Difference Between Leasing and Buying
As you are car shopping, you will notice that they all list the lease price as well as the purchase price, but what exactly does that mean? What is the difference between car leasing and a car purchase? Well, there are actually quite a few differences.
Leasing
Leasing a car means you aren’t paying for the entire vehicle as you would when purchasing it; you are only paying for the portion you use. Basically, it works like this: you pay the dealership for however long you use the vehicle.
This is normally for a term of anywhere from 2 to 4 years. Keep in mind, though, that there are interests and taxes included in those monthly payments that you are making. You also have to return the vehicle at the end of the term.
Purchasing
When you purchase a vehicle, you pay the full amount. You can do this by paying for the car outright or by getting an auto loan, which will have car loan amortization. The interest on the loan will depend on what you are approved for.
These loan payments tend to be more than those of a lease because you get to keep the vehicle once the payments are done. The loan periods are also longer for a car loan than for a car lease.
How Leasing Works
When you lease a vehicle, you are essentially paying to use a brand-new vehicle for an agreed-upon period of time. In Canada, you have a few different options to consider when leasing. Each option works a little bit differently, so one may suit your needs more than the others.
- Standard Lease: This allows you to drive a brand-new vehicle for an agreed-upon term while making payments. Car manufacturers usually require a small down payment, and you must pass a credit check to be approved. Once the lease term has ended, you must either return the vehicle or renew the lease.
- Lease to Own: This process works similarly to a standard lease, but you have the option to purchase the car at the end of the lease. Those with bad credit typically use the lease-to-own process because a credit check isn’t required. Unlike a standard lease, the payments you make do go towards some equity in the vehicle. That being said, because of the nature of lease-to-own programs, they often offer this only on used cars and other used vehicles. It helps you get into the vehicle you need if you are unable to purchase it right away.
- Lease Takeovers: A lease takeover is when you take over a lease someone no longer wants. With a lease takeover, costs are often lower, and there can be an upfront cash incentive. Keep in mind, though, that you get the vehicle in the condition it comes in. There are mileage and maintenance restrictions on leased vehicles, so you could incur extra costs. It is advisable to check the car’s condition and mileage to help you avoid these extra costs.
Pros and Cons of Leasing and Purchasing
While leasing and purchasing a vehicle are very different, each has its pros and cons. Let’s take a look at these.
Leasing
| Pros | Cons |
| Getting a new vehicle every few years | Limited odometer usage without incurring mileage overage fees |
| Lower monthly payments | Costs more over time |
| In some cases, maintenance is free, such as tire rotations and oil changes. | Costly to terminate the lease |
| Covered by a new car warranty always | Can incur wear and tear charges |
| Pay less sales tax | You don’t own the car at the end of the lease (unless you pay extra to keep it) |
| No trade in hassles | Can’t make any upgrades or changes |
As you can see, short-term leases can be much less expensive. That being said, you can only drive around 20,000 km per year without paying extra fees, unlike with financing, which has no mileage limits. You also can’t make any changes you wish to the vehicle because it technically isn’t yours; you are just paying to drive it.
Purchasing
| Pros | Cons |
| Long-term savings | Larger down payments are usually required |
| Make any modifications you’d like, some dealer add-ons included | Higher monthly payments for your car loan term, even with the option of auto loan refinancing |
| No mileage limit, you can drive as much as you want | Need to cover repairs once the manufacturer’s warranty is done |
| Sell whenever you like | The value will depreciate even though you paid full price |
| Can use the vehicle as a trade-in | Might have difficulties trading in or selling, since a vehicle history report is usually required |
When purchasing a vehicle, the biggest difference is that it’s yours. You don’t have any restrictions on what you can or can’t do. While this can cost you more, it gives you greater freedom and an asset. That said, if you like to get a new vehicle every few years, purchasing one each time can be much more costly. Especially since the car loses value over time, and you won’t end up getting back what you paid for the vehicle.
Other costs to consider include insurance premiums and vehicle registration fees. Even if you’re paying cash, you also need to consider the costs of provincial sales tax.
If you need bad credit financing, you may face high interest rates or need a car loan co-signer, so you will need someone to meet the co-signer requirements to get your financing options and loan approval.
Tax Benefits of Purchasing and Leasing
If you own your own business, you may have heard that leasing a vehicle can have more tax benefits than purchasing one. The truth is, they both have tax benefits,s and while they may be structured differently, you can write off the cost of each if you are eligible. No matter which option you choose, they do work out to be the same over time.
Leasing
With leased cars, you can write off your monthly lease payments; however, there is a limit. You can only write off up to $800 per month plus taxes. The reason the CRA does this is that the benefits of the deduction don’t outweigh those of purchasing a vehicle. With vehicle leases, you can’t deduct the down payment you put down as one lump sum. It has to be spread out over the lease term and is included in the $ 800-per-month limit.
