Car Loan vs. Car Leasing - Unveiling the Key Differences

Mari-Liis Sepp, the Head of the Loan Department at Holm Bank, sheds light on the disparities between a car loan and car leasing, and advises on their respective advantages. When contemplating the purchase of a vehicle, the majority of individuals refrain from making the full payment upfront and instead turn to bank-provided financing options like leasing or a loan.

In order to secure financing, applicants must submit an application to the bank, which will carefully evaluate and gauge their creditworthiness. In essence, the bank's objective is to ascertain whether the repayment terms are within the means of the individual. This practice exemplifies the duty of every responsible lender. If the bank is satisfied that the applicant can comfortably meet the repayment obligations, a positive response will be granted. The applicant can then select a suitable payment schedule and proceed to sign the loan agreement.

This is the point where a notable distinction between leasing and a loan becomes apparent. In the case of car leasing, the bank retains ownership of the vehicle while the individual assumes the role of the user. Consequently, leasing entails the obligation to possess comprehensive insurance coverage for the car. The bank, as the owner, seeks to ensure that the vehicle can be repaired in the event of an accident. On the other hand, if someone opts for a car loan, they become the rightful owner of the vehicle rather than the bank.

In both instances, repayments need to be made to the bank according to the chosen payment schedule, which can span up to 10 years. However, the decision of whether to include comprehensive insurance, in addition to mandatory insurance, is left to the individual when opting for a car loan. Nonetheless, it is prudent to mitigate risks and consider obtaining comprehensive insurance as well.

The continuous upward trend of Euribor has been a significant topic of discussion in the financial realm for some time now. Indeed, Euribor should also be taken into account when contemplating the purchase of a car. Car loans generally fall under the category of personal loans, which are typically not tied to Euribor. This implies that the agreed-upon payment schedule at the time of the contract remains valid until the end of the contractual period, and fluctuations in Euribor do not impact the monthly payments. However, car leasing is typically linked to Euribor, and one should be prepared for the possibility that the payment amount due may differ every six months. Given the current upward trajectory of Euribor, it is crucial to calculate lease payments based on a hypothetically higher Euribor to ensure that the variable payments do not become financially burdensome over time.

So, when should one prefer leasing over a car loan, and vice versa? Lease agreements typically start from €10,000 and can extend to a significantly higher amount, enabling the acquisition of a more expensive vehicle. On the other hand, car loans usually range up to €25,000, which is suitable for purchasing a more affordable new or used car. With a car loan, there is no requirement for a down payment or a valuation report, which may be necessary for leasing, depending on the seller. As mentioned earlier, lease payments are influenced by Euribor, while car loan payments remain fixed throughout the entire contract duration. The decision should be carefully evaluated by each individual, taking into account their specific circumstances. Both car leasing and car loans can assist in financing your car purchase. However, it is crucial to remember that both options are credit products that carry both opportunities and obligations.