Difference Between Finance and Leasing

Finance vs Leasing

Finance and leasing are two options available for purchases. People are not aware of their options when they are making purchases of expensive items such as a home or a car. Most are aware of financing where they get money to buy and repay in equal installments over a period of years but not many know much about leasing as an option. Though both finance and leasing allow you to use the item that you are buying, there are fundamental differences in terms and conditions that will be highlighted in this article that will enable you weight their pros and cons and to choose either depending upon your requirements.

What is Finance and What is Lease?

Finance is an option that lets you own the product whereas lease is an option that lets you use the product. But do not make the mistake of confusing leasing with taking a product on rent which is altogether different concept. If you are a sort of person who buys a new car every 2-3 years, then lease would probably be a better option for you. How? Take a look at this example.

Suppose there is a new car worth $20000. You can either get it financed in which case you repay the entire amount as installments for specified period (say 2 years) plus finance charges plus fees as may be applicable. On the other hand, you can get the car leased out to you for a period of two years. If the resale value of the car is $13000 after two years, you get the car for $20000-$13000=$7000 and even this amount has to be paid in installments plus lease fees plus finance charges. You can easily save a lot on your monthly payments when you lease the vehicle in comparison to when you get it financed. You would have in any case sold the car after using it for 2 years for $13000. Then what is the use of paying interest on the entire amount when you can get it leased to you for 2 years? In leasing, the depreciated value of the product is subtracted upfront and you pay equated installments based upon the remaining amount which is what makes leasing attractive,

In the case of leasing, it is not you who are buying the product but the company that is leasing out the product to you. You can use it for a few years as per the agreement and then have to return the product back to the leasing company. However, you can still retain the product if you pay the depreciated value of the product to the leasing company.

However, if you can afford higher monthly payments are like the idea of ownership of the product, and also plan to use it for a longer time period, then financing may be a better option for you.