Loan, leasing or cash?

Added 28 October 2019 by

When buying a car, you have several financing options to choose from. Which one is the most cost-effective: a lease, a loan, or cash?

The search for a used car is the first stage of the purchase. Paying for it is the next one and, although the choice is definitely less complicated than browsing through thousands of advertisements on automotive portals, it still is an important decision whose impact will be felt long after registering the car.

Buying a car for cash is the simplest solution available. If you have some money saved, you can finance the transaction this way. The advantage of this solution is the ability to finalize the transaction quickly, and thus – to negotiate a favourable discount from the seller. The car you are currently driving can actually help you reach the required sum. This is important because buying and selling a car often is a package deal, i.e. just before or just after buying another car, we usually decide to sell the one we are currently owning.

If you don’t have that much cash or you don’t want to spend it all on a car, you can opt for a loan, too. Nowadays the offers tailored specifically to buying a car are less popular than they used to be. With low interest rates, you need nothing more than an ordinary loan. A loan can also help you with the additional expenses such as insurance or whatever servicing will be necessary right in the beginning. The disadvantages include the decreasing of the buyer’s creditworthiness (which is significant if someone is, for example, planning to take out a mortgage to buy an apartment in the future) and the need to establish collateral in the form of a promissory note. Fortunately, a loan can be paid back earlier, e.g. with the money from the sale of the previous vehicle, especially if the purchase of the new one takes some time.

Consumer leasing can be a good alternative to loan. This form of financing is basically operational leasing, i.e. you use a car belonging to a leasing company and pay a monthly fee in exchange. This is an option for private, non-business buyers. It has some advantages, too: the minimum of formalities and the fact that the leasing instalments don’t count when the creditworthiness is calculated, as opposed to the bank loan. In addition, the leasing companies are able to offer significant discounts on insurance, so the third party liability and AC policy (the latter is mandatory for such contracts) should be valued favourably. This is an interesting option for the less experienced drivers.

If you already have a big discount for accident-free driving, in most cases you’ll likely pay more than you would’ve paid if you’d insured the same vehicle directly. So the more experience you have, the worse a deal consumer leasing will be for you. In addition, due to the leasing lasting a minimum of 2 years, you’ll lose the insurance continuity as a private person: there’ll be no trace of this period in the database, as the policy is formally issued for the leasing company. As a result, when buying the car at the end of the leasing contract, it may be difficult for you to find an insurance provider that will honour the previously granted discounts.

Finally, it’s worth mentioning the possible financial benefits associated with buying a car for people who run an enterprise. In the case of a used car worth 40,000 PLN with a 20% initial payment and instalments spread over 36 months, you can save nearly 11,500 PLN on VAT and income tax. When buying this car with a loan, you’ll save 11,400 PLN. When buying for cash, you’ll save 10,800 PLN. Interestingly, by calculating how much you’ll actually spend on a car after deducting tax benefits over the entire period of its financing you’ll see that leasing and loan are only slightly more expensive than buying for cash. Leasing will cost you 31,700 PLN, loan – 32,500 PLN and buying for cash – 29,800 PLN. The important difference is that with loan or leasing you don’t have to pay the whole amount right away.

Cash, leasing and loan: pros and cons:

Form of financing Advantages: Disadvantages:
Cash The ability to quickly complete the transaction and thus negotiate prices

The buyer immediately becomes the owner of the car

The need to spend a large sum of money at once

Possible cost settlement and tax benefit spread over time

Leasing The biggest tax benefits (the cost reducing the tax is 100% of the leasing instalment)

Flexibility in determining the amount of the instalments, from the initial payment, through the instalments, up until the buyout.

Does not reduce creditworthiness

Having to buy insurance from a leasing company (unfavourable for drivers with large discounts)

The minimum contract duration of 2 years without early repayment option (except for assignment)

Loan The ability to spend it on other costs besides buying a car (insurance, service)

The possibility of early repayment

The need to provide collateral (e.g. promissory note)

Necessity of buying insurance (for some offers)

As opposed to leasing, it reduces creditworthiness

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Loan, leasing or cash?
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Loan, leasing or cash?
When buying a car, you have several financing options to choose from. Which one is the most cost-effective: a lease, a loan, or cash?
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