Purchasing
When it comes to tax deductions for purchased vehicles, they are taken over time. If you are eligible to write off vehicle expenses, you may have heard of something called the Capital Cost Allowance. The Capital Cost Allowance is a deduction applied to the cost of your vehicle, based on a rate set by the CRA. It accounts for depreciation costs.
How it works is, whether it is a new or used car, you can deduct up to $30,000 plus taxes. In the first year you purchase the vehicle, you can deduct 15%, and every year after that, you can deduct up to 30% until you claim 100% of the cost.
Unfortunately, if your vehicle costs more than $30,000, you can’t deduct any amount above; you can, however, deduct the interest paid if you have a loan. You can deduct up to $300 per month in interest amounts. So, even though you can’t deduct your payment like a lease, you can still deduct the cost of the vehicle.
Penalties Involved in Both Leasing and Financing
While we have gone over the positives and negatives of leasing and financing, we haven’t really gone over the penalties if you break either term.
Leasing
If you are considering leasing a car, you must review your contract thoroughly and negotiate if necessary. There are many more stipulations involved in a lease agreement than in a financing-to-own agreement. With a lease, make sure the allowed mileage per year fits your lifestyle; otherwise, there are penalties. A set fee per km usually replaces these penalties.
Another way to avoid any extra fees is to keep up on your vehicle’s maintenance. This can be anything from getting your oil changes on time to fixing any imperfections that may be considered as extra wear.
If you return a leased vehicle in poor condition, especially if there is a maintenance stipulation in the contract, you could incur a hefty penalty. If you have to resolve any major wear issues at the end of your term, it goes directly through the manufacturer rather than a mechanic of your choice, which often results in higher maintenance costs.
Two of the biggest penalties in vehicle leases, though, are missed payments and lease violations. When you miss a lease payment, you may lose your deposit; if you miss more than one, the vehicle may be repossessed.
If there ever comes a point you can no longer afford the lease, it is best to speak with your lease advisor and make arrangements. This could potentially save you a lot of money. This actually ties right in with breaking your lease, since this is one of the ways that you would do that.
When it comes to breaking your lease, there are also large penalties involved. You may even be required to pay the lease’s residual value. For whatever reason, you may need to break the lease, and it is important to review your contract, speak to your lease advisor and see what your options are. You may be able to trade the vehicle in for something cheaper or transfer the lease to a friend or family member.
Financing
When it comes to financing a vehicle, the only real stipulation is that you make your payments on time. If you are unable to, you can often reach out to your lender and work out a short-term solution to get you through until you can.
Often, if you do this, lenders can be more accommodating than you may think. In general, they still want to make their money,y so they are willing to work with you.
If you miss payments, you will likely have your vehicle repossessed. This is because a vehicle loan is considered a secured loan, with the vehicle as collateral. If you consistently make late payments, you could incur late fees.
Either way, you could end up paying a lot more for the vehicle than it is worth. This could also damage you in the long term by negatively affecting your credit score, making it more difficult to get financing in the future, and, even if you do, it could be at a higher interest rate than you are used to.
Why You Would Choose to Lease Instead of Purchase
When it comes to leasing, there are a few reasons you might choose this path. For one, the payments are cheaper. It is also an ideal option if you want to keep upgrading your vehicle every few years.
Many people like to do this and keep the same car, just get a newer make and model when the lease expires. It is less costly this way than purchasing a new car every few years. Leasing may also be ideal for someone having difficulty affording a car.
Really, leasing a vehicle can be a great option for some. The car insurance costs are the same as when you purchase a new vehicle, and you can even get gap insurance (replacement insurance) just like you would with a new vehicle purchase.
If you decide to lease a vehicle, it is important to review the lease contract carefully and negotiate if necessary. The reality is that a leasing company wants you to lease the vehicle for its full term.
They also want the vehicle back in good condition so they can lease it again. So, if you keep these things in mind and take care of the vehicle, leasing may be the best option for you.
How a Buyout Works at the End of Leasing
At the end of a lease, you have the option to purchase a vehicle for its predetermined residual value or future value. So, if you choose the buyout option, the lease buyout cost will vary by vehicle. This amount is known as the balloon payment and will include any remaining GST on lease payments. However, once it’s completely paid for, you can no longer use the tax advantages.
When you think of lease vs. loan, though, you need to consider your car-buying checklist, your monthly budget, and whether you want to go through with a private car sale. A vehicle affordability calculator can help you determine the cost difference, and if you want to deal with a dealer invoice price.
What Gap Insurance is and if You Need it
While GAP insurance isn’t mandatory, it is very helpful. This is because GAP insurance, also known as Guaranteed Asset Protection, pays the difference between the vehicle’s actual cash value and the remaining balance on your car loan or lease if it’s stolen or totalled. The idea behind this insurance is to protect you from negative equity and having to make payments on a vehicle that is no longer drivable. With this insurance, your driving habits will make a difference.
