How does leasing a car differ from getting a car loan?

Answered by Car Loans Expert Jim on December 26, 2020

I want to get my first car soon. Can you explain the difference between borrowing and leasing to get a car?

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Car Loans Expert

There are a couple of main differences between borrowing money to buy a car and signing a lease.

When you lease a car, you are purchasing the use of the car (not the car itself!) for a set period of time, usually two to four years. The leasing company retains ownership of the car, and you have to either return it or buy it at the end of the lease term. The good news with a lease is that the monthly payments are significantly lower than the cost of borrowing to buy.

There are two downsides to leasing. The first is that there are extra costs when signing the contract. You pay an acquisition fee, security deposit, registration fee, and sales tax, along with the down payment. The second downside is that you don’t build up equity. At the end of the lease you don’t own the car, unless you choose to buy it at its residual value.

When you get a loan to buy a car, you borrow the money, less a down payment, to give to the dealer in exchange for the car. Then you pay the lender monthly at a set rate of interest for a term of two to eight years. The good news is that at the end of the loan repayment, you own the car free and clear. And while paying it off, you can sell it or trade it in, using the money from the sale to either pay off your loan or make your down payment on your next car.

Of course, there are some drawbacks to car loans. First, the monthly payments are typically much higher than when leasing a vehicle. Second, you are borrowing money to buy something that loses value continuously from the time you start driving it. This is called “depreciation” and it is one of the factors, along with mileage and condition, that estimators use to determine the value of a used car. So it’s good that you have the car when the loan repayment is complete, but it has a much lower market value than it did when you bought it.

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