A Lease-To-Own Vehicle Agreement Vs. Traditional Leasing

A Lease-To-Own Vehicle Agreement Vs. Traditional Leasing

Written by Bryan Daly
Fact-checked by Caitlin Wood
Last Updated October 13, 2020

When it comes to driving new or used vehicles, there are several different payment options that drivers can choose from, such as leasing, dealership financing, and buying the car right away with one large transaction. The options that are available to you, however, are often dependant on your profile as a borrower, especially if you aren’t planning on paying for the vehicle outright. For some of these payment options, leasing, and financing, in particular, elements such as your gross monthly income, employment history, and the health of your credit will be examined to determine your creditworthiness. And, if your credit, especially your credit score, isn’t as healthy as you’d like it to be, it’s entirely possible that your only payment option is a “lease-to-own” vehicle agreement. At least, this might be the best option for your financial situation.

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A lease-to-own, also known as a rent-to-own agreement, is a payment plan that works for both vehicles and other types of rental properties, such as condominiums and houses. When it comes to cars and trucks, these types of agreements work along the same lines as traditional leasing, in the sense that for a brief period you would be renting a car, with the dealership retaining the ownership of the vehicle itself during that time. However, where a lease-to-own agreement differs from a normal lease agreement is right in the title. Below, we’ll discuss some of the key differences between traditional leasing and leasing-to-own, after which you’ll hopefully be closer to making your decision for the payment option that works best for your financial situation.  

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Traditional Leasing

This type of payment plan is common among borrowers who are looking to drive a vehicle that they would not necessarily be able to afford otherwise, which usually pertains to a brand new or lightly used car/truck. You, as a potential driver, can go to the dealership, where your financial and credit profiles will be reviewed to determine your creditworthiness. Following your approval and the confirmation of the lease agreement, you would essentially be renting the vehicle from that dealership for a predetermined amount of time (usually 2-4 years), making regular monthly payments as you go. Once the lease period has reached its end, you’ll return the car to the dealership where you can either extend the lease, trade in the car for another, or return it all together and move on.

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Advantages of Leasing

  • You’ll be able to drive a newer, more reliable vehicle that you might not be able to afford otherwise. This is a common desire for people such as private limousine drivers, who need to transport clients around for business purposes.
  • Typically, you do not need to pay for any repairs or required maintenance for a leased vehicle, as long as those issues are covered by the lease agreement, such as basic wear-and-tear. If covered mechanical work needs to be done on the car, you can bring it back to the dealership for free in-house servicing.
  • Both the down payment and subsequent monthly payments will often be cheaper than those you would get with dealership financing.

Disadvantages of Leasing

  • Lease agreements often come with a set limit for the amount of mileage that the driver is permitted to put on the vehicle. Once the lease period ends, any extra mileage could be subject to an extra fee.
  • Following the termination of the lease contract, drivers will also be charged for any external or internal damage that the car has received. While lease agreements often cover normal wear-and-tear, any additional accidents, scratches, cracks or dents as a result of the driver’s actions will not be covered.  Own a car? Find out if you should repair or get a new car.  
  • If you continue to lease cars throughout the years, you might end up paying the same amount (if not more) that you would for a new vehicle, only that vehicle will not be yours.
  • Traditional leasing often requires the borrower to have good credit. So, if your credit is poor, there’s a chance your request for leasing will be denied.

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Lease-To-Own Agreements

This type of payment program is commonly offered at dealerships that specialize in selling used cars that have been purchased at vehicle auctions. Lease-to-own agreements are also advertised towards borrowers with bad credit, because a credit check is not a standard practice during the approval process, as it is with other payment options like financing or traditional leasing. Potential drivers only need to provide proof of their identity, residency/citizenship and a stable source of income, although some dealerships will also require proof of insurance before proceeding.

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Similar to traditional leasing, you would sign an agreement, wherein you would make regular payments for a predetermined period of time. However, instead of renting the car, only to return it to the dealership (or trade it in for another vehicle) at the end of the lease agreement, every payment you make would be going towards owning the vehicle itself. And, instead of monthly payments, as is common for both leasing and financing, lease-to-own agreements usually require weekly or bi-weekly installments, which will range in accordance with the car’s base value. Once the lease period ends, the car title will be signed over in your name, and you’ll own it for the rest of its days on the road.

Advantages of Lease-To-Own Agreements

  • Once the leasing period ends, which will usually be 1-2 years (as opposed to 2-4 years with a traditional lease), you will become the official owner of the vehicle.
  • Even if your credit score is low, you will still have very little trouble getting a lease-to-own agreement.
  • Unlike dealership financing, if a regular lease-to-own payment is made late, it will have no effect on your credit score.  

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Disadvantages of Lease-To-Own Agreements

  • Lease-to-own vehicles are more heavily used and have higher mileage than traditional leased cars. As a result, you could end up paying far more in weekly payments and rental fees than the car is actually worth by the end of your agreement.
  • Having more frequent payments (weekly or bi-weekly) might make a payment plan harder for you to manage properly.
  • Lease-to-own vehicles usually require a down payment, along with an additional signing fee at the end of the contract. While these fees might not be overwhelming, they will add to the cost of the vehicle. If the driver wishes to terminate their contract early, instead of buying the car, they’ll be forfeiting their down payment as collateral.
  • Unlike leasing, repairs and maintenance are not covered under a lease-to-own contract. If desired, the driver needs to purchase an additional warranty, which will likely not be included.
  • While late payments won’t affect your credit score, you will be charged a penalty fee for defaulting.

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Which Leasing Option Works Best For You?

If you’re trying to decide between traditional leasing and a lease-to-own agreement for your next vehicle, like with any large financial transaction, it’s important to think about your own financial situation. Ask yourself, how will my finances be affected by such a lengthy period of regular payments? For instance, while lease-to-own agreements do have shorter terms than typical leases, the weekly or bi-weekly payments are likely going to end up being more expensive overall. If you have poor credit, your only option might be a lease-to-own. However, if your credit is in good shape, it may actually be better to choose traditional leasing or dealership car financing. If you do decide that a lease-to-own vehicle is right for you, make sure you also do a lot of prior research to make sure the dealership you’re purchasing the vehicle from is legitimate. On top of that, checking the history of that used car is a very good idea, to be certain there’s nothing functionally wrong with it.

Whatever your choice ends up being, these are just some of the factors that should be considered before you make it. If you’re still unsure of what the best payment option is for your next vehicle, speak to a financial advisor for more advice. Whether this car ends up being your first or your last, you need to make sure that your financial health is always intact.

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Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and traveling the world in search of the coolest sights our planet has to offer. Bryan uses the BMO Cash Back Mastercard to earn cash back on everything from boring bill payments to exciting excursions. He is also a strong saver, holding both a TFSA and an RRSP account in order to prepare for his future while taking full advantage of tax benefits.

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