Terms, tips to be aware of if considering a lease

According to Brian Murphy, VP of research and editorial at Canadian Black Book, leasing is a trend that’s growing in popularity.

“There’s been a significant uptick in leasing since the economic crisis of 2008, when leasing essentially stopped. The market in Canada is now leasing at just under 30 per cent, but we see some room for that to grow this year.”

Like thousands of Canadians, you may be considering leasing your next vehicle. If that’s the case, here’s a closer look at some tips, facts and terminologies you may find helpful. Depreciation, term and residual value

As you drive a vehicle, you add miles, wear and tear—all of which cause depreciation, or a reduction in the vehicle’s value. Residual value is what the vehicle is worth at any given point after it’s new. Effectively, when you drive a car, you’re depreciating it to its current residual value. Finally, the amount of time you’ll spend leasing the vehicle in question is called the term. So, the vehicle you’re leasing will undergo depreciation during the term you drive it for, and at the end of that term, that vehicle will have depreciated to its residual value.

Determined up front

When you lease a vehicle, the term and residual value are determined at the start. For example, you’ll drive a new $30,000 Chevrolet Malibu for a term of three years, and at the end of that term, the vehicle will have depreciated to a residual value of $20,000.

Cost certainty, depreciation, lower risk

Leasing provides cost certainty and reduced risk. Murphy comments “essentially, your monthly payment is interest, taxes and depreciation. What leasing does offer to consumers is cost certainly — if your lease payment is $400 a month for your first payment, it will be $400 a month for your last. The folks leasing the car to you are bearing all the risk if the car is worth less than expected at the end of the term.”

About that down payment

Many experts advise that shoppers not make a large down payment when leasing, in case of the unexpected. Murphy explains: “A big up-front payment can be a problem should the vehicle be written off in an accident, when some of that money could disappear into the insurance settlement.” Making a larger up-front downpayment could cost you money, if the vehicle is totaled early in the lease.

Gap insurance

Gap insurance is available, intending to protect those who lease from owing more than the vehicle is worth, if it winds up wrecked or stolen. Be sure to ask your dealer which coverages, like gap insurance, are included with the lease, and which are not.

“No matter what you do with the payment, always make sure that you have depreciation waiver insurance through your vehicle insurance policy, or alternatively, that your lease includes gap insurance to cover a total loss situation,” Murphy says.

“Not all leases include gap insurance, so be cautious, however, most dealers do sell this type of insurance. This insurance will cover any shortfall in value between what the insurance company pays you for a loss, and the money the leasing company might like to recover when the vehicle which is leased to you (which is their asset) has been destroyed.”

Gross capitalized cost

This is the sticker price of the vehicle in question, and the lease payments are set based on it. Just like when buying a car, the up-front price is negotiable, so don’t forget to haggle.

Lower payments

When leasing, monthly payments are lower than those that come with financing, since you’re only ‘renting’ the vehicle.

Who is leasing best for?

There’s no single answer as to whether leasing or buying is a better choice, but leasing does tend to be popular with lowermileage drivers who want to be in a newer vehicle, and with shoppers seeking lower monthly payments, and with shoppers not concerned with the pride of ownership.

If you want a lower monthly payment, and want to be driving a newer ride that’s replaced every few years, leasing may be right for you.

Leasing can mean

less hassle

Robert Gagnon is a leasing expert at a Northern Ontario Ford dealership. He explains: “leasing is an alternative to a conventional purchase. It gives the consumer lower monthly payments and a lower obligation for a shorter term. With a shorter term comes lower maintenance costs and less risk.”

Leases have a mileage limit A mileage limit is set out at the beginning of the lease. Go over that mileage limit, you’ll be charged some amount per kilometre of overage. Be aware of this as you negotiate your lease, and be sure you have enough mileage. Murphy adds: “If you drive a lot per year (more than 20,000km), and you like to keep your cars more than 4-5 years, then leasing is likely not for you.”

Leasing means perpetual payments Remember that if you always lease a vehicle, you’re always making monthly payments. Compared to financing where you eventually pay the vehicle off and have no payment, leasing a new vehicle every few years means that payments are always ongoing.

Note that when you lease a vehicle, your insurance may cost more, too. Justin Pritchard is an automotive consultant and a member of the Automobile Journalists Association of Canada (AJAC). http://justinpritchard.ca/