Financed vs. Leased: What’s the difference?

Deciding whether or not to finance or lease a car is an important decision. Both leasing and financing have their advantages and which is right for you can depend on a range of factors, including how much driving a newer car matters to you, how many miles you want to be able to drive annually, and how important ownership is to you.

While both financing and leasing a car involve contracts and monthly payments, what exactly you’re paying for can differ greatly between the two options. For example, GAP insurance is generally a required part of a lease contract but may be optional if you’re financing a vehicle.

We’re here to help you understand the difference between financed vs. leased, so that you can decide which is best for you. We’ll also review which option is more expensive, based on your driving needs, and we’ll explain how you can convert a leased car into a financed vehicle, depending on your contract.

Once you have a better idea of where you stand on the question of financed versus leased, enter your ZIP code into our free online tool to compare auto insurance rates and find affordable coverage that’s right for you.

What is the difference between leasing and financing a car?

So, what is leasing a car? The main difference between leasing and financing a car comes down to ownership. When you lease, you’re essentially renting a vehicle for an amount of time determined via contract at the start of a lease. Typically, a lease for a single automobile lasts between two and four years, which often ends with a driver trading in their car for a new leased vehicle at the end of this period. Most drivers who lease pay monthly. And at the end of a lease, you do not own the automobile.

What is financing a car? When you finance, you’re purchasing a car over time by making payments on a loan. Financing is typically available through the dealership from which a driver purchases a vehicle. In other words, a driver pays the dealership on a monthly basis until they pay off their auto loan. Most banks and credit unions also offer loans for financing a vehicle. Some drivers prefer these over loans from dealerships since banks and credit unions can help drivers obtain credit information and receive loan approval, saving them time and making it more straightforward to comparison shop at dealerships.

Whether you finance a car through a dealership or a bank, once the loan is paid off, you own your vehicle. At that point, you can either resell it or trade it in when shopping for a new car.

Read more: Leasing vs. Buying: What’s the difference?

Why finance a car?

Financing a vehicle may take some time, but once your loan is paid off, you’ll be the proud owner of an automobile that you can drive, customize, and resell whenever you want.

Here are some advantages to financing:

• Financing allows you to make monthly payments on a vehicle that you may not be able to afford with a single payment
• There’s typically no mileage limit on a car that you’re financing, so you can drive it as far or as often as you want without risking a fee
• You won’t have to trade in a vehicle that you’re financing after a few years, so if you find a car you love, you can keep it for as long as it lasts
• Depending on your financing agreement, you may be able to customize or modify your automobile while financing (something prohibited by leases)
• Financing leads to ownership, meaning you can resell your car or even give it to a friend or a family member

Why lease a car?

While leasing a vehicle won’t lead to ownership (unless you choose to convert your lease to a financing agreement), leasing generally provides drivers with a newer, more reliable automobile at a more affordable monthly price point.

Here are some advantages to leasing:

• Leases allow you to drive a newer vehicle for a lower monthly price than if you were to finance the same automobile
• Leases make it easy to trade in your car for a new one every few years, so you can always drive a vehicle with modern safety and performance features
• The newer automobiles available to lease often have oil changes and repairs covered by the manufacturer
• Leases can be great if you only need a car for a year or two since you can agree to a lease term of 24 months or less
• Leases prevent concern about the resale value of your automobile or the reselling process, since you simply return your vehicle at the end of the lease

Is it more expensive to lease or finance a car?

In the long term, financing a car is almost always a better financial decision than leasing. This is mainly the case for two reasons. First, because you eventually cease having to make payments on a financed vehicle, the longer you own a vehicle the more you save in comparison to the cost of leasing the same automobile. Second, because you can resell a car after you’ve paid off the loan, you can end up retrieving a substantial amount of what you’ve paid for a financed vehicle as long as you’ve kept it in good condition.

With the above in mind, leasing is a good financial option if you only need an automobile for a few years. Leasing can also save you money if you drive a car as part of your business and want to write off payments on your leased vehicle for tax purposes. And if trading your own car for a new one every three or four years is important to you, leasing may be the least expensive option for doing so. But again, financing is the more affordable option in the long run for the majority of drivers.

Can you finance a car you’re leasing?

Yes, most leases can be converted to a finance agreement. If your lease has a buyout option (most do), you can choose to convert your lease to a finance at the end of the lease term — you can also do this during the lease term, but substantial cancellation fees will apply.

Whether or not financing a car you’re leasing makes financial sense depends on a variety of factors. Before deciding to change your lease to a finance agreement, consider the following determinants:

• Is your leased car’s buyout price comparable to or lower than that of similar used vehicles? If not, then financing the lease probably isn’t a good idea
• What’s the condition of the leased car? If your leased car is still in great condition, it may be worth keeping
• Will lease termination fees or other fees apply? It’s worth doing the math to determine if it’s less expensive to buy out your lease right away or wait until the lease term concludes

Changing a lease to a finance may also mean you need to obtain new insurance coverage. Insurance requirements for leased and purchased cars aren’t exactly the same. According to the Insurance Information Institute, most leases require full coverage auto insurance as part of your contract. So, when you switch to a financed vehicle, you may need to purchase both comprehensive insurance and collision insurance to ensure that you’re covered.

What to Remember About Financing vs. Leasing

• Financing involves purchasing a car with a loan. It’s more expensive than leasing in the short term but can save you a considerable amount over time
• Leasing is like renting a car for an extended period. Leasing is ideal if you only need a vehicle for a year or two, want to trade in your old automobile for a new one every few years, or receive tax benefits from leasing as part of your business expenses
• Most lease agreements allow you to purchase the car you’re leasing, but doing so before your lease term ends can result in steep termination fees

Whether it is better to lease or finance a car will depend on your personal circumstances and preferences.

If you’re financing or leasing, you’re probably looking for an affordable auto insurance policy that meets your needs. To help you get started on your search, try our free online quote tool to find the best coverage options in your area.