Although the purpose of leasing and financing is different, mainly the way the vehicle is "paid" is very similar. You make a monthly payment; you pay insurance, you have warranty coverage (or not), you drive a new vehicle, and that's it. But how about if you want to transfer it? How does your finance compare to a lease takeover deal? What are the actual technical differences? Well, I will talk about it today:
The Residual Value Difference
The term "Residual Value' is explicitly attached to a Lease, and the actual purpose is that the vehicle gets sold at the end of the contract to the person who leased it. That what a dealership calls "the ideal used car client": the one that decides to buy a car that has been using for a long time, knows it pretty well, how much care it got and how it will perform in the future.
Finance contracts do not come with a "Residual Value Number" as you are expected to own the complete car at the end of the contract. Technically, you own it since the beginning, but you have a debt to pay for a period.
So, if we face one against the other, we could just say that:
- Lease Contract Residual Value - Variable (depends on many factors but on average 30% - 50% MSRP)
- Finance Contract Residual Value - 0 (it will always be like that)
The Warranty Coverage
Multiple people finance vehicles with the "peace of mind" option. Basically, they add an Extended Warranty for the full period of payments (5, 6, 7 or even eight years) to guarantee all problems to be managed by the vehicle manufacturer.
If we compare this to a Lease Takeover, it is basically the same: many people add warranties to the vehicle for the leasing term if leased for more than three years and sometimes, cars come with an additional warranty after these are returned. See the following example:
- Someone can lease a Hyundai Tucson for only 3 years, but the vehicle itself will still have 2 more years of additional warranty when returned. Manufacturers like Kia, Hyundai, Mitsubishi, and Volkswagen have more than 3 years of default manufacturer warranty.
Cases like these are excellent opportunities for dealerships first to repair and then sell a vehicle that still has manufacturer warranty coverage for any unexpected problem. Seeing both cases, we can conclude:
- Lease Contract Warranty Coverage - Variable (may match the complete term of payments or not)
- Finance Contract Warranty Coverage - Variable (may match the complete term of payments or not)
Interest Rates?
The interest of acquiring a vehicle is also dependent on many factors, but let's still just assume you match the ideal scenario of a client with the perfect Credit Score to have access to the best manufacturer rates.
Although I've seen 0% Finance deals for up to 8 years (96 months) and I've also seen 3.9% Leasing deals for only 36 months, in my humble opinion it should stay outside of the comparison as it is attached to many variables that are out of your control. It changes every month, per model, per trim, per manufacturer... keep it out.
To summarize: basically, the residual value is the only technical difference when you are taking over a lease or a finance contract. The rest is the original deal that the current contract defines.
