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Know Your Financing Options: Exploring the difference between lease loans and car loans

21 Aug 2023

Navigating the world of automotive financing can be daunting, especially with various options such as whether to lease or buy a vehicle.

But what sets lease agreements and car loans (also known as a goods loan) apart?

We unpack these financial terms and discover how each method impacts your wallet, ownership rights, and overall driving experience, so that you can make an informed decision that aligns with your goals as a car owner.

Lease Agreement (Car Lease / Vehicle Lease) Explained

In a lease agreement, the leasing company or lessor retains ownership of the car throughout the lease term. The lessee (the person leasing the car) does not own the vehicle.

Under a lease agreement the lessee makes regular lease payments to the lessor, usually monthly, for the right to use the vehicle. These payments cover the vehicle's depreciation and the leasing company's profit.

At the end of the lease term, the lessee typically has several options:

  • a. Return the car to the leasing company and walk away.
  • b. Purchase the vehicle at the predetermined residual value (buyout option).
  • c. Trade-in the car for a new lease or purchase.

Take Note of Mileage Limits: It's essential to be mindful of mileage restrictions that commonly accompany lease agreements. Going beyond the predetermined mileage limit may incur additional fees.
The primary advantage of a lease is that monthly payments are usually lower than those of a traditional car loan. However, the lessee does not build equity in the car and does not own it at the end of the lease unless they choose to buy it at the residual value.

Car Loan (Goods Loan) Explained

With a goods loan, the borrower (buyer) takes ownership of the car from the beginning of the loan term. The lender places a lien on the vehicle as collateral until the loan is repaid in full.

Throughout the loan term, the borrower makes regular instalment payments to the lender, covering both the principal (the loan amount) and interest. As these payments are made, the loan gradually gets paid off.

At the end of the loan term, once all payments are made, the borrower becomes the outright owner of the car, and the lender's lien is removed.

As the owner of the vehicle, the borrower can use the car as they wish and make modifications without restrictions.

The primary advantage of a goods loan is that the borrower attains full ownership of the car by the end of the loan term, granting them unrestricted usage without mileage limitations. However, it's important to note that compared to leasing, monthly payments are generally higher with this financing option.

In summary, a car lease entails renting a vehicle for a fixed duration with a buyout option at the lease end. On the other hand, a car loan grants ownership to the borrower from the outset, requiring regular payments to gain full ownership over time.

Still have questions? Our team of experts are here to assist. 

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