Financed vs. Leased: What’s the difference?

Are you trying to decide whether to finance or lease a vehicle? Leasing a car has fewer responsibilities, but you’ll have specific limits. On the other hand, financing a vehicle has more perks for the owner.

So, is it better to lease or finance a car? Don’t worry – we’ll show you how financing and leasing work.

Read our guide to learn about financing and leasing a car. Also, we’ll compare insurance for a leased car vs. a bought car and show you which car insurance companies are best.

What’s the difference between a financed car and a leased car?

Leasing and financing a vehicle aren’t the same thing. The financing option provides lifetime ownership, but leasing is like renting a car for a specific time.

Let’s look at a summary of how financing and leasing are different:

Financing vs. Leasing Facts

One of the most significant differences between financing and leasing is how much you pay per month and how much you can drive. However, a leasing mileage limit isn’t all bad, since you can get a car insurance discount for driving less than average.

Financing a Car

Financing a vehicle involves signing a contract that says you’re buying a car from a dealer. You’ll have monthly payments until you pay off the balance of the vehicle.

You can customize your car with anything you want, but if you miss too many payments, your lender can repossess your vehicle. The driver chooses their own insurance and isn’t restricted to mileage limits.

Leasing a Car

Leasing a vehicle is temporary. You’ll make monthly payments, but those payments are at least $100 less than financing the car.

Some lease agreements already have insurance attached to the car, and drivers of leased cars can’t customize their vehicle. When the lease ends, you must return the vehicle to the dealer under the mileage limit set at the start of the lease.

Read more: How much is car insurance for a leased car?

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Will you have a down payment?

Yes, you will. However, down payments work differently with financing and leasing a vehicle. Your down payment on a leased car goes toward the first monthly payment. That includes a refundable security deposit, taxes, and other fees.

There isn’t a security deposit when you finance your vehicle. However, your payments are more expensive than leasing.

Can you trade in a vehicle under contract?

Yes, you can. You can trade in a car more easily when you’re financing. The dealership could purchase your vehicle for its fair market value.

For instance, if you bought a 2021 Ford F-150 and want to trade it in a few months for the 2022 version, you could trade it to the dealer and get the 2022 model using your vehicle’s value.

The dealership will offer a price, but you won’t receive the money in cash. The value of the car is deducted from the new vehicle cost instead.

Trading in a leased car ends your lease contract early, resulting in early cancellation fees.

Some lenders and dealerships can help you end a lease by waiving some of the costs. However, you’ll likely encounter more costs when you want to trade in your leased vehicle.

How does car depreciation affect me?

If you’re leasing a vehicle, the depreciating value won’t affect you, but a driver financing their car is affected. Over time, a vehicle’s value drops. A car’s value decreases by at least $3,000 each year, and it could affect the trade-in value.

Which car insurance coverage is required under a financed and leased car?

You’ll need full coverage insurance whether you’re financing or leasing. Although liability insurance is the minimum coverage required, drivers who lease or finance their vehicles must have full coverage car insurance.

How much is full coverage insurance? Let’s examine the cost of full coverage by state:

Average Monthly Full Coverage Car Insurance Rates by State

The average cost of full coverage is $94 a month, but your monthly rates could be different. Car insurance quotes vary because several factors determine the cost of insurance, such as age, gender, credit history, driving record, and driving frequency.

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Why is full coverage insurance required?

Dealers and lenders want the utmost protection on their vehicles. Therefore, full coverage insurance is essential to a financed or leased car.

Full coverage also provides coverage from multiple angles. In addition to liability insurance, full coverage has collision and comprehensive insurance. These coverages pay for vehicle damage regardless of fault.

You’ll also get coverages like uninsured/underinsured motorist coverage, which pays for car damage and bodily injuries when a driver isn’t insured or doesn’t have enough to cover your expenses. Look at your full coverage policy to see which coverages are available.

Financed vs. Leased: The Bottom Line

Leasing allows you to rent a car for a few thousand miles, but once that limit is up, you’ll have an option to buy the car or enter into a new lease agreement for another vehicle.

Meanwhile, financing a vehicle eventually gives you car ownership, but it takes a few monthly payments to pay off the entire balance.

Both options have benefits, but one choice isn’t better than the other. Financing is best for drivers who want to own a vehicle, but leasing is perfect for drivers who want to explore multiple vehicles over time.

You’ll need full coverage regardless of your choice. We recommend adding a medium coverage level to ensure you have a sufficient coverage limit.

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