According to Moneysense, it is estimated that 20%—or one in every five cars on Canadian roads—are leased. The other 80% of drivers opt to buy in cash or finance. Even so, this statistic alone does not justify the need to buy a car rather than leasing it. This is because there are circumstances in which leasing a car is more economically viable when compared to buying one and vice versa. The decision to either lease or buy a car is highly subjective, and individuals should weigh the advantages and drawbacks of both options against their personal situations before making a final decision. One thing that stands out between leasing and buying a car is ownership. While financing means that you will own the vehicle upon paying off your loan, the same cannot be said about a lease.
How Does Leasing a Car Work?Leasing is technically renting a vehicle from a dealership for a specified period, usually between 36 and 48 months. The person leasing a car is expected to make regular payments to the dealership for the stated period. Unlike buying, where you pay for the actual value of the car, you only pay for the depreciation value of the vehicle in a lease. In other words, you’ll be making payments toward the usage of the vehicle in the same way that people lease an apartment or an office space over a specific period. Upon expiry of the lease, you can choose either to return or purchase the vehicle at a predetermined value on the lease agreement. If you choose to renew the lease agreement, you will get a relatively newer car with enhanced features. The factors that you need to consider when leasing a vehicle include the lease period, mileage, residual value, rent amount, taxes and other associated fees. A longer lease period may prove expensive in the long run since your payments won’t be accruing as much equity as they would if you were financing the vehicle. Normally, most leased vehicles come with an annual mileage cap of up to 25,000 miles. Exotic vehicles come with an even smaller cap of between 10,000 to 12,000 miles. Driving past the stated mileage attracts punitive fines for every extra mile. The total cost of leasing a vehicle is also a major consideration in the decision to lease or buy. All said and done, the decision to lease a car comes down to your priorities and specific budget needs.
Benefits of Leasing a Vehicle
1. CostLeasing a car is relatively inexpensive when compared to buying one—by as much as 30% to 60% lower! The huge cost difference is based on the fact that you’re paying only for usage (depreciation value) rather than the actual value of the vehicle and depreciation. Leases don’t require down payments, which means that you can drive home after paying for one month’s payment and other small fees. This is perhaps the biggest benefit of leasing, as it allows anyone to drive their dream ride, albeit temporarily.
2. Repairs and MaintenanceIf you lease a new vehicle for a period of 36 months, you’ll probably enjoy the manufacturer’s bumper-to-bumper warranty throughout your lease period. Some manufacturers offer free routine maintenance for a certain period. Therefore, if your timing (and driving) is good, you won’t incur expensive repair and maintenance costs.
3. Avoidance of Used Car IssuesA lease ensures that you never experience the problems that come with used cars. This is because you get a new car every time you renew your lease agreement. As such, you’ll never have to bother yourself with reselling the older car or revamping it to fetch a better resale price.
4. Luxury of Driving Latest CarsLeasing affords you the luxury of driving the latest cars at relatively low costs. You can swap your used ride for an enhanced version every two or three years. If you were to do the same by purchasing a new vehicle, it would be more costly. A lease is particularly beneficial for drivers with short-term vehicle needs.
Disadvantages of Car Leasing
1. Car OwnershipRemember when we stated that leasing a vehicle is relatively cheaper than buying one? Well, that statement is only true if you’re leasing the car over a short period of time! When you lease a vehicle, you are basically paying for the usage of the car when it is depreciating the most. Although the monthly payments are 30% to 60% cheaper, they are expensive in the long run. A driver financing a car payment will eventually own it, while someone who leases a car will have nothing to show for it when they stop making payments, since they can never own the car regardless of how long they lease it.
2. Mileage LimitationsLimited mileage is another major drawback of leasing a vehicle. The mileage cap limits your movement big time. Extra mileage is penalized punitively at a rate of between 10 and 20 cents for every extra mile over the allotted mileage. If you’ll be racking up a lot of extra mileage, then leasing won’t be the right option for you.
3. Insurance CostsThe dealership is not the only party looking to make a killing from your lease. Insurance providers also charge exorbitant coverage costs depending on your age, driving record and residence, among other factors. The dealership is partly responsible for the higher insurance costs, since it demands higher coverage levels for leased vehicles. For a leased car, you’ll end up paying comprehensive and collision insurance coverage, which is quite expensive.
