Lease Vs Finance Which Car Loan Is Easier To Break?

First of all, what is the difference between a lease vs finance when it comes to a car loan

? Well there are number of factors that will come into play, but the most important misconception is lease is like a long term car rental, where finance means the car belong to my name. Well it is true and not true, on paper finance will have your name on the ownership portion, and lease will have the lien holder's name and address instead of yours. But when you look at the big picture, both lease and finance means you are taking on a loan and until the loan is paid off in full, and only then you can say you own the car. So before the lease or finance is paid off in full there is still a lien on your vehicle which restricts you from selling the vehicle without clearing the lien first. When it comes to you breaking the contract it is easier to break a lease contract vs finance for few different reasons. First of all when you lease a vehicle you are paying for the depreciation on the vehicle, not the entire loan. On every lease there is a residual value or end value. Which can also be called your buyback on the car, it is usually 40-50% of the selling price of the vehicle when it was new. So let's take a $30,000 vehicle for example, your lease end value will most likely to be $15,000 depending on the manufacture. Usually import has a higher residual value, versus domestic vehicles. So lease use the same vehicle and let's assume the monthly payment on the lease is $450 per month, with 0 down. After 2 years into your lease, you owe the leasing company $21,000 to pay out, and let's say your vehicle still worth $19,000 according to Canadian black book. At that point you only need to pay $2,000 to get out of that lease. Of course the lower the mileage you have on the car the better and easier it is for you to break that lease. Rarely you will have very little chance of getting any equity when you break the lease. But occasionally when the lessee bring back a vehicle less than 10,000 km there maybe a small amount of equity you can claim for yourself.

Now when you are financing a vehicle, you are not only paying for the entire loan with taxes added. But also interest rate accumulated over the term. So the same $30,000 car can have a finance lien of $36,000. Now after 2 years into that loan, you may still have $28,000 owing on the vehicle. But when your car is only worth $19,000, to break that financing contract you will be looking at $9,000. So in short, if you are looking to get out of your future contract when it comes to a car loan, it is always easier to break out of a lease vs finance.

by: Rick Li

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