Negotiating a Car Lease in Canada
When it comes to leasing a car in Canada, you can absolutely negotiate. It works the same as a regular car loan; you should negotiate the total price of the car before mentioning that you want to lease or trade in your vehicle. This typically lowers your payments and saves you as much money as possible.
This number, known as the capitalization cost, is the most important. You want to negotiate a number below the MSRP. However, this isn’t the only number that you can negotiate. You can also negotiate:
- The lease rate (interest charges)
- Acquisition fees
- Disposition fees
- Annual kilometre limit and other mileage restrictions
Unlike with a financed vehicle, you don’t have to purchase extended warranties. This is because most leases are brand new and are covered by the manufacturer’s factory warranty for the duration of the lease. However, you are still responsible for regular maintenance and excessive wear and tear.
Some things you’re unable to negotiate are the residual value, which is also part of the vehicle’s resale value.
Leasing Vs. Financing an Electric Vehicle in Canada
Many people opt for electric vehicles because they no longer have to worry about fuel efficiency. They also save money in the long run with a prepaid maintenance plan and no fuel costs. However, you need to decide whether to lease an electric vehicle or finance a vehicle with an auto loan. Both will come with new-vehicle warranty coverage and sometimes even manufacturer rebates.
Leasing is best if you’re only looking to have the loan for 2 to 4 years. You also have lower monthly payments because you’re only paying the vehicle’s depreciation during your specific term lease. You don’t pay the car outright eventually, as you would with a traditionally financed car.
The biggest downside to leasing is that you have a mileage allowance, so you can’t drive as much as you would with a financed vehicle. However, you do need to consider EV lease incentives. Depending on the car, though, there are also rebate programs for financing.
How Depreciation Affects Resale Value
With a lease, you can determine depreciation by subtracting the residual value from the capitalization cost. The residual value is what the manufacturer estimates the vehicle will be worth at the end of the lease. If the actual resale value falls below the residual value, then the leasing bank will absorb the cost.
To determine the actual resale value, a vehicle appraisal is required. This will also include a vehicle inspection report, which helps determine the car’s value.
The Credit Score Needed to Lease a Vehicle
When it comes to leasing, just like with vehicle financing rates, your credit score matters. As with anything, the higher your credit score, the better your chances of approval. However, usually a minimum credit score of 680 is required.
Can You Lease a Used Car?
Yes, while you can lease a used car in Canada, it’s usually done through Certified Pre-owned Programs through luxury car brands. Many people choose to do this because the car has already experienced its largest depreciation, meaning its depreciation rate slows, and the monthly lease cost is much lower.
Even though every single lease payment is lower, you still have:
- A mileage allowance
- Excess wear and tear penalties
- Early termination fees for ending your lease early
- Different end-of-lease options
Instead of financing payments on a brand new car, you can reduce your vehicle ownership costs with a lease. It helps you focus on car affordability and can even be seen as a short-term car rental alternative. There’s often no car loan default because of the reduced payments (especially when you use some negotiating tips), but you do have to watch out for a loan prepayment penalty.
Subvented Lease Rates and Money Factors
In Canada, a subvented lease is a subsidized lease program offered directly by car manufacturer finance companies to help accelerate sales. With these offers, you can get inflated residual values, upfront rebates, and even below-market-value interest rates. However, you must meet the credit approval requirements to receive these dealer incentives.
How Leasing Impacts Your Credit History
When you have a lease in Canada, it’s viewed on your credit report as an installment loan. When you make these monthly loan payments, you can build your payment history, which can increase your credit score. However, missed payments can negatively impact your credit score.
What Happens at the End of a Lease Term
Whether you have a closed-end lease or an open-end lease, you have options when your lease ends, whether you took advantage of the best lease deals or not. You can choose to return the vehicle, purchase it, or trade it in.
Returning A Leased Vehicle: If you choose to return a leased vehicle at the end of the auto loan term, a lease return inspection is required. To avoid any surprise charges, you can get your own inspection done 30-90 days before the lease ends.
Purchasing a Leased Vehicle: After the lease period ends, you can pay the car off by purchasing it. In your finance agreement, there is a residual value you can pay to purchase the same vehicle you leased once the loan term length ends. While there won’t be much in the way of registration fees, there will be other payments in the lease transfer process. If you’re paying the remaining amount in cash, you won’t have to pay interest.
You’re able to continue making car payments to continue with your car purchase, based on your financing approval odds. If you made a security deposit, that will be applied to the vehicle’s equity.
Trading in a Leased Vehicle: If you decide to not go payment-free and trade in your lease, your trade-in value will be important. In fact, your trade-in value can be more than your residual buyout value, giving you equity that you can take advantage of. In some cases, you can pay for another vehicle outright. This amount is known as the cap-cost reduction. You can even consider other lease options and build equity in a new vehicle. Before you choose the next car, though, it’s important to pay attention to the car’s depreciation.
