Financing vs. Leasing vs. Buying
Driving a brand new car is nice but how do you decide how you own it? These days there are three basic options when acquiring a sweet new ride: buying it cash, financing, and leasing. In this article we will look at the three options and see the positive and negative points of each to make sure you make the right decision for you.
First some facts, about half of all new cars sold each year are leased and more and more people are interested in paying a monthly fee for their car. It is a general trend that people want more flexibility in their ownership and payments and that they dislike paying a large fee upfront whilst the value of the car drops fast. Learn more about the perks of leasing.
When financing a car, you pay a monthly fee which covers the price of the car over time. Once approved, the financing bank will transfer the amount you desire to your account with which you can use to buy the car. The car is fully owned by you and the money you owe to the bank is tax deductible. You can enter with any down-payment you want to get to the desired monthly rate. The bank is the final decider of the credit conditions based on your financial situation. Usually, the bank charges a steep interest rate (much higher than leasing) to cover the risk, around 8-10%.
Leasing is basically a long-term rental. Like with financing you can enter with any down-payment but unlike financing, you don’t own the car and the payments are not tax deductible. The big difference with financing is that with leasing, the car has a residual value set by the leasing company. You can see the residual value as an assessment by the leasing company of how much they think the car is worth after your leasing terms have ended. Popular models often have high residual values because the leasing companies believe they can sell the car easily after making your monthly payments low . Depending on the contract, you also have the option to purchase the car at this price when the leasing ends.
The big plus of leasing is that monthly rates are lower than financing because of the residual value and the process of getting the car is much faster and less complicated.
There are a few points you should be careful of when you make a lease:
- Insurance - As the car is not yours you will need to obtain expensive full casco insurance.
- Excess mileage - If you drive more than as set forth in the contract per year you will face an additional cost for the excess mileage.
- Ending early - If you want to end your leasing early you might have to pay a big fine set by the leasing company so make sure to check the contract carefully and discuss this with your dealer.
Buying is the most straightforward of the three, you pay the whole amount of the car and you can drive away.
Let’s look at the three in a simple overview
|Owner of the car||Leasing company||Customer directly||Customer directly|
|Flexibility||Low monthly payments but high fee for getting out||High monthly payments but the car is yours||-|
*Private motor vehicles must be declared as an asset in the tax return.
Leasing vs Financing, example of total monthly costs
We show the difference of leasing and financing based on a concret example of a VW Polo 1.0 TSI Comfortline.
|VW Polo 1.0 TSI Comfortline||Leasing||Financing|
|Total savings||-2'608 CHF|
|Price of car||25'000 CHF||25'000 CHF|
|Residual value||9'000 CHF||0|
|Financing amount||16'000 CHF||25'000 CHF|
|Duration in months||48||48|
|Monthly costs||370 CHF||628 CHF|
|Total cost over the 48 months periode||17'753 CHF||30'160 CHF|
|Total cost including the acquiring at the end||26'753 CHF||30'161 CHF|
|Insurance *||+800 CHF|
* Insurance tend to be 200 CHF more expensive per year due to Full Casco
In this example you save about 2'600 CHF over the total 48 month period. However, be careful of the hidden costs mentioned above.
Not sure what to do? Don’t hesitate to contact us for personal advice at +41 44 461 13 44 or email us at email@example.com. If you need some more information on leasing in particular and why it could be good for you please check it here.
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