After a house, a car may be the biggest purchase you make. Car manufacturers, eager to get you on the road in one of their vehicles offer many ways to drive a car. After you decide how much of a car you can afford and have researched the vehicle you want to buy, the next step is to figure out how you’ll pay for it.
This article aims to educate you on the pros and cons of leasing a car vs. buying one. They both come with benefits and drawbacks. We just want to help you choose better and make the best financial decision for you.
In general, a lease is like a rental. It gives you a car with relatively low monthly payments, and you get a new car every 2-3 years. Financing is borrowing money from a lender to buy a car unless you can pay in full up front. Financing an auto loan means you’ll be paying higher monthly payments, but you’ll own the car once you’re done paying off the loan.
Why is leasing a car cheaper than buying one?
When talking about monthly payments, on a lease, you’re only paying the depreciation of the vehicle. At the end of the contract, you’ll return the car to the dealer who can now sell the car for its fair market value. The dealer will try to get you into a new car lease and, since you no longer have a car, you’re looking to get into something quick giving the dealer some leverage.
Buying a car means you’ll pay for the cost of the vehicle and its depreciation since you won’t be returning it. At the end of the loan or financing, the car is yours to keep. You can drive it for free. Well, except you’re not just paying for gas and car insurance. You’re also paying for maintenance and higher repair costs as the car ages.
Mathematically, let’s take a $30,000 car with a $2,000 downpayment. Financial experts say you should be able to pay off a car in 48 months (and if you can’t afford it, go cheaper) and most leases are 36 months. If the interest rate is identical at 3% (often the interest on a lease is less), then your monthly payments to buy it are just over $700 whereas the monthly lease payments come in under half that amount.
Before you leave the article and go lease a new car, remember that after 48 months, the financed vehicle is paid for, owned by you, and has resale value. The 3-year lease, on the other hand, is over, you spent over $11,000 on a car with nothing to show for it.
Use this handy government of Canada vehicle lease or buy calculator to help you determine the costs for your situation.
The flaws of leasing a car
First, at the end of your lease term, you have nothing to show for your money. You also need to read the fine print. Most manufacturer leases give you 20,000 kilometres per year of the lease or 60,000 on a 3-year lease. If you drive over that limit, there are fines. You can pay anywhere from $0.10-0.20 per km depending on the brand. Some luxury manufacturers may limit you to only 12,000 km per year (BMW, Audi, etc.) so make sure to read and understand all the details of the contract. You need to know how many km’s you drive, on average, every year.
Also, any add-ons or modifications to the car will need to be removed upon returning the vehicle. If you spent good money on a car stereo, let’s hope you can sell it or install it in the new vehicle. You’ll also pay to reinstate the original stereo.
A lease only covers normal wear and tear on the vehicle. If you have more damage than what is deemed OK by that dealers’ standards, you’ll be paying for those repairs. It’s important to understand what normal wear means – ask lots of questions and study the lease terms.
Finally, if you compare car insurance, leasing will cost you more money. Since you don’t own the car, the dealer will often have higher standards and make you pay extra for higher third-party liability coverage and want more endorsements added on like comprehensive and collision. Be sure to get a few different car insurance quotes and find the best deal for you and your new car.
When to lease a car
There are some exceptions where it makes sense to lease a car. It might make sense if you’re a business owner who can deduct some vehicle-related expenses. Or you could just want to drive a new car every few years without the hassle of maintenance and the luxury of all the latest gadgets. Finally, the car will probably remain under warranty the whole time you’re driving it.
If you’re going to lease, make sure to care for the vehicle and accurately monitor your kilometres.
When to buy a car
If you want to build up equity and trade-in at the end of your time with the car, look to purchase. You get complete ownership of the vehicle, you can customize it however you like, and drive it for as long you wish. Once you’re done with the loan, you can keep the car payments going to fund your next vehicle or maybe start putting it towards a high-interest savings account for a dream vacation.
Shop around for the best rates
When I bought my last car, the dealership offered me a financing rate of 4.5%. Except, I had a substantial down payment and a great credit rating, so I was a little surprised. Sometimes, a car dealer may offer 0% financing. It’s usually not the bank doing the lending, but the car manufacturer itself. The automaker still earns the same amount of money had you bought it outright but just over a more extended period. They want to sell their cars and it’s one tactic to do so. If you want 0% financing, you’ll need to qualify for it with a long history of an excellent credit score. I went to my bank and asked what they could give me, and their deal was much better. I borrowed from my HELOC and had the car paid off within a year without any contractual pressures.
The differences in early termination
If you need to move or discover you don’t need the car, or can’t afford the payments, there is yet another difference between financing and leasing. If you financed, you can sell the car back to the dealer and pay off any amount remaining with the sale of the car, plus extras. If you end the lease early, it may cost you just as much had you stayed with the contract. Whole businesses like lease busters have popped up because of this situation.
What about buying the leased car?
Nobody knows the wear and tear better than you do so this might be a good option. Let’s say you really love the car, your salary has increased so you can afford higher car payments, and you need winter tires anyway – yes, you can buy it out. Be aware of the financial implications.
In the end, there a number of ways to get behind the wheel of a car. Buying used removes much of the depreciation value and may be the best value for your dollar. However, much depends on why you need a car in the first place and what you can afford. At Ratehub.ca, we hope to help you along the way. Will you buy or lease your next car? Let us know your thoughts in the comments below.