Buying vs Leasing a Car in Germany: Pros and Cons

Nov 17, 2021Car in Germany, Living in Germany

If you need a car in Germany you generally have three options: to buy it in cash, take a car loan or opt for leasing. Not everyone has enough cash for a purchase, so the choice usually will be between financing and leasing.

For tax reasons, leasing is beneficial for self-employed and freelancers as well as someone with short-term plans in Germany. From a financial perspective, buying or financing a car is the better option in most cases.

You still can’t decide whether to lease or finance a car in Germany? Well, leasing is considered to be something in-between financing and car rental. Taking out a car loan means a larger commitment, but you also benefit. Read all about the pros and cons of leasing compared to financing a car in this article.

Car loan or leasing? What is better in Germany?

According to the latest report, 64% of buyers in Germany financed their new cars in 2018, while 17% choose car leasing. Only one in five cars was purchased in cash.

How does car leasing work in Germany?

Leasing is becoming increasingly popular as an alternative to cash purchases and car loans.

Leasing is a long-time car rental. When leasing a car in Germany you will sign a lease contract, pay a not refundable deposit or down-payment or contribution towards the cost of the car.

After signing the contract, you will be responsible for maintaining and repairing the car, but you aren’t permitted to sell it or let third-parties use it if stated in the contract.

The lessee becomes the keeper of the car, but not the legal owner.

A typical leasing contract has a minimum length of one year and a maximum of 36 months. At the end of the term, you can either return the car or purchase it.

Furthermore, when returning the car a customer pays for any damages that were made to the car and exceeds kilometers driven over the limit.

Mileage limit for leased car

Often lease companies set a limit you can drive with a leased car. Standard is usually between 10,000 or 12,000 km per year, so 30,000 or 36,000 over a typical 36-month lease.

Car leasing rates

The amount of your monthly lease rate is calculated based on these factors:

  • Car’s age
  • Model and performance
  • Mileage
  • Possible special services such as a service contract and included insurances

The average rate leasers pay per month is around 170 EUR.

Car leasing is most often used for those purposes:

  • companies that rent cars for their employees
  • people who drive many thousands kilometres every year for private or business reasons – the value of the car depreciates quickly
  • private buyers that don’t have money for down payments or can’t get a reasonable car loan
  • private buyers who prefers to change cars frequently

Pros of leasing the car

Convenience: You negotiate conditions such as lease length and monthly rate upfront. It’s a relatively simple and hassle-free process.

Affordability: Leasing the car is cheaper than financing. You avoid large down payments and your monthly payments are low. With some contracts, insurance and service are included, even the tire change you don’t have to pay then.

Flexibility: The benefit is obvious – you can drive a newer or nicer car every year by signing for a new lease every time. The minimal car lease in Germany is one year.

Leveraging: You can drive a new car without a large investment. New cars depreciate a lot, financing a new vehicle leads to a significant loss in cash.

Furthermore, car leasing is particularly beneficial for self-employed and freelancers, as the monthly leasing installments can be deducted as a business expenses.

Advantages of leasing the car in Germany:

  • Tax deductible for self-employed and freelancers – they can write off leasing rates
  • Flexibility
  • Short leasing period also possible
  • Low rates
  • Possibility to always change cars

Cons of leasing the car

The terms of the contract are often very strict and can land you with hefty excess charges if you don’t adhere to them.

Ownership: The biggest issue with leasing is that you rent and don’t own a car as it will be with financing. You don’t have legal ownership of the vehicle unless you decide to pay off the residual value at the end of the lease.

Servicing: The vehicle must be serviced by the original equipment manufacturer’s. Especially for premium brands like Audi, BMW, Mercedes, prices are very high when compared to your regular neighborhood car mechanic.

Contractual inflexibility: Although leasing a contract means flexibility, it’s not always that way. For instance, if the leaser wants to end the agreement earlier, he will pay either a large fee, continue to pay monthly installments until the term ends, or find someone else to take over your lease.

