The difference between a car loan and a car lease

When taking out a car lease, you borrow or rent a vehicle from a car dealer or car finance provider for an agreed period with regular repayments. When the lease period comes to an end, you can either choose to trade in the car for a new model, pay the left-over lump sum still owing on the car (balloon payment) or extend the lease on the same car.

A car loan is a loan you take out to purchase a car. It’s a great way to purchase a car when you don’t have enough savings to buy it outright and can afford to repay a loan in regular instalments.

This may seem the case initially however, the repayments you make on a lease don’t go toward paying down the whole principal amount. So, not only do you not own the car, but at the end of the lease term, you will owe a significant lump sum payment (balloon payment) should you wish to acquire the car. Sometimes the balloon payment can be higher than the market value of the car, so the sale of the car might not cover what you are still owing!

Remember, if you choose to lease one car after another, your monthly repayments will continue, whereas, with a car loan, your payments go towards reducing the total amount owed and, if you maintain your regular required payments, you should pay off your loan by the end of the loan term.

If you look for a car loan with no penalties for extra and early repayments, you could pay off your car loan well before the end of the loan term. Over the long term, the most economical option is to buy a car and own it for as long as possible.

Always review the interest rates associated with any lease, in particular the comparison rate as that reflects the actual annual interest rate, together with the loan amount, the term of the loan and the required repayments. It also includes many of the fees and charges associated with taking out the lease. This may include things such as establishment or set up fees, annual or ongoing fees. Pay close attention to annual or monthly fees as these can really add up.

Review our article about comparison rates, so you can critically review rates offered by other banks.

Leases are highly controlled in many ways, including loan structure, terms and not being able to purchase a car from a private seller or choose your own insurer. There can even be limits to the number of kilometres you can drive.

With a car loan through Police Credit Union, there are options to suit your needs, the opportunity to purchase a new or used car with the customisations and specifications to your liking and no limit to the distance you’re allowed to drive. Plus, you can pay out a loan early with absolutely no penalties and have the option of a fixed or variable rate.  

There can be numerous hidden costs with a lease. On top of the already mentioned balloon payment, some leased cars not only have mileage costs, but can also have costs for ‘wear and tear’. Also, if your personal circumstances change during the term of the lease and you need to break the lease, you will often face some significant prescribed penalties. With a Police Credit Union Car Loan, you are able to make extra and early repayments without penalties.

People who take the car leasing route often find they have to wait to receive their car. In contrast, a car loan will allow you to find the car you want to purchase and, should you have all the correct documentation and meet all the requirements, you could apply for your loan and drive off in your new car on the same day^ with a car loan through Police Credit Union.

Check out our low car loan rates.

To find out more, speak to our friendly staff:

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