4. Customization or ModificationsYou can’t customize a leased vehicle! Your lease agreement stipulates that the vehicle should be returned in the same condition in which you received it in. This means that you’ll need to get rid of the killer spoilers that you recently installed, take out the modern sound system, pay to reinstall the original stereo, and no engine modifications as well!
5. Extra FeesYou’ll also pay high additional security fees, and canceling your lease agreement doesn’t get you off the hook from paying the balance.
How Does Financing a Car Work?Financing a car means taking out a car loan from a lender that you will repay over a stipulated period. Many Canadians prefer financing a car rather than leasing it. A driver opting for financing agrees to pay back the car loan with interest and other associated costs in regular monthly payments until the loan is fully settled. In the Canadian market, lenders offer varying financing terms. This means that some options can be more expensive than others. At MoneyWizard.ca, we strongly recommend that you shop around and compare quotes from different financial institutions before making your final decision. The common financing options include traditional banks, online lenders, credit unions and some car dealerships. Car buyers with a deposit of at least 20% of the vehicle’s value and a good credit score are in a better position to negotiate for better terms. If you’re in this category, make sure to negotiate for suitable terms.
Benefits of Financing a VehicleYou’ll notice that the benefits of financing a car stem from the drawbacks of leasing one. Listed below are some of the benefits of financing a vehicle.
1. Car OwnershipThe greatest benefit of financing a car is that you will eventually own it after you’ve completed paying off the car loan. This is particularly important for drivers who tend to develop an emotional attachment to their favorite vehicle. You stop making the monthly payments when the debt has been fully paid, unlike in leasing where payments never stop.
2. Lower Overall PaymentsYou’ll pay less in the long run if you opt to finance your next vehicle. Although monthly financing payments are considerably more than leasing payments, you will end up paying less in the long run compared to an individual that chooses to lease throughout.
3. No Mileage LimitationsIt makes sense to purchase a vehicle if you plan to drive over the average mileage per year. Dealerships don’t limit your mileage when you are paying off a car loan, which means that you can travel as much as you want.
4. Unlimited Modifications or CustomizationsLooking to style your new Subaru with a badass Turbo silencer exhaust system, a tweaked 2.5-liter turbocharged four-cylinder, killer sport rims, and a spoiler that complements its new looks and performance? Well, you can only make these modifications on a car that you are financing, not a lease.
5. Depreciation DiscountIf you’re on a tight budget, you can take advantage of the depreciation discount by purchasing a vehicle between two and three years old. Over this period, cars lose between 20% and 40% of their original value. Therefore, you can get a well-maintained vehicle at a bargain if you can hackle like a pro!
Disadvantages of Financing
1. Costly Monthly PaymentsThe most obvious disadvantage of financing a car is the cost of monthly payments compared to leasing. As noted earlier, you’ll be paying between 30% and 60% more than the cost of a lease. It gets worse if you can’t put down a deposit of at least 20% of the vehicle’s value. The monthly payments are generally high because you are paying for the actual value of the car including depreciation. While negotiating for a longer loan term might help lower your monthly premiums, you’ll only end up paying more interest in the long run.
2. DepreciationSince you won’t be returning the vehicle to the dealer, as is the case with leasing, depreciation will affect the resale value of the vehicle. Also, remember that the car acts as collateral for the loan, and your dealer can repossess it when you default on your monthly payments.
Leasing vs Financing: How It Affects Your InsuranceTechnically, leasing or financing does not affect the cost of insurance. Common factors that influence the cost of insurance include the vehicle’s value, driving record and the type of coverage you’re seeking. However, your dealer might demand that you obtain comprehensive and collision coverage for the vehicle’s extra protection, and this is the only case in which your dealer’s actions will affect your insurance costs. The additional cost is standard rates, the same amount that the next driver pays for voluntarily when they need extra coverage.
Frequently Asked Questions
1. What credit score do I deed to lease a car?Your credit score plays a critical role in determining the type of vehicle that you can lease and the interest rate the dealership will charge. Borrowers with prime credit scores of 661 and above pose little financial risk to the dealership and are rewarded with better lease terms, which include paying lower interest rates.
While a below-average credit score may not necessarily lock you out of a lease arrangement, you will end up paying more in interest or need a higher down payment since you fall in the high-risk category.