Monthly cost	458.90	727.15
Total cost of instalments	22,027	34,903
Total cost including acquisition of car	34,027	34,903
Difference in financing		876
Difference in insurance		-804
Total difference (savings compared to lease)		72

Assumptions / explanations

According to analyses by comparis.ch, full casco insurance for a leased car costs on average 200 francs more per year than that for a non-leased car. The costs of a lease at 4.9 percent roughly correspond to those of a loan at 7.9%.

 

How much does a car lease really cost?

Many people do not realise how expensive leasing really is when they sign a lease contract. Even a personal loan is often cheaper and has the additional advantage of the car being yours right from the start.

 

Hidden costs of a car lease

• Car insurance: As lessee, you are obliged to buy expensive full casco insurance. Even after a few years, you may not switch to partial casco insurance, which is cheaper. What’s more, full casco is even more expensive for leased vehicles than it is for vehicles paid for in cash.
• Tax: For private individuals, loan interest is tax-deductible, whereas interest payments for a lease are not. For self-employed persons, a lease may be more convenient because it can be accounted for via the company and thus deducted from the profit.
• Service Under a lease, you may be contractually obliged to have your car serviced in authorised repair shops only, which are expensive. You may also incur considerable additional costs when returning the car after the lease has expired. Why? As the garage has to buy the vehicle from the leasing company at the residual value, it is in their interest to bill as many complaints as possible to the customer.
• Excess mileage: The lease contract stipulates a maximum number of kilometres that may be driven per year. If you exceed your allowance, those additional kilometres could cost you dearly.
• 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. If there is no purchase option in your lease contract, you have no claim to the car even after the lease has expired. In this case, the garage buys the car at the residual value. This price is usually less than the market value because the car depreciated in value as you used it. At the end of the day, the garage makes a profit at your expense. If you finance a car with a loan, on the other hand, you can sell it any time at its market value – and if you can get more for it than the residual amount of your loan, you can reap the benefits yourself.
• Financing trap: Should your income or personal situation suddenly change and you are unable to continue the lease, you can expect to pay a high price for early termination. So instead of being able to resolve money worries by selling your car, you may run into even greater financial trouble.

 

The 6 great advantages of a car loan at a glance 

• The car is yours right from the start. This means that you may use the car in any way you like.
• If you suddenly find yourself in financial difficulties, you are free to sell the car and terminate the personal loan.
• You do not have to rely on a specific repair shop, but are free to choose the cheapest provider.
• It is you who decides which parts should be repaired, not the leasing company.
• After two to three years, you can switch to cheaper partial casco insurance or you may even choose to get partial casco from the beginning.
• In your tax declaration, you can deduct the loan as debt from your property and the interest paid from your income. If you lease a car, you cannot make any deductions.