Is leasing a car cheaper than buying a car using a loan? This moneyland.ch guide explains the differences between loans and leasing, and how to calculate which solution is cheaper for you.
The cost of a new car, or even a good used car, can easily reach into the tens of thousands of francs. Although paying up front using your savings is often the cheapest way to buy a car, many people are unable or unwilling to spend that kind of money all at once. The alternative is to either get a personal loan and buy the car you want, or to lease the car from a leasing service provider.
In this guide, moneyland.ch looks at the pros and cons of both options, and tells you how to find out which option is cheaper for the car you want.
Which costs apply to both leasing and buying?
It is important to understand that there are certain basic costs that apply whether you own or lease your car. These costs also apply even if you buy a car in cash, without using a loan or a lease. They include:
When comparing the costs of leasing versus a car loan, you only need to compare the additional costs that specifically apply to each.
Which costs apply to car leasing?
There are a number of different factors that collectively determine how much leasing a car will cost you.
You may be required to pay a down payment, or have the option to. This down payment is often equal to at least 10 percent of the car’s value.
The bulk of your lease payment is made up of the car’s decline in value. This portion of your payment is always similar regardless of which leasing company is used for the lease. The leasing company estimates how much value the car will lose every year of the lease term.
Several factors play a role. The most important factor is your selected annual mileage limit – the number of kilometers you expect to drive each year. There are other factors that may also be accounted for, such as whether the car will be kept in a garage.
The more value the car loses each year, the lower its residual value at the end of the lease term will be, and the higher your lease payments are.
The interest is the amount you pay to the leasing company on top of the value decline. It is shown as an annual interest rate. This rate shows the percentage of the loan – in this case, the loan of a car – that you will have to pay each year as interest.
In every case, the leasing company that lends you the car will require you to get fully comprehensive car insurance. While full-comprehensive insurance is beneficial for new cars, you are not obligated to get it when you own your own car. For that reason, the difference in price between semi-comprehensive car insurance and fully-comprehensive car insurance can be seen as an additional cost of leasing.
Many leasing companies require you to service the car at regular intervals. What is more, the contract may bind you to using specific partner garages, which may have higher fees than some other garages. The differences between the necessary and required servicing, and the cheapest and partner garages makes up another leasing-specific cost.
It is worth noting though, that new cars often come with a basic service and repair guarantee for a certain period of time – often one year.
When you return the leased car, the leasing company will inspect the vehicle and charge you for any extraordinary damages that go beyond basic wear and tear.
If you surpass the mileage limit you agreed to in the contract, you have to pay additional fees for the extra kilometers driven. Typically, the cost of each additional kilometer is calculated by dividing the car’s residual value, as per the contract, by 2000. For example, if the pre-agreed residual value at the end of the lease term is 10,000 francs, then you would pay five centimes per extra kilometer (10,000 divided by 2000).
Example of the cost of car leasing
You want to lease a VW Tiguan that costs 50,000 francs. The lease will last for five years, and you will drive 15,000 kilometers per year. The interest rate is three percent per year. The required down payment is 5000 francs.
In this case, you could expect to pay a total of around 41,531 francs in lease payments over the five years you use the car, including the 5000-franc downpayment. Additionally, the markup on maintenance and repair costs, for the sake of this example, is 1000 francs per year, on average. When you return the car, the leasing company charges an additional 2000 francs for extraordinary damages and extra mileage.
In this example, the total cost of leasing would come to 48,531 francs over the full term, or 9706 francs per year.
If you would not otherwise get full-comprehensive car insurance, the added cost would add around 477 francs per year, based on insurance premiums for Zurich. The cost of leasing, in that case, would be 50,916 francs in total, or 10,183 francs per year.
If you drive more or less than 15,000 kilometers per year, the cost of leasing would be higher or lower respectively. The same is true if you get a lease with an annual interest rate above or below three percent.
You can calculate the cost of leasing based on your specific needs using the car leasing calculator on moneyland.ch.
Which costs apply to buying a car with a loan?
There are several factors that determine the cost of buying a car using a personal loan.
The interest is the price you pay for the loan. It is shown as an annual interest rate that is applied as a percentage to the outstanding amount you owe.
The amount you owe is divided up into monthly repayments across the loan term. Every month, you pay back the required portion of the loan, plus the interest.
As with leasing, losses in the car’s value also make up part of the cost. The more kilometers you drive each year, and the more wear, tear, and damage is inflicted on the car, the bigger the cost of depreciation will be. The rule of thumb is that a car loses around 10 percent of its value per year. The loss of value is highest in the first few years of use, with the depreciation in the first year often being as high as 20 percent.
Example of the cost of buying a car with a loan
You get a 45,000-franc personal loan with a five-year loan term to buy a VW Tiguan that costs 50,000 francs. The remaining 5000 francs comes from your savings. You will keep the car for five years. You have excellent creditworthiness and qualify for a low interest rate of just five percent per year.
After the five years, you sell the car for its residual value of 28,525 francs – a value loss of 10 percent per year, plus a further 1000 franc reduction due to extraordinary damages. So the total cost of depreciation is 21,475 francs.
In this example, the total cost of the loan repayments plus interest (50,814 francs) plus the portion paid out of your savings (5000 francs) and the cost of depreciation (21,475 francs) would come to 77,289 francs. After subtracting the money that you get back when you sell the car (28,525 francs), the total cost is 48,764 francs. That translates into 9753 francs per year.
If you chose to get fully-comprehensive car insurance, the cost would come to 51,149 francs in total, or 10,230 francs per year.
If the car loses value at a rate higher or lower than 10 percent per year, then the cost will be higher or lower respectively. The same is true if the interest rate for your personal loan is higher or lower than five percent.
You can calculate the cost of a loan based on your specific situation using the loan calculator on moneyland.ch.
Should I lease a car or buy using a loan?
As the examples above show, the cost of leasing a car is very similar to that of buying a car using a personal loan, in most cases.
The interest rates you get are a key factor:
It is important to note, though, that when you use leasing, your choice of cars is limited to those offered by leasing companies. For used cars in particular, the choice may be very limited. If leasing is not available for the car you want, using a personal loan may be your only option.
Another thing to be aware of is that if you terminate a leasing contract before the lease term expires, the leasing company can charge you penalty fees. With a personal loan, on the other hand, you can make additional loan repayments or even pay off your entire loan at any time. You also have the option of refinancing your loan if you find a cheaper offer.
When you buy a car using a loan, you are under no obligation to sell the car. The longer you continue to use the car after the loan is paid off, the lower the real cost-to-value ratio will be.
Car plans as an alternative
A car plan is essentially a long-term car rental. The fixed rent you pay covers the use of the car, a certain amount of mileage, servicing and repairs, road taxes, and fully-comprehensive car insurance. A handful of plans even include the cost of energy in the rent.
Car plans are available with relatively short rental terms – in some cases as short as just a few months – which gives you a lot of flexibility. In exchange for the flexibility, the total cost is somewhat higher than that of leasing or buying a car with a personal loan.
Using the examples above as a basis, car plans for a VW Tiguan that include around 15,000 kilometers per year and require an initial down payment of around 5000 francs are available from around 10,000 francs per year.
The downside is that your choice of cars is very limited – much more so than when you use leasing.
More on this topic:
Compare personal loans now
Car plans explained
How to save on car insurance
Tips for buying a car in Switzerland
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