What is the difference between financing and leasing

Leasing or financing: which suits you better?

If you want to fulfill your dream of a new car, you have various options. The car can be bought, financed or leased. Compared to leasing, when it comes to financing, the vehicle ultimately belongs to the owner, but when leasing, the customer has to pay for the loss in value. This guide shows the differences between leasing and financing and when which form is more suitable.

the essentials in brief

  • Leasing means acquiring the right to use a vehicle.

  • In the case of financing, the car becomes the property of the borrower after the loan has been repaid.

  • Both loan and leasing installments are subject to interest.

  • Lessees may have to make additional payments after the contract expires to compensate for the loss in value.

What is leasing?

In order to determine which form of finance is more suitable, consumers first need to know what leasing is. This means leaving something for a certain period of time. But how does leasing work?

  • To lease a vehicle, customers sign a contract with a leasing provider or the manufacturer. This states that the owner, in this case the provider, grants the customer a right of use for a certain period of time.

  • The lessee becomes the owner of the vehicle, but not the legal owner. He is responsible for maintaining and repairing the car, but may not sell it and, if agreed in the contract, not give it to third parties.

  • As a rule, leasing contracts are concluded for a minimum of one year and a maximum of 36 months. After this time has expired, customers can continue to lease the vehicle or return it to the provider.

In return for leaving the car, customers are obliged to pay a monthly leasing rate. This is intended to compensate for the depreciation caused by the use of the vehicle. The rate is made up of various factors:

  • Vehicle age

  • Model and performance

  • Mileage

  • Possible special services such as a service contract and included insurance

Variants of leasing

When leasing there are various types of contract that decide on the amount of the rate and also on possible additional payments after the contract has expired. The following forms are possible:

Residual value leasing

With residual value leasing, the providers determine how much the loss in value is during the period of use. This results in a residual value, i.e. the value of the car at the end of the leasing period. The difference between the purchase price and the residual value determines the amount of the installment.An example for calculating the leasing rate:

A leased vehicle has a new value of 20,000 euros. Taking into account the intensity of use, the providers assume that the residual value will be 13,000 euros after a two-year leasing period. This corresponds to a difference of 7,000 euros.

Interest must also be taken into account when calculating the leasing rate. How high this is varies depending on the provider.

With a loss of value of 7,000 euros in 24 months, the rate is 291.67 euros. Based on a 3.45 percent interest rate, the lessee has to pay 337.94 euros per month.

After the lease expires, the lessors check the actual value of the vehicle. The development of the economy, also accidents and signs of wear and tear can be responsible for a deviation from the initial assessment. If the residual value is lower than agreed in the contract, the customer must pay for the difference.

As with financing, the leasing rates can also be reduced by the customer making a down payment. Some providers even ask for this before leasing the vehicle.

Mileage leasing: The most frequently used type of contract is kilometer leasing. When concluding the contract, customers set a maximum mileage that they can cover with the vehicle. The lower the performance, the cheaper the rates.

After returning the vehicle, the providers check the kilometers traveled. If the customers are below their maximum performance, they will be reimbursed part of the costs. If they are higher, however, you have to expect an additional payment.

Many providers have a grace limit that the lessee can exceed. Usually this is 1,500 to 2,500 kilometers. After exceeding this limit, an amount is due for each additional kilometer. Often the costs are between 10 and 15 cents. It is therefore important for customers to estimate their mileage as precisely as possible.

How does financing work?

Financing is an option when consumers want to buy a vehicle but do not have the financial means to pay the purchase price. When financing a car, you take out a loan from the dealer, manufacturer or an independent credit institution and pay the repayment in monthly installments. In return for providing the loan, the lenders charge interest, which is included in the monthly installments. This therefore consists of the repayment portion to repay the loan and the interest portion to cover the costs.

As with leasing, the borrowers are only owners of the vehicle and not its legal owners during the financing period. The banks require the vehicle registration document as security, which means that they have the car. Unless their customer pays the installments, the lenders are allowed to sell the vehicle to cover the loan. After the loan has been repaid, the banks hand over the vehicle registration document to the borrowers, making them the legal owners.

Consumers must meet various requirements for car financing. All banks stipulate that the borrower must have a place of residence in Germany and have reached the age of majority. In addition, the applicants must have a good credit rating. Many credit institutions also require positive SCHUFA information. However, there are also lenders who grant loans with negative Schufa entries. However, these are subject to significantly higher interest rates in order to cover the additional risk.

Car financing is possible with the dealer as well as with the house bank. However, these are tied to their fixed conditions. Consumers can compare different providers online to find the right offer. With the free loan calculator from FINANZCHECK.de, borrowers quickly and easily get a good overview of the conditions under which they can finance their dream vehicle.

Leasing or financing: what's the difference?

In order to be able to decide whether leasing or financing is more suitable, consumers have to weigh up all the facts. The following list gives a good overview of the differences between the two forms: