Leasing a Car Vs. Buying a Car
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- The difference between financing and leasing
- The pros and cons of each
- The penalties if standards aren’t met for each
- What makes the most sense for you
Deciding whether to buy or lease a car is a decision every Canadian in the market for a car must make. Both options come with a list of advantages and disadvantages. We know that people who lease typically love a few things about their cars. They love the new car smell, the way the car shines as the sun beams down on the hood and lastly, they love the slick new innovative technology we see as each year's new models roll out. On the other hand, we know that car financers have no qualms about paying a bit more monthly now, with the guarantee of not paying anything in the future. From a practical standpoint, it seems obvious that car financing would be the better option. In this article, we’re going to dig a little deeper into the pros and cons of each route.
What does car financing mean?
When you buy a car at a dealership, financing means you take a loan out for the price of the vehicle minus whatever down payment you choose to make. Now that you’ve been approved for the loan, you must decide on the frequency you make payments back to the lender and the length of that loan term. But the main difference between this and leasing is, once you’ve paid all your monthly payments you now own the car. Now you have the option to continue using that car or sell it with the plan of financing a newer vehicle! If you’re curious to see what the payments of your car loan would be, try our car loan calculator!
What is a car lease?
In contrast, leasing means you're only making payments on that car while you have the car. You can almost think of leasing as a long-term rental. You make payments to the dealership to lease the vehicle for usually 2-4 years. Typically, a lease is cheaper than a car loan because you are paying for the depreciation of the car. At the end of the agreed-upon lease term, the vehicle is returned to the dealership and you don’t own the vehicle.
The main difference between leasing and financing
To put things simply, the difference between leasing and financing is ultimately ownership. With leasing, you're paying to essentially rent the car long-term and pay for the depreciation of the car with the end result being returning the car to the dealership. There is usually an option with leasing to buy the car at the end of the term agreement. With financing a car, every payment you make gets you a step closer to owning that vehicle. Once that loan is paid off you have 100% equity of that vehicle. Loan payments are higher as you're actually paying for the sticker value of that vehicle and not just the depreciation costs.
The advantages of buying (financing) a car
Many Canadians see car buying in a more practical scope and just want to have a reliable car that will last as long as possible. They drive the vehicle until it falls apart and requires expensive repairs. If you’re solely looking for a vehicle that can drive you and your family around that doesn’t necessarily have the newest technology or that shiny spoiler, car financing is the way to go. From a practical standpoint, there is hardly any advantage to owning a new car every few years.
Truly your best option with buying a car is putting the largest down payment you can afford with the shortest term length. This way you’ll pay the minimum amount of interest and it’ll be the fastest way to own that vehicle. If you want to see how much a large down payment can help reduce your monthly payments, plug in the estimated numbers in our car loan calculator.
Another advantage of buying over leasing is that financing a car is a great way to build up your credit score. If you can manage to make your payments on time consistently, you will be able to improve your credit score throughout the length of your loan term.
Once you’ve paid off your loan, assuming you haven’t agreed on a loan term of a maximum of 8 years, the car should still be reliable enough to drive around for a few years without needing repairs. Now you’ll be able to reap the benefits of owning a car without having to continually make monthly or weekly payments. Alternatively, once you’ve paid off your loan in full you may want to sell that vehicle as it’s now your asset and use that money to buy a newer vehicle.
Lastly, when you buy a car you don’t have to worry about the number of kilometers you're putting on the car. If you're an avid adventurer and love taking your car all across Canada, a loan is perfect for you. Unlike leasing, a car loan has no maximum mileage allowed on the vehicle per year. This means you never have to stress about taking your car around town or around Canada!
The advantages of leasing a car
One of the main advantages of leasing a car is that you're usually getting a brand new vehicle with all the fancy bells and whistles. Whether you’re looking for the slickest looking car or that new piece of technology new to the auto market, leasing may be the only means of accessing that.
The second advantage of leasing a car is that you will have smaller monthly payments. If having enough cash to afford a vehicle is an issue for you, leasing may seem like the better option. If you wanted to replicate these small payments with a car loan, you’d likely have to extend your loan term to eight years. An 8-year loan is not ideal for anyone as you’ll be paying much more in interest. Alternatively, if you wanted to replicate these payments in a loan you’d need to have put down a significant amount in a down-payment to lessen your monthly payments.
The third advantage to getting a lease is you're not locked into a long contract. If you’re the kind of person who doesn’t do well with commitments or is always looking for a fancy new car, a lease is probably more appropriate. When you get a lease you can have term lengths as short as two years! Many people love the idea of getting a new lease every two years, while it may not be practical financially, it will certainly keep you in style.
Lastly, one advantage to leasing is you won’t have to worry about long term maintenance of that car. If you only own the vehicle for 2-3 years, you should be lucky enough to keep it out of the mechanic shop. This could save you hundreds, if not thousands of dollars over time.
Disadvantages of buying (financing) a car
Of course, financing a car has its disadvantages, but these are all things you can avoid as long as you take care of your vehicle. Much like everything else you own, it’s your responsibility to take care of the vehicle. No cars last forever, but if you're diligent in taking care of your vehicle, you can avoid being in the mechanic shop often. You may get unlucky and get an unavoidable problem, but you can hope that this problem falls within the car's warranty. If you don’t take care of the vehicle, you may find yourself paying a lot in mechanic bills.
The second disadvantage of buying a car is as the car gets older, it’s bound to depreciate. All cars depreciate at different rates but this could impact your decision to sell the car at the end of your loan term. If the vehicle has depreciated significantly in the 4-8 year period that you financed it, it may make more sense to drive the vehicle into its grave rather than to sell/trade it for an upgrade.
Disadvantages of leasing a car
Leasing also has some disadvantages that must be considered. The main disadvantage is if you agree to lease, you will ALWAYS have a monthly payment. When you finance a car, eventually you’ll have paid off that loan, and the monthly payment will no longer be necessary. So yes, leasing a car may seem like it’s costing you less short term, but in the long run, you’re actually paying way more jumping from lease to lease.
The second disadvantage to leasing a vehicle is there are limitations on how much mileage you can put on the vehicle during the length of your term. The standard agreement for annual mileage on a car lease is 24,000km. Some manufacturers offer low mileage agreements which may cost less but it would mean keeping the annual mileage beneath 20,000km or even 15,000km. If you’re not much of an adventurer, exceeding the mileage limits probably won’t be an issue for you. If you’re the type of person who’s skiing in Mont Tremblant one week and surfing in Tofino the following month, you're going to have a hard time staying under the mileage limit. However, there are options to buy increased kilometers upfront if you expect to exceed 24,000km. If you don’t opt to pay for the extra kilometers upfront, you will be charged for every kilometer that you exceed the limit, this can add up very quickly!
Lastly, if you lease a vehicle, you’re expected to return that vehicle in the same condition you bought it in. This isn’t to say a dealer won’t account for normal wear and tear that occurs over a 2-5 year period, but if there is excess wear and tear you’ll be required to pay to fix it. Often, when the dealer is requiring the borrower to pay for damages, they end up being fixed by the manufacturer rather than a local mechanic. Having the manufacturer repair the vehicle is often much more costly than a local mechanic. If you’re seriously considering getting a car lease, make sure you understand clearly what the dealership considers to be excess wear and tear.
Financing penalties
Before you commit to leasing or financing a vehicle, it’s important to know the penalties you can face if you fail to meet any of the agreement's expectations. With financing, the vehicle is used as collateral for the loan. Therefore, if you fail to make payments you run the risk of having your vehicle being repossessed. If you don’t make your payments on time you’ll face costly fees and an increased interest rate. In both cases, your credit score will take a serious negative hit. Another potential financial penalty is signing such a long-term agreement that through interest you end up paying more money than the actual worth of the vehicle.
So yes, there are plenty of pros to financing a vehicle, but it’s critical that you’re well researched and budgeted before signing the agreement. Don’t put yourself in a contract that you won’t be able to afford half-way into the term agreement. Ensure your repayment plan is realistic so you can continue to improve your credit score.
Leasing penalties
Leasing companies want the guarantee that the borrowers will commit to the duration of their agreement. Because of this, the penalties on lease agreements are typically much harsher than financing penalties. As we’ve discussed in previous blogs, financing allows for lots of changes in the agreement once the agreement has already begun. Oftentimes, people in financing agreements can change the duration of their term, the frequency they pay, and the amount they pay. With lease agreements, there is little to no adjustments that can be made to the agreement once the agreement has begun. If you signed the contract to pay $500 per month over three years, you will be stuck paying that.
If you, for whatever reason, decided to end the lease term early, you will face fairly harsh penalties. The leasing company may require you to pay the remaining payments of that lease, or if you’re lucky, an early termination fee. One of the only options for people to try and get out of their lease early is to find a friend or family member willing to take over their lease. If you have no success in transferring the lease to someone else and you must get out of the agreement, the best way may be to buy the car outright and sell it.
Focus on the total costs
It’s clear that most of the time, buying a car makes much more sense than leasing a car. But it’s important that before you decide on one of these two options, you actually consider the total cost of both routes. For example, some cars may depreciate faster than others. If this is the case, depending on which vehicle your looking at it may make more sense to lease because of how slow a particular vehicle depreciates.
The decision is in your hands
To summarize everything we just talked about, leases are great for people who want a fancy new car every few years, and financing plans are more practical for people who want a car long-term with no driving restrictions. People financing their vehicles are in it for the long run and have the discipline to pay off their loan as soon as possible so they can eventually own that vehicle. People leasing their vehicles want that flashy new car with the upgraded stereo system, there is nothing wrong with this mentality, but it can get costly.
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