Limited mileage: The most common type of leasing contract is based on mileage. Usually, you will be given the maximum amount of km that you can drive. All kilometers above that will add up to the final payment at the end of the lease.

Disadvantages of leasing the car in Germany:

  • No car ownership in the end
  • All damages and changes made must be compensated when returning the car
  • Leasing contracts cannot be terminated earlier than agreed
  • Obligations to service the car only in partner shops

When planning a car leasing, one should carefully check the conditions since Germany has different leasing models. It’s recommended to select the contract which is based on the mileage and not on the residual value. 

In many cases, you will have options to book additional services, such as insurance or maintenance. It can lead to a higher monthly lease rate.

Financing vs Leasing

How much will you pay for a typical car such as Ford Fiesta when leasing it vs taking out a car loan? Here is an example of expenses when buying in cash vs financing vs leasing a Ford Fiesta in Germany:

LeasingCar loanCash
Car price13,290 EUR13,290 EUR13,290 EUR
Discount
Interest rate1,53 %1,48 %0
Monthly payment 171,21377,880
Term duration36 months36 months
Total cost6,164 EUR13,914 EUR11,961 EUR

The cheapest option would be a car leasing, but keep in mind, you won’t have ownership in the end.

Learn about car loans and car financing in this article.

Here in summary, the main differences between financing and leasing a car in Germany.

Ownership

  • Lease: You don’t own the car, it’s like a lease of the apartment – you pay to use it for a fixed period of time. At the end, you should return or buy a car.
  • Financing: You own the car and can keep it. Also, owners can add any customizations or modifications.

Down Payment

  • Lease: It includes the first month’s payment, together with a refundable security deposit, taxes, registration fees, and possibly other fees.
  • Financing: Downpayment will be add up to the loan amount.

Taxes

  • Lease: Leasers don’t pay any taxes when signing for a car lease.
  • Financing: You will pay 19% in sales tax on the net price of the car when financing a car in Germany.

Monthly Payments

  • Lease: With lease you will pay lower monthly payments than with the loan. You pay for the depreciation of the vehicle during the time of the lease, plus interest, rent charges, taxes, and fees.
  • Financing: Loan payments are usually 2-3 times higher than leasing – you’re paying for the entire value of the car.

Usage

  • Lease: Leasing instead of buying is often recommended if you want to use your car for business. Self-employed and freelancers can deduct the monthly leasing payments as operating costs.
  • Financing: Is better option for private use.

Flexibility

  • Lease: You want to stay flexible – change your car frequently, not sure how long you want to use the car, or don’t plan to use it for a long time.
  • Financing: If you are ready to settle for one car for a longer period of time.

Early Termination

  • Lease: If you don’t want to use car anymore you can end lease before it’s term. However, you often will need to pay termination fees or the rest of the lease.
  • Financing: You can sell your car whenever you want, and the money you make selling it can be used towards paying off the loan.

Depreciation

  • Lease: Future value of the car doesn’t affect you as the leaser.
  • Financing: Cars always depreciate in value, when financing a new car you will loose lot of money on depreciation if you want to sell it later.

Customisation

  • Lease: As a leaser, you won’t have much room for the customisation. If you decide to make some changes you will need to remove them by the end of the lease.
  • Financing: It’s your own car, so you can do whatever you want.

Wear & Tear

  • Lease: If car undergoes excessive wear and tear, most leases will require you to pay penalty fees to fix them.
  • Financing: The only worry for someone with a car loan/financing is how it will affect the resale value.

Distance Restrictions

  • Lease: Most leases will require you to negotiate an annual limit on how much you can drive the car. Extra charges will apply if you go over that limit.
  • Financing: You can drive as often and as far as you want.

