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Car Loan vs Car Lease: Key differences

3 min read Mar 8, 2024

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Getting a vehicle is easier now with flexible Auto Loans and car leasing. With financing, you pay in installments to own the car eventually, while leasing is like renting with no ownership at the end. Both offer convenience, but financing means ownership, while leasing doesn't. Understanding these differences will help you decide how to get a car.

How does a car lease work?

A car lease essentially means renting a four-wheeler vehicle for a defined period. This period usually ranges from one to five years. During this duration, you are required to make monthly payments to the leasing company.

The monthly payments cover all the additional costs associated with the car, including insurance, warranty, and other fees. It also covers the depreciation of the car's value over the lease period. At the end of the tenure, you are required to return the car to the leasing company. However, there are several leasing companies that provide the option of buying at its residual value after the end of the leasing period.

How does a Car Loan work?

Unlike a car lease, in the case of a Car Loan, you borrow money from a lender — a bank or an NBFC — to purchase the four-wheeler. However, in most cases, you are also required to pay a certain money upfront, called a down payment.

After taking a Car Loan, you are required to pay a monthly installment, which includes the principal and interest. You can determine the period of the Car Loan; usually, it is taken for a period of three to seven years. Once you repay the loan and get the ‘No Objection Certificate’ from the lender, you become the owner of the car with no further financial obligations to the lender.

Advantages and disadvantages of Car Loan

Advantages of Car Loan

  • You get to own the vehicle once you repay the loan without any additional costs.
  • You are allowed to make changes to your vehicle as per your needs and requirements.
  • You are not bound by any terms and conditions associated with car leasing.
  • The value of a new car remains significant at the end of the loan tenure as it remains a first-owner vehicle.
  • Car Loan EMI payments are usually lower than lease payments.

Disadvantages of Car Loan

  • The car's value depreciates over time. This means you could have potentially invested more than the worth of the four-wheeler.
  • In many cases, you are required to make a down payment to get your hands behind the steering wheel.
  • You must take care of all the additional costs associated with car purchases, including insurance and other repairs.
  • Car Loans have a longer repayment period. This means you will end up paying more as interest for a longer period.

Advantages and disadvantages of leasing a car

Advantages of leasing a car

  • You can drive a new car every few years.
  • You can avoid the hassle of selling or trading an older vehicle.
  • Most lease agreements include manufacturer warranties.
  • Lease payments may be tax-deductible for business use of the vehicle.

Disadvantages of leasing a car

  • Lease payments are typically higher than loan payments.
  • Lease agreements often come with mileage limits. You may have to pay penalties if you drive more than mileage limits.
  • The leasing company could charge you for excessive wear and tear on the vehicle at the end of the lease term.
  • You cannot make modifications to the vehicle as you are not allowed to customise the four-wheeler.
  • If you end your lease early, you may have to pay hefty additional fees.
Criteria Car Lease Car Loan
EMI Monthly payments towards leasing Monthly payments towards the loan
Down payment Generally none or minimal Required in many instances
Mileage Limit Typically imposed No imposed limit
Returning the car Return at end of lease term Keep after loan repayment
Ownership of car Not owned, just rented Owned after loan repayment
Adding accessories May have restrictions/not permitted in most cases Can add without restrictions
Tax benefit Possible tax deductions Interest payments may be deductible
Guarantor May be required depending on the credit profile, but not required usually May be required depending on credit profile, but usually no requirement

Should you lease a car or opt for a loan?

Deciding between financing a car and leasing one depends on multiple factors. You need to analyse your preferences and think of your financial situation before making a decision.

For instance, if you are ready to pay a higher monthly payment to drive a new car every few years without worrying about additional insurance, repair and other costs and claiming potential tax benefits, you can opt for leasing a car.

On the other hand, if you want to really own the car and make customisation as per your desires along with a lower monthly payment, you can go for a Car Loan. Hence, assess your priorities, budget and driving habits to determine which option suits you the best.

Also Read: How to get a Car Loan with bad credit score?

Conclusion

Hopefully, in the long-standing debate between an auto lease and an Auto Loan, this will help you make the final decision as finance your car or to rent it out for a short duration. If you are planning to take a Car Loan, you can check Axis Bank’s Car Loan which is available at attractive interest rates. With loans starting at as low as ₹1,00,000 and interest starting at 9.25%, you may also get 100% on-road funding with an Axis Bank Car Loan to realise your dream of owning a car.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.