When buying a car, you have several payment options: cash, loan or lease. Paying upfront with cash means you own the car and don’t owe any money. It’s a nice position to be in, but not everyone has that amount saved up. You can take out a loan. That means you own the car (you’ve paid for it upfront) but you owe money to the lending company (e.g., your bank). Or you can lease your vehicle, the topic of this post.
What Does Leasing Mean?
Leasing your vehicle means you pay for the vehicle’s depreciation, but you don’t own the vehicle while you’re in your lease.
Consider it more like a multi-year rental agreement. In your contract will be a buy-out amount that you can pay when the lease has expired to finally own the car. Or, you can give the car back to the dealership and lease a new one.
Why Lease Instead of Finance a Vehicle?
Financing a vehicle, i.e., taking out a loan, lets you own the car, as I mentioned above. Leasing does not. So why would anyone lease a vehicle?
The biggest reason to lease is that the monthly payments are much lower than if you took out a loan for your car. This lets some people afford a car.
Look at these figures as an example:
- Car retail price: $35,000 + HST
- Deposit: $5,000
- Interest rate: 5%
- Monthly payment on a 3-year loan: $1,035.49
- Monthly payment on a 3-year lease: $576.23
If affordability is a factor for you, the numbers demonstrate how leasing has an advantage over financing.
How Does Leasing Work?
Leasing is similar to financing. You still have to go through a credit check, and that will help determine your interest rate. So, if you have bad credit or no credit history, your interest rate will likely be very high.
Clarify with your dealership who you will need to contact regarding your lease. Many dealerships offer leasing through a third party, which means you won’t be dealing with the dealership if you have questions about the lease or need to discuss payment difficulties.
Because you don’t own your car in a lease, your contract will have stipulations about the use of the car. For example, it will limit the number of kilometres you can drive, and if you exceed that limit, you will have to pay a financial penalty. Your lease may also limit how far away you can drive your vehicle, e.g., you can only use it within your province. Read the contract carefully.
Who Pays for Car Repairs and Insurance?
You do. You don’t own the car, but you’re responsible for maintaining it.
How Can I Calculate the Difference Between Financing and Leasing?
The Office of Consumer Affairs has a calculator specifically for this question. It will help you see how much you pay monthly for a lease versus a loan and how much you’ll pay if you finance your lease buyout.
This calculator has one more bonus. After you’ve repaid your loan, you have no further financial obligations to your lender. You can either enjoy the extra space in your budget, or you can continue paying the same monthly amount but into a savings account. This calculator helps you see where you would be financially with such a plan.
Leasing a Car: Look at All Sides of the Argument
When you lease a car, you’re signing a contract. Read it carefully and understand fully what you’re getting into. Be very clear about your reasons for leasing, too. If it’s just to afford a new car because your financial situation won’t allow you to otherwise have one, then getting a loan on a used car may be a better option.