Financing

  1. Vehicle becomes your property at the end of the contract period
  2. Monthly installment is calculated on the basis of the loan amount, term and interest rates
  3. Contract period is usually between 3 and 6 years
  4. In addition to the net car price you pay a 19% sales tax
  5. No limit on mileage
  6. Borrowers can decide for themselves how to maintain their vehicle

Leasing

  1. Customers return the vehicle to the dealer at the end of the contract period
  2. Monthly rate depends on various factors such as model, usage and leasing period
  3. Leasing contracts usually last between 1 to 3 years and are extendable
  4. You don’t pay 19% sales tax
  5. You may be required to pay for the depreciation
  6. For mileage leasing the mileage is limited
  7. Customers must comply with the service agreements of the providers

Car loans and car financing in Germany

If you don’t have enough cash to buy a car, you can finance a vehicle in Germany. There are a wide variety of loan providers who will secure reasonable financing conditions for your purchase.

Learn about car loans and car financing in this article.

To receive a loan, foreign nationals will need to have their primary residency in Germany and some stable income.

You can select between traditional banks e.g., Sparkasse or more flexible financing options such as Auxmoney and Smava.

Auxmoney is known for its high success rate when taking a car loan. You can borrow between 1,000 EUR and 50,000 EUR for the duration between 12 and 84 months.

Smava

Another option will be to finance your car with Smava. You can find and apply for various loans in Germany on this platform, including online and classic financial institutions.

Smava is rated as 5 out of 5 in finding credit in Germany. With Smava you can apply for loans in banks like Commerzbank, Postbank, Unicredit, Sparkasse, Deutsche Bank.

Here you can borrow between 1,000 EUR and 120,000 EUR. Both services have a very quick payout time. You will receive the money within days.

Verivox

Compare and select the right loan with Verivox. You can borrow from 1,000 EUR and up to 100,000 EUR for up to 10 years with Verivox. The loan can be taken online and with a same-day payout.

Have a look at Verivox turbocredit:

  • Interest rate starts from 0.0% p. a.
  • 100% digital, no submission of documents
  • Same-day processing incl. money withdrawal is possible
  • Special repayment
  • Pauses in payments are possible

So which one should you choose?

Which financing model is best for you – car leasing or financing via car loan? Keep in mind that leasing doesn’t mean owning the car, you can only use it for some time and return it back.

Whereas once you have your loan paid off, the car belongs to you. Once you have the leasing paid off, the vehicle goes back to the provider unless you buy it.

Therefore, you should weigh the options carefully and calculate the costs for each individual case. In the end, whether or not you want to lease or finance your car depends on your long-term intentions.

Generally, leasing a car is cheaper than financing.

If you like to have a new car every few years, leasing makes much more sense financially.

Also, how and how much you use your vehicle in a year will help determine whether it’s better to get a lease or a loan. Since the lease has restrictions on mileage, you might want to take a car loan when planning to use the car heavily.

In most cases, leasing contracts are only worthwhile for the self-employed and freelancers, who benefit from tax deductions, and for people who don’t want to commit to a long-term contract.

Is leasing a car a good idea in Germany?

To lease a car can be a good solution for people in the following situations:

  1. Self-employed

For self-employed and freelancers in Germany, car lease can be a great option, but only if it’s required for business use. In that case, you can offset leasing costs as business expenses.

2. Someone with short term plans in Germany

If you don’t know for how long you will stay in Germany or if it’s more than 1-3 years plan, leasing a car is a better solution. In the end, you will reduce your liability in the country since most car loans are taken for terms between 3-6 years.

3. Someone who likes to change cars

If you love driving new cars and trying different models, leasing a vehicle is definitely a better option.

4. Someone who don’t have a large budget or isn’t qualified for a car loan

To get a car loan, you will need to have a down payment of several thousand euros on hand. Otherwise, many traditional banks will refuse your application.

It’s not necessary for a car lease. Otherwise, you can apply for simpler loans from private financial institutions in Germany, such as Auxmoney.

Recommended products and services in Germany:

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