Car purchase: lease or loan?

Two financing options that differ greatly

Car loans have become a popular way of financing vehicle purchases. And with good reason – lending terms have been particularly favourable for several years. An alternative financing method to a car loan is private leasing. Both options have their merits and come with specific terms.

Whether it is best to lease or buy will depend on your personal situation and how you intend to use the car. If you own your car, you can use it as often you like for as long as you like without any restrictions, sell it at any time, and use the proceeds from selling the car however you wish. In addition, car loans are attractive, usually offering more flexibility in terms of the repayment period and guaranteeing fixed monthly instalments. Interest rates are very low right now, and interest on loans is tax deductible.

For private clients too!

While companies have been relying on financial leasing and operational leasing for many years, there is still some uncertainty regarding these solutions among private clients. This is largely due to the particularities and restrictions that you need to be aware of before deciding on a private lease instead of a traditional car loan.

Most private leasing solutions are essentially operational leases rather than financial leases. Moreover, the offers are only available to Luxembourg residents.

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Operational leases are, in a sense, an all-inclusive rental contract. The lessee pays a monthly instalment and in return they get to use the chosen vehicle for a certain period of time over a set number of kilometres. Rental includes not only the financing of the vehicle, but also the cost of supplying it, insurance premiums, road assistance services and vehicle maintenance. The contract period varies depending on the offer, which allows for more flexibility. For most solutions, this is between 24 and 60 months.

The monthly instalment amount depends primarily on the depreciation of the vehicle’s value, i.e. the difference between the purchase price of the vehicle and the price at which the leasing company can resell the vehicle at the end of the contract. In addition, other factors affect the rate, such as the term, kilometre limit and additional services. The decisive factor is, of course, the estimated resale value of the vehicle.

It’s important to remember from the outset of any leasing arrangement that the lessee is does not own the car, nor can they become the owner. This is because private leasing offers do not include the option to purchase the vehicle at the end of the contract.

Pros and cons

Under a lease, the lessee benefits from peace of mind as well as greater comfort and convenience. This financing solution is provided without a down payment, i.e. without tying up capital. Against payment of a monthly instalment, the lessee benefits from an all-inclusive service and a new, high-quality vehicle, with the possibility of upgrading it more often for up-to-date models. However, these advantages come at a price:

• The vehicle does not belong to the lessee; they do not own it at the end of the contract.
• The rental period and the kilometre limit are specified in the contract. These stipulations can be renegotiated during the contract term and the monthly instalment amount will be adjusted accordingly.
• Additional costs will be incurred if the kilometre limit is exceeded.
• Costs are incurred in the event of early termination.
• The lessee undertakes to maintain the car to the best of their ability. The lessee has to pay for any repairs (scratches, dents, etc.) themselves at the end of the contract. It seems logical, but you have to be aware of it if you want to avoid unpleasant surprises at the end of the contract.

Leasing covers a wide range of services

All-inclusive offers usually include the following:

• the provision and registration of the new car;
• a fixed number of kilometres that may be travelled per year;
• inspections, tyre change and storage, general inspections, some repairs and replacement of defective parts;
• insurance premiums (with a very high insurance cover) and the annual road tax;
• road assistance services in Luxembourg and abroad.

Depending on the contract and leasing provider, additional services are possible:

• special damage insurance;
• vehicle pickup for inspections and repairs at the place of residence;
• a replacement vehicle at no additional cost if a car is not operational for a longer period of time; and
• online contract conclusion and support.