In an ideal world, you could save enough money to purchase a car outright. But, with the average cost of a new vehicle in Canada coming in at $66,500, that’s unlikely for most. If you’re in the market for a new vehicle, you might question whether you should lease or finance a car in Canada.
What makes the most financial sense, and what should you consider when working through this decision?
Here’s what you need to know about how to lease and finance a car in Canada, and how to decide whether leasing a new car vs buying a new car is right for you.
How Leasing a New Car Works
When you lease a vehicle, you make monthly payments for a set term – typically two to five years. At the end of the term, you can choose to trade in your car for a new one, or you can buy the vehicle.
In a lease, you pay for the depreciation of the vehicle during the set term. Your payments are equal to the price of the car minus how much the car will be worth at the end of your lease. This is known as the residual value. If you decide to buy the vehicle at the end of your term, you will pay the residual value.
How Buying a New Car Works
When you finance a car, you can take out a loan for the full cost of the vehicle, or you can come up with a downpayment. The larger your down payment, the smaller your loan. You are also responsible for monthly car payments. You pay these for a set period until the balance is gone. Your payments include interest.
Until the vehicle is paid in full, the lender keeps a lien on your vehicle. If you can’t make your payment, the lender can repossess the car. Once you pay the loan in full, the title is transferred to you, and you officially own the car.
Leasing a New Car vs Buying a New Car: How to Decide
When trying to decide between leasing a new car vs buying a new car, consider the following factors:
- Determine what you can afford. When creating your car budget, consider the monthly payment, fuel, maintenance, insurance, and seasonal expenses such as winter tires. What can you realistically afford to spend on a vehicle each month?
- Cost: Perform a few calculations to see if leasing or financing a vehicle is most cost-effective. You can use the Government of Canada’s Vehicle Lease or Loan Calculator to compare the two options and to see what fits your budget. Factors including the cost of the vehicle, downpayment, interest rate, and term length will all impact your monthly payment.
- In addition to cost, think about your preferences. Do you like having a new car every few years with all the new technology and innovations? Do you want to avoid the maintenance that comes with driving an older vehicle? If so, you might prefer leasing. If you are happy to drive the same car until it no longer runs, consider financing.
Pros and Cons of Leasing a New Car vs Buying a New Car
Before you decide if leasing a new car or buying a new car is the right move for you, carefully think through the benefits and challenges of each option.
Pros of leasing a new car
- Lower monthly bill. Monthly lease payments are typically lower than monthly financing payments.
- No negative equity. Providing you don’t go over your allotted miles or damage the vehicle, you can return the car at the end of your lease with no negative equity.
- Try before you buy. You can use the lease period to decide if you like the vehicle. If you fall in love with the car and don’t want to give it back, you have the option of purchasing it at the end of your term.
- Lower maintenance costs. Since you’re driving a newer car, you can expect less maintenance. Some leasing companies also offer full-maintenance lease options.
- You get to give it back. If you get in an accident, you know you get to give the car back at the end of your term. You don’t have to worry about depreciating value when you go to sell it because it’s no longer your problem.
Cons of leasing a new car
- You don’t own it. This means you can’t make any major changes or upgrades to the car.
- Wear and tear. If you don’t take good care of the vehicle, you may have to pay additional wear-and-tear fees when your lease is over.
- Kilometre limits. Leases come with kilometre limits. If you go over, you pay more money.
- You never pay it off. If you continue to lease, you’ll always have a monthly payment.
- Early termination fees. If you can’t afford your payments and need to cancel your lease you may have to pay termination fees. This can negatively impact your credit score.
Pros of buying a new car
- You own it. Once your loan is paid, the car is yours. There are no restrictions on what you can do or the upgrades you can make.
- It’s an asset. Even though cars depreciate, once you pay off your loan, you’re left with a tangible asset.
- Credit building. If you make your payments on time, every time, this can help to boost your credit score.
Cons of buying a new car
- If you can’t pay your bill on time, your car can be repossessed. This can negatively impact your credit score.
- Maintenance costs. You’re responsible for the upkeep of your vehicle, from oil changes to winter tires, and any repairs.
- As soon as you drive your car off the dealership’s lot, it loses value and continues to do so. After one year, your car may be worth less than 25% of the purchase price. Over the next four years, your car can lose between 15% to 25% of its value each year.
- Potential for negative equity. This is when you owe more on your car loan than your car is worth. For instance, if your car is worth $15,000 and you still owe $20,000 on the loan.
Can’t Afford Your Car Debt? We Can Help
Getting a new car is a big and expensive decision, so you want to get it right. To determine if leasing a new car vs buying a new car is the best option for you, start by reviewing your budget, and comparing the cost of borrowing for a lease vs a loan. Also, consider your personal preferences. Ultimately the right vehicle is the one you can afford. You want to avoid going into debt and missing your car payments.
If you’re in a situation where you can no longer afford your car or lease payments, and you’re considering Bankruptcy or other debt solutions, it’s time to talk to a Licensed Insolvency Trustee. At Allan Marshall & Associates, you can speak to one of our associates for free. They can assess your debt situation and help you come up with a plan. When you’re ready to discuss your debt, call us at 1-888-371-8900 or fill in our online contact form.
