Leasing versus buying your next vehicle
Interest rates can differ between leasing and financing, so compare costs of both.
If you are in the market for a new or pre-owned vehicle, a key decision will be whether to buy or lease. Car buyers should understand the differences, as there are pros and cons for each option.
Let’s compare leasing versus buying so that you can make a wise decision about your next vehicle purchase.
People choose financing over leasing for a variety of reasons: they plan to keep their vehicles longer than five years; they are not concerned about the cost of repairs after the factory warranty expires; their cash flow is not a concern; the status of driving a new car is irrelevant; or they have cash on hand to cover the finance price, including taxes.
Let’s say Ted wants to purchase a $33,000 (plus tax) vehicle and paying cash is not an option. In this case, Ted would apply for a loan to purchase the vehicle, which would need to be repaid in full (along with interest costs). Ted can choose dealer-arranged financing or he can deal directly with a bank or lending institution.
In this scenario, Ted will be required to pay the HST up front, which increases the amount borrowed and total interest he will pay. In effect, Ted is paying full taxes on the vehicle in advance, rather than over time through monthly payments.
On the other hand, with a leased vehicle worth $33,000, Ted would only pay for the portion of the vehicle that he is using and the not the balance or residual value of the vehicle after the term of the lease, usually three or four years.
Let's assume the residual value is $16,000 after three years based on normal wear and tear. In this case, Ted would only be making payments on the $17,000 difference (plus interest, profit and HST). These monthly “lease” payments would be lower than a regular monthly “finance” payment.
Standard lease agreements are based on driving roughly 24,000 kilometres per year, and agreements can be written that allow for additional kilometres. Items included in a standard lease agreement include monthly payment obligation, warranty details, maintenance expenses, insurance requirements, number of kilometres permitted and any penalties associated with excessive wear and tear and/or damage.
If you drive considerably more than 30,000 kilometres per year, then financing the vehicle may be a better financial option.
One type of lease arrangement worth considering is the prepaid option. With prepaid leases, the lessee pays the total lease payment obligation up front with the benefit of a reduced interest rate, thereby saving hundreds (or thousands) in interest costs, and you only pay taxes on the lease portion and not on the residual amount unless you purchase the vehicle at the end.
A prepaid lease is also easier for those who may not otherwise qualify for leasing (i.e., someone who is new to the country or who has poor credit history).
The financing versus leasing issue is of particular concern to seniors. Many seniors are hesitant to commit to a longterm financing or lease agreement based on their personal circumstances.
For seniors, two- and threeyear auto leases are available, which are quite popular with our customers. The benefits of shorter-term leases include less monthly and overall financial commitment during the ownership period, warranty considerations, more safety features on a newer model and less worry about exceeding kilometre limits, because seniors tend to put on fewer kilometres in retirement than they did during their working years.
Leasing is an attractive option for many consumers, but it is not necessarily the right option for everyone. Interest rates can differ between leasing and financing, so compare the total cost of both before deciding.
Any sales and leasing consultant at any registered new car dealership would be happy to provide you with a leasing versus purchasing price comparison based on your financial circumstances and driving requirements. This column represents the views and values of the TADA. Write to president@tada.ca or go to tada.ca. Cliff Lafreniere is president of the Trillium Automobile Dealers Association and is president of Pinewood Park Motors (Ford) in Kirkland Lake. For information about automotive trends and careers, visit carsandjobs.com.