What's the difference between a loan vs. a lease?

If you use a loan to purchase your sofa, you borrow money and then pay it back in installments over a period of months or years. In many instances, you can also finance the delivery fee and other service charges as part of your loan.

With lease-to-own financing, you pay to use the sofa for a specific period. After making payments for an agreed amount of time and satisfying the lease contract terms, you obtain full ownership. This option is typically only available for certain durable goods, and the amount you can finance for services is often limited.

Your choice may be influenced by what options are available to you. Lease-to-own financing may be the answer, for example, if you can’t afford a down payment or have less-than-ideal credit.

To help determine your best option for your situation, consider the components of each option.

How do costs and fee structures differ?

When you borrow money, there are often fees and additional costs. Depending on the type of loan you’re applying for, you may be asked to pay application, funding, and/or origination fees. Before finalizing any financing, it’s best to ask for a list of the fees associated with the application. If you don’t understand what a fee is for, ask your lender or merchant for clarification.

When using lease-to-own financing, companies may charge a fee for documents or processing, but the upfront fees can be much smaller for this type of financing. Processing fees may vary by state.

What about interest rates for loans?

The lower the interest rate for a loan, the lower your overall cost. Banks and other lenders typically use your FICO score or a credit score from another major credit bureau as part of determining the interest rate you will be charged. Loan interest rates can fluctuate or be fixed for the life of the loan.

What are lease factor rates?

For a lease, the financed rate is known as a factor rate or money factor instead of an interest rate. Depending on the lease contract, it may be called a “lease charge” or “cost of lease.” Whatever term is used, it’s part of the fixed payment amount you agree to when you sign the lease agreement. The payments don’t change over the term of the lease.

Will there be a down payment?

Depending on the size of your purchase, you’ll want to consider the amount you’re able to finance. Traditional lenders typically don’t finance the entire amount of a big-ticket item. Instead, they may loan you a percentage of the cost, such as 80%, for example. That means you’re responsible for a down payment, which is the different between the loan amount the final cost of the item, including tax.

Most often, you can use lease-to-own financing for the total price of the item, eliminating the need for a down payment. Most lease agreements also include tax, so you can finance the entire purchase if money is especially tight.

How quickly can you get your loan or lease?

You’ll want to consider how fast you need or want something when choosing a loan versus a lease. Typically, obtaining a loan through traditional lenders, such as a bank, takes longer. If a merchant has access to other lending options, the process will likely move much quicker. Securing lease-to-own financing can also be very fast, with approvals in seconds in some instances.

Your decision

There are many factors that will influence your decision to use lease-to-own financing or a loan for your sofa or other big-ticket item. In addition to the inherent differences between the two options, your budget, cash on hand, expected income, and credit history will all play a part in your decision.

By knowing the differences between loans and leases – and how they are similar – you can better know what questions to ask, what to look for, and how to determine the best option for you.

The advertised service is a lease-to-own agreement provided by Snap RTO LLC. Lease-to-own financing is not available to residents of Minnesota, New Jersey and Wisconsin.