Leasing is easier, buying is cheaper
Low lease payments seem attractive but loan is more sensible
If you’re gearing up to buy your first car, chances are you won’t be waltzing into the dealership with a duffel bag full of cash.
Most first-time buyers have their eye on the bottom line; and the monthly, bi-weekly or weekly payments represent the most meaningful figures — more so than the actual cost of the vehicle.
Which brings us to the age-old debate between leasing and purchasing.
At first blush, leasing looks to be the easiest way into a new car. Lower payments? Zero dollars down? Worry-free ownership? Where do I sign?
For those who like to have a new car every few years, leasing can be the bee’s knees. The problem is, once you get on the leasing treadmill, it’s hard to get off.
In the long run, leasing represents the highest cost of ownership. Yes, the payments are lower, but because the loan is covering only part of the vehicle’s value (the amount it will depreciate over the term), a higher percentage of your payment is going to interest.
At the end of the term, you don’t own the vehicle and you’ve paid more in interest. As such, the residual value of the vehicle, or what it costs to buy it, can be prohibitively high.
So you have two choices: pay the high price of keeping the car, or give it back and walk away.
But the latter option can come with other surprises. Exceeding the allowed mileage for the term (usually 20,000 km per year) gets costly, and if the lease company determines the vehicle’s condition is not satisfactory, you could be on the hook for brakes, tires and bodywork.
However, if you play by the rules and don’t mind having continual car payments, leasing is a pretty stressfree way to keep yourself in a fresh ride every two to four years. And there are some enticing offers currently on entry-level cars.
Although just18 per cent of Canadians leased their vehicles last year, the trend is growing.
Derek Poirier of Welland Toyota tells me more than half of his Yaris and Corolla buyers are choosing to lease. If you plan to keep your car for a longer period, and that duffel bag of cash is not forthcoming, financing is the smarter option. Of course, the monthly payments will be higher. The upside is that, if you take out a five-year loan, your payments will be $0 in five years and you’ll have some equity in the vehicle. The shorter the loan period, the less interest you pay. As they say, do the math. When buying a car outright, there are other considerations beyond just the payments and loan term. The longer you keep a vehicle, the more maintenance requirements factor in, and there’s no guarantee as to how that will play out. But generally, if the car is properly maintained and treated nicely, the buyer still comes out ahead. If you purchase instead of leasing your first car, does that mean you have to drive it till the wheels fall off its rusting husk? Naw, don’t go that far. Canadian auto analyst Dennis DesRosiers says the average length of ownership for your first new car is 9.2 years. That says something for us pragmatic Canucks, but there’s no rule saying we have to hang on to a vehicle that long. Even with purchase financing, upgrading is not an issue. The equity in the car will, in most cases, exceed the balance of the loan. Bottom line, if cash flow is a consideration, the easiest way into your first new car is leasing. For those looking further down the road, purchasing makes the most fiscal sense.