Leasing a car in Canada is a well-suited option for those who are not prepared to make a car purchase. Instead of accessing a car loan, it gives drivers the opportunity to effectively rent a vehicle for a set period of time. With a shorter period and drastically reduced upfront and monthly costs, many households opt for auto leases.
What Is An Auto Lease?
A lease enables drivers to access a new vehicle for a set amount of time. The driver and dealer agree on a monthly fee which is paid for over the borrowing period. Unlike other arrangements, leases don’t need approval for a vehicle loan. They also don’t need as large of an upfront downpayment.
A key difference between loans and leasing is the payments. Instead of paying for the right to own the vehicle, it is a matter of access and utility. Functioning like a rental arrangement, you only pay the monthly amount for the borrowing period. Once this period is at an end, the driver has the option to purchase the car or to return it.
The lease arrangement does require a small down payment. From there, the only investment is in the monthly payments. This cost encompasses the fee to use the vehicle, any tax and interest, as well as overall depreciation of the car’s value.
Can’t afford your car lease? Check out how to cancel your lease contract early?
What Kind Of Cars Can You Lease?
There are a lot of different cars that you can lease, ranging from trucks to SUVs to compact vehicles. Leases are, however, usually found on new vehicles. This does not necessarily refer to the year in which the vehicle was manufactured. Instead, it is representative of mileage and relative wear and tear.
In terms of the type of car, you can find just about anything available for lease. Naturally, different dealerships specialize in certain makes and models.
Types Of Auto Leasing
When it comes to leasing a vehicle, typically there are four options to choose from.
Leasing A New Car
- What it is? This type of lease lets you drive a new automobile for an agreed amount of time, typically four years.
- How does it work? A standard down payment is required upfront and you are expected to make regular, monthly payments for the leasing period. At the end of the leasing period, the leaseholder can return the vehicle, trading it out for a newer model. The alternative is to add time to the existing lease and keep the same vehicle.
Lease-To-Own
- What it is? A lease-to-own, lets you buy out the vehicle at the end of the lease’s term. Usually, this type of lease is easy to get for those with poor credit. With these leases, you are often dealing with used cars with more mileage and more wear and tear.
- How does it work? You pay a small down payment. From there, you pay the regular fee for the lease. Unlike standard leases, these payments are usually more frequent, either weekly or once every two weeks. These payments are applied to the future ownership price of the vehicle. At the end of the term, you pay for the remaining equity.
Lease Takeovers
- What it is? A lease takeover can offer a good rate on leasing for those who take over the remainder of another person’s lease.
- How does it work? You don’t have to pay as much of an upfront price when taking over. Sometimes, there may be a financial incentive when you are taking over the lease since the dealership needs the car to be rented. In these situations, it’s important to be aware of the vehicle’s state and mileage. Carefully read through the lease to ensure there are no surprises.
Leasing A Used Car
- What it is? While not the most common kind of lease, it is common amongst those using a lease to eventually own the vehicle. It is also a possibility for those taking over someone else’s lease.
- How does it work? A lease for a used car works just like that of a new car. However, since there is likely to be a higher mileage and more wear and tear, it’s necessary to take a look at the state of the vehicle. Consider all aspects of the mechanical and electrical condition to avoid unpleasant surprises as it ages.
Pros And Cons Of Leasing A Car In Canada
When looking for a new vehicle, it’s important that you weigh the pros and cons of your financing options. For those considering leasing their next vehicle, these are the factors you should consider.
Pros Of Auto Leasing
- More Affordable – With leasing, you’ll have lower payments toward the vehicle since it simply accounts for depreciation.
- Try Before You Buy – Enables you to try out a vehicle before you make your decision
- Short Commitment – Lease contracts tend to be shorter, usually lasting between two and four years
- Upgrade – Opportunity to trade the vehicle for something newer or better-suited. Moreover, it lets you stay up-to-date on new vehicle technology.
- Warranty Coverage – Keeps your leased vehicle (new car) under warranty.
Cons Of Auto Leasing
- Mileage Cap – Includes a mileage cap that you can’t go over without having to pay for each mileage you go over.
- Don’t Own The Vehicle – You don’t technically own the vehicle during the leasing period. At the end of the term, you must either return the car or buy it out
- Can Be Expensive – Can cost more in the long term, especially if you continue leasing.
- Fees – Lease contract underwriting is designed to profit, so ensure you understand it to avoid fees related to damage to the vehicle (the interior, dings to the paint, etc.).
