Leasing or buying a vehicle are both options that come with a different set of advantages and disadvantages, and making the right decision is entirely based on your personal needs and situation.
According to Statistics Canada, the average Canadian puts 20 per cent of their income towards an auto loan every year. Financing a vehicle is an option for Canadians who want to eventually own the car they’re paying off. However, some Canadians are leasing their vehicles – a popular alternative to financing.
How Does Leasing a Vehicle Work?
When you lease a vehicle, you make regular payments on a car over a short-fixed term (typically 2-4 years) and then return the vehicle once the lease is up. Leasing, like renting a car for a long period of time, means you only pay for the car’s value that you use. Unlike financing or owning a vehicle, you’re only required to pay for the depreciation costs of a leased car. Due to this factor, leasing a vehicle typically has lower monthly payments.
How Does Financing a Vehicle Work?
When you finance a vehicle, you’re entering into a contract with a lender where you agree to make payments over set period of time. Dealerships have relationships with a ton of lenders who can work with individuals facing a wide variety of financial situations. Once you’re approved for auto financing, it’s your responsibility to make all monthly payments on time and in full. Although approval rates are often based on a borrower’s financial situation, financing is a great tool to use for rebuilding credit, and options to refinance and trade-in the vehicle before the loan is up are available. Once a term is finished on an auto loan, the vehicle officially belongs to the borrower.
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How is Leasing Different from Financing?
When you finance a car, the entire cost of the vehicle, including fees and taxes, is stretched out over the length of the term. The shorter the term length, the higher the monthly payments, and the longer the term length, the smaller the monthly payments. Although the average car loan length is roughly 6-7 years, payments for a financed vehicle will eventually end. With a leased vehicle, monthly payments are calculated by the vehicle’s residual value (the value of the vehicle that is leftover once the lease is finished) and the car’s total sale price – because this number is often lower than a loan for auto financing, monthly payments when leasing a vehicle are known to be more affordable. However, once the term on a leased vehicle is up, you’re required to either buy-out the vehicle or return it and repeat the process. Most Canadians who choose to lease don’t buy the vehicle and instead return it for a new vehicle and new lease, which restarts a payment process. The payment cycle on a leased vehicle can be a turn-off to people who want to eventually finance a vehicle, which will lead to ownership.
Leasing a vehicle is a convenient option for Canadians who aren’t interested in owning a vehicle and want lower monthly payments. The leasing process is also appealing to people who prefer changing their vehicles every few years to models that are newer and fall within the warranty period. Although leasing a vehicle might seem financially convenient regarding lower monthly payments, over time, the cost of leasing several vehicles will eventually be higher than the cost of owning a vehicle. When you finance a vehicle, you’re given the freedom to use the car at your convenience, regardless of the mileage used. With a leased vehicle, there are set kilometre-limits, and going over these limits on a leased contract results in hefty fees. Additionally, borrowers who finance a vehicle aren’t required to return their vehicle – once it’s paid for, it’s theirs to keep. Leasing a vehicle means you’re stuck with the car and payments until the lease is over and returning it before the lease is up is extremely costly. For people who finance and want to return their vehicle due to financial or lifestyle changes, options, like refinancing and trading in the vehicle, are common and easy to do. When you lease, these options aren’t available to you.
Leasing companies understand that some wear-and-tear is bound to happen over the course of a leased term, however any major damage done to the body of a leased vehicle will come straight out of the borrower’s pocket. The difference between cost, convenience and flexibility of leasing versus financing are major and should be researched before you decide which path to take. Other factors to note are the penalties that come alongside leasing and financing.
Leasing companies want to ensure that borrowers will stay driving the vehicle through the duration of the term. These companies make money off your payments and put the cash towards paying off the vehicle so that they can continue leasing it. Due to this, leasing contracts typically include penalties that you won’t find when financing a vehicle. As mentioned earlier, there are a lot of options available for people who are financing and want to change their vehicle or their monthly rates. However, these options don’t exist with leasing.
The penalties for terminating a car lease early could require you to pay for the remaining payments on the lease, an early termination fee or any negative equity left on the vehicle. An option for people who want to end a lease term early is to try and transfer the lease to a friend or family member. However, this option isn’t available to everyone. If you’re in a lease and want to get out early, buying out the leased car and trying to sell it yourself or trading it in could be the best option for saving as much money possible through the turn-in process. If a leased car has a ton of damage once the term is over, the borrower must settle with the leasing company to pay for the accidents, and these are typically resolved through the manufacturer instead of a local mechanic, which can sometimes be more expensive.
When you agree to finance a vehicle, the vehicle is used as collateral while you’re making your monthly payments. Any late payments could result in hefty fees and increased interest rates, and any missed payments could result in repossession of the vehicle and serious credit score damage. Another financial penalty for financing is getting stuck into a lengthy contract and owing more in payments than the actual worth of the vehicle. A positive factor with financing a vehicle is being able to rebuild your credit score through the process, however when you enter a financing agreement, ensure that the repayment plan fits into your budget, otherwise, you could face serious penalties if you can’t make your payments.
Financing and leasing a vehicle are two different options that will heavily depend on your needs as a driver and how much cash flow you possess. Before you decide between the two, consider each process, the differences and the penalties for both. If you’re ready to lease or finance a vehicle or are interested in trading in your current vehicle, Canada Drives can help you right now.
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