With the rising cost of cars, many Canadians turn to leasing and financing to acquire a vehicle. However, deciding between these two options can be challenging, especially for first-time buyers.
This raises the question; what is the better option between leasing a vehicle vs. Financing in Canada? Find out here.
Pros and Cons of Leasing a Car
Leasing a car implies hiring or renting a vehicle for some time and paying an agreed sum over the lease period to cover the depreciation of the car’s value.
In the lease contract, the leasing company will state the following:
- Vehicle’s worth
- lease amount
- lease term
- mileage limits,
Other terms, like the additional fees for mechanical repairs and damages incurred during the lease period, will also be indicated.
A credit score of 700 and above would help you to get the best shot of being approved for favorable lease terms,
Benefits of Leasing a Car in Canada
Are you considering leasing a vehicle? Here are the top benefits of this option
- More affordable: You have the advantage of renting a relatively new car for a cheaper amount than it would have cost to buy one. According to LeaseCosts, leasing a vehicle, on average, fall under CA$ 400 per month, while financing a car costs between CA$ 400 to CA$ 800 monthly (Finder).
- Luxurious experience: Leasing a car gives you the luxury of driving new or slightly used cars every few years without going through the financial strain of buying them.
- Flexibility: Car leasing caters to a flexible lifestyle as you won’t have to face the hassles and expenditures of owning a car.
- Gap insurance: If you lease a car from a dealership, you will get gap insurance which protects you if the vehicle gets stolen.
- Little or no maintenance cost: In most cases, you don’t have to deal with car maintenance or depreciation when leasing a car, as the warranty agreement will cover repair costs.
Disadvantages of Leasing a Car
It is obvious the benefits of leasing a car are very enticing; however, let’s examine the drawbacks that come with it.
- You don’t own the vehicle: You will not have anything to show after all the monthly payments you made during the lease term, as you do not own the car.
- No customization: You can not customize a leased car to your taste, as nearly every lease company requires you to return the vehicle as it was initially.
- Lease-Termination Charges: A hefty lease termination fee will be charged if you are unsatisfied with the car or want to trade it before the end of the lease terms.
- Maintenance Charges: The leasing company may charge extra fees for excessive wear and tear when you return the car at the end of the lease term.
- Distance Restrictions: Lease agreements always include mileage limits, that is, the number of miles you may drive during your lease term, which restricts your movement to a specified distance.
Pros and Cons of Financing a Vehicle
Car Financing means buying a car by taking out a car loan and making a monthly payment of the agreed sum over the loan term, including the interest rate charged by the lender.
However, taking out an auto loan is risky as your car stands a chance of repossession by the lender if you fail to complete the loan payments during the agreed loan period.
Benefits of Financing a Car
The majority of Canadian view buying a car in a more practical scope and want a reliable vehicle that will last as long as possible. Thus, they mostly take out car loans, and here are the reasons:
- Ownership: The vehicle becomes yours once you finish paying off the loan. Alternatively, you can sell your car whenever you want and use the proceeds to repay your loan.
- Customization: You are free to customize your car to your taste.
- Equity: Financing a car is an excellent tool for rebuilding credit if you make timely payments. The vehicle might depreciate, but the equity or resale value still significantly benefits you.
- No Distance Restrictions: There are no mileage limits during your loan period, as you can drive as often and as far as you want.
- Negotiation: With a good credit score, you can get an auto loan with a lower interest rate, thus reducing the total cost of the car.
Disadvantages of Financing a Car
Financing a car has its drawbacks, but they are things you can avoid as long as you take care of your vehicle and make timely payments. Below are a few disadvantages of financing a car.
- High risky: The borrower using his car as collateral against the loan wants to secure the risk of losing his car if he fails to make timely payments when due.
- Additional fees: You can incur additional fees if you do not make timely loan payments, thus increasing the total price of the car.
- Bad credit score: Failure to repay your auto loan will negatively affect your credit score and reduce your creditworthiness.
- Repair and maintenance costs: Once the car is yours, you are fully responsible for the maintenance and repair costs.
- Monthly payments: The long-term loan attracts higher interest rates that will increase the total cost of the vehicle significantly.
Cost Comparison: Leasing vs. Financing in Canada
When we talk of cost comparison between leasing or financing a vehicle in Canada, it can be determined by the duration one has in mind like; short, medium, or long term.
For example, let’s compare leasing versus financing a car with the same price, same term, and same downpayment in these three durations.
- Short-term: Monthly vehicle leasing in the short-term will always be 60% lower than loan payments (financing).
- Medium-term: The cost of leasing a car in the medium term is about the same as the cost of financing, assuming the buyer sells the vehicle at loan-end and the leaser returns the car at the lease-end.
- Long-term: The long-term cost of leasing is more expensive than the cost of financing, assuming the buyer continues to use the car after the loan term, as he gets to drive the car for more years, which spreads the cost over a more extended period.
Wrap-Up: Should you Lease or Finance a Car?
Whether you want to lease or finance a vehicle depends on your long-term intentions.
If you prefer driving new or slightly used cars every few years (short-term), leasing is recommended financially. However, if you intend to buy a car and use it until it gets old (long-term), applying for a car loan is the best option.
Frequently Asked Questions
Can I buy the car after leasing it?
Yes, you can either return the car you leased at the end of the lease term or buy the vehicle if you wish to.
What are the tax benefits of leasing a car vs. buying a car?
When leasing a car, you pay tax as part of the monthly payments. Likewise, these taxes for either option are deductible when buying a vehicle, especially for business use.
Can you negotiate a car lease in Canada?
There is room for negotiation on payments, taxes, and rates in car leasing as there is car financing.