This article is not intended to be an in-depth discussion on the differences of leasing and residual financing. We have highlighted some of the main advantages and disadvantages of both plans.
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Consumers often use the term leasing as a generic description to describe a financing plan popular for its reduced monthly payments, instead of using it as a description of a specific finance plan. An example comes to mind in the generic use of the word Jell-O, to describe any type of gelatin desert, or in America the word Kleenex to describe all facial tissues.
There is a finance plan that looks very similar to a lease but has a few distinct characteristics that some find useful. This alternative finance plan offers the same, and/or lower monthly, payments as a true lease but the two plans are quite different in their mechanics. Here are the major differences between these two beneficial financing options.
Leasing – Essentially it is a long-term rental contract generally 24 – 36 months in duration. The vehicle continues to be the property of the leasing company which provides you some nice benefits.
- Monthly payment savings of (20-30%). Since you will use the vehicle for a set period of time you will only pay the difference of the originating capitalized cost minus the end of contract residual value, which is typically 60%.
- The real market depreciation of the vehicle is absorbed by the lease company. You will pay for the anticipated depreciation in the monthly payments but should the market value of the car drop more than expected you are protected.
- Self employed persons can gain tax advantages. You should consult your personal tax advisor before deciding on which type of finance program to utilize.
LAP “lease alternative program” – Also known as “balloon financing” or “residual note financing” is a 36 – 60 months in duration. Utilizing the same calculations as a standard lease program it differs in that the car is titled in your name, this too has benefits.
- Cost of the vehicle is divided into two portions same as a lease. Just as in a lease since you will use the vehicle for a set period of time you will only pay the difference of the originating capitalized cost minus the end of contract residual value, which is typically 60%.
- No contractual restrictions on km usage.
- Ability to cancel contract at any time with no contractual penalties.
- Generally lower down and lower monthly payments.
- You are absorbing the anticipated depreciation of the vehicle in the monthly payment same as with a standard lease, however if the value of the vehicle drops more than expected you will pay that cost. The converse is also true should the value not drop as anticipated you will benefit at contracts end.
To sum up; a standard lease contract releases you from the concern of the future value of the car and places it on the leasing company. This option makes a lot of financial sense because the lease company is in the business of cars and is better equipped to handle market fluctuation than an individual. This responsibility release comes at a price of course which is why lease payments can be higher than LAP “balloon” programs but lower than conventional 60 month finance contracts.
LAP “balloon” programs, normally the least expensive way to finance a new or used car, requires you to be more involved in its future value. There are several ways to protect yourself, and we can explain these options to you by phone or by conducting a desktop sharing session with you.
Here is a 30 second video Jeanne G. on using LAP program