How to Lease a Car in Canada

Getting a lease on a vehicle 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?

The process of auto leasing is actually very straightforward. 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 that the payments are for the actual driving of the vehicle. 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. Since the vehicle allows you to plan for a specific set of time, there is the opportunity to choose the best type at present. At the end of the lease, you can reassess and determine if you want to buy or simply lease a new vehicle. 

Types of Auto Leasing

When it comes to leasing a vehicle, typically there are four options to choose from. 

Regular Leasing

  • What it is? This type of lease lets you drive a new automobile for an agreed amount of time, typically four years, once your application has been approved.
  • How does it work? A standard down payment is required up front and you are expected to make regular, monthly payments for the borrowing 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. 

Leasing-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 cars with more mileage and more wear and tear. 
  • How does it work? You pay a small down payment right away. 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. 
New vs. Used Cars

Pros and Cons of Auto Leasing

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

  • Lower payments toward the vehicle since it simply accounts for depreciation
  • Enables you to try out a vehicle before you make your decision
  • Lease contracts tend to be shorter, usually lasting between two and four years
  • Opportunity to trade the vehicle for something newer or better-suited
  • Lets you stay up-to-date on new vehicle technology
  • Keeps your (new) leased vehicle under warranty 

Cons

  • Includes a mileage cap that you can’t go over without having to pay for damage
  • 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 cost more in the long-term, especially if you continue leasing
  • Lease contract underwriting is designed to profit, so ensure you understand it
  • Caveats to the lease contract to avoid fees related to damage to the vehicle (the interior, dings to the paint, etc.)

Cost of Leasing vs. Buying

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

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

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

For those looking to lease a new vehicle, here are the four major steps you should take.

Understand Your Car Needs

  • What kind of car do you need? The first question to ask yourself is the type of vehicle you require. 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. Use this number to find a suitable lease. 
  • Wear and tear: Be sure to investigate the specific mechanical and electrical issues which are covered by the lease. Look at what you would have to pay out of pocket. 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: Since leases rely on your credit score, the first step is to do your research. Figure out how your credit profile presents. Is it less or greater than 650? While there are options available to those with worse credit, there are ways to improve your overall credit rating. Consider options like secured credit cards to improve your credit before getting the actual lease. 
  • 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. While you may not have to pay anything down, it is often a good way to lower the fees on a regular basis.  

Find The Right Dealership

  • Get quotes: When you are out to find a good dealership, there are a couple of steps to take. First, look into all alternatives. As highlighted above, owning may be a good way to go. Look into financing agreements from all angles. If and 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 get to driving (and to paying 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. 

Is Leasing Right for You? 

Lease if…You are unsure as to your long-term vehicle requirements. It is a good option for those who aren’t on the steadiest financial ground or may lack the money for a down payment. If you want to stay abreast of new vehicle developments, a lease may be the best way to go. 

Buy if…You are able to handle the regular payments. If you know what you will need from the vehicle into the future, and know that you will rack up a lot of miles, buying the vehicle with a car loan might be the best route. 

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. 

Auto Glossary

Terms
Add-Ons

Any features or services that are applied on top of the base price of a car are considered add-ons. These can include things such as tinted windows, heated seats, leather seats, alarms, and wheel locks, to name a few.

Base Price

The base price of a car is the cost of the vehicle without any upgrades or added features that can be added after the car is ordered from a dealership. Only standard equipment and the manufacturer’s warranty are included in the base price, but any other fees will be added afterward.

Certified Pre-Owned (CPO)

CPO cars refer to used cars that have been certified, either by the dealership selling the car or the manufacturer of the vehicle. This gives consumers confidence knowing they are buying a used vehicle that is in good condition. When a used car is obtained by a dealership, it is inspected by a certified mechanic. The car is then repaired if it meets the required standards and is then ready to be sold as a CPO vehicle.

Clear Title

A clear title means that the owner of the car has a free and clear title and no longer carries a balance owing on a car loan. There are no liens of the title or levies from creditors.

Dealership

Auto dealerships are businesses that are authorized to sell new or used automobiles to consumers and serve as a direct dealer for automakers

Dealership Financing

Consumers can obtain dealer financing to help fund the purchase of a vehicle. A contract is signed with a dealership that requires a consumer to pay for a specific amount plus interest and funding fees over a certain period of time. Dealers will send the details of the consumer’s financials to various lenders to find one that will approve the loan.

Depreciation

Depreciation refers to the decline in the value of a vehicle. Immediately after purchase, a vehicle will become less valuable as soon as it is used. Put another way, depreciation is the rate at which an automobile loses its value over time

Extended Warranty

Vehicles come with a manufacturer’s warranty when purchased, but buyers can choose to purchase an extended warranty. This serves as a form of insurance policy on the vehicle to cover the cost of potential repairs in the future. An extended warranty is usually good for a certain period of time and/or mileage.

Lease

A contract that allows an individual the right to use or occupy a property for a specified period of time in exchange for a monthly payment. Leases are common for a property like apartments and vehicles. The individual on the lease does not own the asset at the end of the lease’s term, it is strictly for rental purposes.

MSRP (Manufacturer’s Suggested Retail Price)

Car manufacturers will offer recommendations on how much a car should be priced at the retail level, known as the manufacturer’s suggested retail price, or MSRP. The purpose of the MSRP is to standardize pricing in the automobile industry so that there is not a lot of fluctuation in price from one dealership to another.

Title Loan

A title loan uses the vehicle title as a form of collateral to secure a loan. Borrowers must own their vehicles free and clear and no longer owe any amount on a car loan. A lender will place a lien on the car title in exchange for funds. If the borrower defaults on the loan, the lender can take possession of the vehicle and sell it to cover any losses.

Trade-in Allowance

A trade-in allowance is the amount that a car dealer will reduce the cost of a new car purchase by after the consumer’s old vehicle has been traded in. It is somewhat like being given credit from the sale of an existing vehicle that is then applied to the purchase of a new vehicle.

Trade-in Value

A trade-in value is the amount that dealerships offer consumers for their vehicle and is typically applied toward the purchase price of another vehicle. Dealerships will assess the value of the vehicle and will base the amount that can be applied to a new car purchase. The consumer will then trade in the old vehicle and the assessed value amount will be deducted from the price of another vehicle. Trade-in value is often different than what the vehicle may be worth when sold in the open market.

Vehicle Identification Number (VIN)

Every vehicle will have its own unique vehicle identification number, which is used to identify a specific vehicle. No two vehicles will have the same VIN, making them easily identifiable with this unique 17-character code.

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