Car Lease vs Car Loan: What’s Right for You?

For many, owning a car is a necessity. Whether for dropping the kids off at school, commuting for work, or weekend roadtrips, a car is critical for getting from A to B. However, purchasing a new car is a significant financial investment - one that many are not able to afford without help.

A car lease and a car loan are two options that provide the opportunity to own and use a car without paying for the vehicle outright. Each option (car leases and car loans) has its own pros and cons, which can influence which may be most appropriate for you.

What is a car lease?

A car lease is a contract where a lender purchases a vehicle upon the borrower’s request for an agreed period. Regular payments will be made to the lender during this period. Once this period ends, the car will be returned to the lender. Alternatively, the borrower can purchase the vehicle from the lender through a final sum after the lease period has ended. 

What is a car loan?  

A car loan is an agreement where a lender will provide the borrower with the funds required to purchase a new or second hand vehicle. Car loans can be either secured or non-secured, where the loan is tied to an asset (typically the vehicle), which can affect repayment terms and interest rates on the loan. After the car loan period is over and the final payment is made, ownership of the vehicle is under the borrower.

Car lease vs car loan - pros and cons

Pros of a car lease

• No down payments: Unlike buying a car outright or paying a deposit on a car loan, large down payments are generally not required for a car lease.
• Lower monthly payment: Monthly payments for a car lease only include the expected depreciation of the vehicle during the lease period, rather than the full purchase price. This can significantly lower monthly payments.
• The latest car model: A car lease may appeal to car lovers who have their eye on the newest model. A car lease allows borrowers to only commit to the car purchase while on lease, rather than having to sell it when wanting to upgrade.
• No need to resell: A car lease removes the hassle of selling the car or negotiating with a dealer to trade in the vehicle. 

Cons of a car lease 

• Restrictions: The lender if the owner of the vehicle, which means they can place restrictions on use and alterations. Some leases may cap the number of kilometres per year, and limit modifications like roof racks or tinted.
• No equity: Monthly lease payments cover the depreciation of the vehicle over the lease period. While this can reduce repayments each month, there is no built up equity and you are not working towards ownership.
• Cancellation payments: If you decide to end a car lease earlier than the agreed period, there may be a significant cancellation fee.

Pros of a car loan

• Ownership: Once paid off, you are the official owner of the car.
• No limitations: Unlike a car lease, there are no restrictions on km driven or aftermarket alterations.
• Tax: The vehicle can be a potential tax deduction from interest and tax depreciation costs on the car.
• Lower or no cancellation fees: If needs change, it is generally easier to pay off the loan without incurring pre-payment penalties. 

Cons of a car loan 

• Down payment: Car finance requires a down payment, which can be 10% to 20% of the car’s purchase price.
• Higher monthly payments: Unlike a car lease, where the borrower pays the depreciated value of the vehicle, the borrower will pay off the full value of the car (plus interest).
• Depreciation: Cars depreciate by an average of 25% each year. Having a depreciating asset can be tied up in the borrower's capital.

Car lease vs car loan: what’s right for you?  

Determining whether a car lease or a car loan is right for you ultimately depends on your situation and needs. If you’re after flexibility and control (ie. owning the car) but do not have the finances to purchase the vehicle outright, a car loan is going to be more appropriate. If you’re looking to drive the latest model and do not want the hassle of reselling your vehicle every few years, a car lease may be the better fit.

Before committing to either a car lease or car loan, having a comprehensive understanding of what’s involved is essential. Powered by Australia’s best finance and mortgage brokers, Before U Loan provides Australians with the tips, resources, and what to look for before leasing or getting a car loan. We can connect you with a broker to help determine the best financial product for your situation - browse our network of partner brokers to get started.