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

Apr 26, 2021
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When you’re looking to finance a major purchase, there are many options available. Two of the most popular options are a loan and a lease. Understanding the difference between the two will help you make the best decision.

Fundamentally, a loan is borrowing money to purchase something, and then paying back in installments over a period of months or years.

A lease is a rental agreement where you pay to use an item (car, couch, computer) for a specified amount of time. When the contracted time is up, you either own the item or have the option to purchase or return the item to the company that financed it.

Although they function differently, they also have common components like costs and fees, interest rates, financed amount, flexibility, and time frame.

The cost and fee structure between loans and leases have similarities and some differences.

Loan Costs

When you borrow money, there are often fees and additional costs. Depending on the type of loan you’re applying for, there can be an application, funding, and origination fees. Before finalizing a loan, make sure to ask for a list of all the fees associated with the application. If you don’t understand what a fee is for, research first and clarify with the lender.

Lease Costs

Leases often have fewer fees upfront. Some companies may charge a fee for documents or processing, but the percentage of fees can be much smaller when you choose a lease.

One of the biggest considerations when getting a loan vs. a lease is the interest rate. The lower the rate, the less overall cost you have. It doesn’t matter if it’s a lease or a loan, going for the lowest rate is always a money-saving idea.

Loan Interest Rates

When you take out a loan, interest rates can fluctuate or be fixed for the life of the loan. Variable rates can be beneficial when interest rates are low but not so good when they begin to rise.

Lease Factor Rates

With a lease, the financed rate is known as a factor rate or money factor, not interest rate. Depending on the lease contract it may be expressed as “lease charge” or “rent charge.” It’s part of the fixed payment amount agreed upon when you sign the lease agreement. The payments are set for a specific amount and don’t change over the term of the lease. It’s easy to budget for a fixed payment each month because you know what to expect.

Depending on the size of your purchase, another important question is the financed amount.

Loan Financed Amount

Banks typically don’t finance the entire amount of a large-ticket item but may lend 60%-90% of the cost. This means you’re responsible for the down payment, which is the difference of what the loan amount is and the final cost of the item, including tax.

Lease Financed Amount

With most leases, you can finance 100% of the price, eliminating the need for a down payment and costing you less upfront. Most lease agreements also include tax, so you can finance the whole purchase if money is tight.

Flexibility in length and other terms can be a determining factor of which option will work best for you. This is the biggest difference between loans and leases.

Loan Flexibility

Banks are usually not as flexible as leasing companies. If you want a standard loan term, a bank would be a good fit. But if you need flexible terms, it might not be right for you.

Lease Flexibility

With a lease, you normally choose the terms, and the leasing company can customize it for you. You can specify the length of time and talk about what you can afford to pay. This makes it easy to budget your payments each month.

Getting financing is something that can take some time. And when a major household appliance breaks down, you want to replace it fast.

Loan Time Frame

The loan process can take longer than a lease. Banks generally need to review your credit history and score before offering you a loan. They may ask questions or require something to be cleared up on your credit before the loan can be finalized.

Lease Time Frame

Leasing doesn’t usually take as long as getting a loan. Many merchants have access to leasing companies on-site and an application can be completed in minutes. Other companies offer online applications designed to help you get money quickly. Many times, you’ll have an answer to your lease application the same day or next.

Leases have shorter terms than loans but can have higher total costs. There are many other pros and cons for both leasing and taking out a loan. Let’s go over them at-a-glance.

Pros:

  • Ownership at the end of the loan
  • Can be less expensive in the long run

Cons:

  • More paperwork
  • Length of time to finalize your loan
  • Higher down payment
  • Higher monthly payments

Pros:

  • Short terms, usually 2 years or less
  • Can be more flexible
  • Lower upfront cost
  • Lower payments

Cons:

  • Can cost more in the long run
  • If you want to keep the equipment, you may owe at the end of the lease
  • You are only renting the merchandise until you fulfill the contract terms and obtain ownership

When looking for a loan, you need to have time for the application process and a down payment out of pocket. You also need a good credit score to be approved for a loan and qualify for a lower interest rate so that your payments are affordable. A lease may be the answer for borrowers who can’t afford a large down payment or have good credit. A lease can be customized to specific terms and possibly finance 100% of the purchase price.

Both loans and leases are legally binding contracts. Be aware of what you are signing, and all the extras included in your contract. If you don’t know what something means, it’s ok to ask questions! Now that you know more about the differences and similarities between loans and leases, you’ll know what to look for, what questions to ask, and determine which is the best option for you.

The content of this article is for informational purposes only and should not be construed as personalized legal, financial, or other advice. This article represents paid promotional material provided by or on behalf of Snap Finance, LLC, or its affiliates.
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