Cost Of Buying vs Leasing A Car In Canada
Having a car is an expense and not an investment. Whether you’re thinking about buying your next car or leasing it, there are costs that you need to consider.
Leasing A Car In Canada
In this example, you’ve gone to a dealership and discussed leasing a car worth $20,000. You have $1,000 to use toward your down payment on a three-year-long lease. Assuming that the vehicle depreciates $3,000 over the course of those three years, with an interest rate of 5%, you can expect a monthly lease payment of $130.23. However, in the end, you will not own the vehicle and must return it to the dealership or trade it in.
Buying A Car In Canada
Let’s say you want to buy that same car, worth $20,000, using a car loan. There are available loans for those with credit challenges. Interest rates run between 4.9% and 29.9%. This amount compounds monthly. Depending on the rate of interest for which you are approved, and the term you choose, you can own the car in as little as five years. With a 5% interest and three-year loan term, you can expect a monthly payment of $569.45.
Step To Take When Leasing A Car In Canada
For those looking to lease a new vehicle, here are the five major steps you should take.
Understand Your Car Needs
- What kind of car do you need? How many passengers does it need to hold? What are the essential safety features? Are you looking for something modern or basic? Identify the type of vehicle you want before seeking out a car lease.
- Mileage requirements. Leases all have different mileage stipulations, after which the financial incentive reduces drastically. Consider how much you tend to drive and average it out over the term.
- Wear and tear. Be sure to investigate the specific mechanical and electrical issues which are covered by the lease. Consider the speed at which the vehicle’s value depreciates. Get a full picture of the vehicle’s history and how it is likely to apply to your driving personality.
Evaluate Your Finances
- Credit score. It’s always a good idea to check your credit score. This way there won’t be any surprises. While there are options available to those with poor credit, having good credit will help.
- Budget. Next, take a look at your budget. Consider what would be a feasible monthly payment amount. Be sure to think about added costs such as oil changes, fuel costs, insurance, and other routine maintenance like tire changes.
- Down payment. Higher down payments tend to give you a lower monthly cost. However, this is not money that’s returned to you at the end of the lease. Consider what you can afford to reasonably spend and set that money aside.
Find The Right Dealership
- Get several quotes. When you settle on the lease, don’t just go with the first offer. Use your knowledge of the vehicle and quotes from different dealerships to leverage yourself into a better agreement.
- Test the car. Once you’ve settled on the vehicle you plan to lease, book yourself in to test it out. A lot of things look good on paper, while others don’t live up to the hype. Experience it firsthand and feel how comfortable you are driving it.
Review Your Contract
When reviewing a technical document, it is common for people to defer to the expertise of the provider. This is not the right way to go. Document review is your opportunity to ask questions. It is your chance to learn the nuances of a contract before you sign, which is technically your responsibility.
Things to note in your lease agreement:
- Mileage stipulations (at the start and overtime)
- Repair requirements (interior and exterior)
- Routine maintenance demands
- Term of the lease
- Payment frequency and amount
- Depreciation costs
- Exit options for the lease
- What happens at the end of the term
If you are unsure as to any of the above, it is best to ask before signing an agreement.
Start Making Payments
Now that you’ve signed the lease and gotten the keys, it’s time to drive (and pay your lease fees). In order to remain in good standing, be sure to never miss a payment. Don’t go over your mileage and take care of the vehicle. When the term ends, you will have a quality automobile to either trade in or extend the lease on.
Consider Purchasing A Car As An Alternative To Leasing
If you are able to handle the regular payments. You know what you will need from the vehicle in the future. If you know that you will rack up a lot of miles. Purchasing a vehicle might be a better route.
Financing a used car is often a great alternative to leasing a brand new vehicle. Plus, buying a used car isn’t as annoying as it used to be. You can even buy used cars online, with companies like Clutch.
Ultimately, both owning and car and leasing a car are expensive. Choosing which one is the right option for you depends on your lifestyle and needs.
If you’ve been thinking about leasing your next car. But are open to purchasing either a new or used vehicle. Consider the following benefits of buying a car:
- Once you’ve paid off your loan, you’ll own the vehicle outright
- You won’t be restricted by a lease agreement
- Further fees and no penalties for minor damage
- You can take your vehicle to any garage or auto shop
Final Thoughts
Equipped with a thorough understanding of leases; their advantages and disadvantages, you can make the best choice for your vehicular needs. By determining your vehicular needs, both in the near and distant future, you can ensure that you are financially secure and have a reliable car in your garage.
