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Difference Between Leasing and Buying
As you are car shopping you will notice that they all have the lease price as well as the purchase price on them, but what exactly does that mean? What is the difference between car leasing and a car purchase? Well, there are actually quite a few differences.
Leasing
Leasing a car means that you aren't paying for the full vehicle like you would by purchasing it, you are only paying for the potion that you are using. Basically how it works is you pay the dealership for however long you are using the vehicle. This is normally for a term of anywhere from 2 to 4 years. Keep in mind though that there are interest and tax included in those monthly payments that you are making. You also have to return the vehicle at the end of the term.
Purchasing
When you purchase a vehicle, you are paying the full amount for it. You can do this by paying for the car outright or by getting an auto loan. The interest on the loan will depend on what you are approved for. These loan payments tend to be more than those of a lease because you get to keep the vehicle once the payments are done. The loan periods also tend to be longer on a car loan than a car lease.
How Leasing Works
When you are leasing a vehicle you are essentially paying to use a brand new vehicle for an agreed amount of time. In Canada, you have a few different options to consider when leasing. Each option works a little bit differently so one may suit your needs more so than the others.
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Standard Lease: This allows you to drive a brand new vehicle for an agreed upon term while making payments. Car manufacturer’s usually require a small down payment up front and you do have to pass a credit check to get approved. Once the lease term has ended, you then have to return the vehicle or renew the lease.
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Lease to Own: This process works similar to a standard lease, but you get the option of car ownership at the end of the lease. The lease to own process is typically used for those who have bad credit because a credit check isn’t required. Unlike a standard lease, the payments you make do go towards some equity in the vehicle. That being said, because of the circumstance of lease to own programs, they often only offer this on used cars or other types of used vehicles. It does help you get into a vehicle you need if you are unable to purchase right away.
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Lease Takeovers: A lease takeover is when you take over a lease someone no longer wants. With a lease takeover the costs are often lower and there can be a cash incentive upfront. Keep in mind though, that you get the vehicle in the condition it comes in. There are mileage and maintenance restrictions on leased vehicles so you could end up incurring extra costs. It is advised to look into the condition of the care as well as the mileage to help save yourself these extra costs.
Pros and Cons of Leasing and Purchasing
While leasing and purchasing a vehicle are very different, there are pros and cons to both. Let's take a look at these.
Leasing
| Pros | Cons |
| Getting a new vehicle every few years | Limited mileage usage without incurring fees |
| Lower monthly payments | Costs more over time |
| In some cases there is free maintenance such as tire rotations and oil changes. | Costly to terminate lease |
| Covered by a warranty always | Can incur wear and tear charges |
| Pay less sales tax | You don’t own the car at the end on the lease (unless you pay extra to keep in |
| No trade in hassles | Can’t make any upgrades or changes |
As you can see, short term leases can be much less expensive. That being said, you can only drive around 20,000 - 20,000 km per year without having to pay extra fees, unlike financing where there are no mileage limilts. You also can’t make any changes you wish to the vehicle because it technically isn’t yours, you are just paying to drive it.
Purchasing
| Pros | Cons |
| Long term savings | Larger down payments are usually required |
| Make any modifications you’d like | Higher monthly payments |
| No mileage limit, you can drive as much as you want | Need to cover repairs once the manufacturer's warranty is done |
| Sell whenever you like | The value will depreciate even though you paid full price |
| Can use the vehicle as a trade in | Might have difficulties trading in or selling |
With purchasing a vehicle, the biggest difference is the vehicle is yours. You don’t have any restrictions on what you can or can’t do. While this can cost you more, it does give you more freedom and you gain an asset. That being said, if you like to get a new vehicle every few years, purchasing new every time can be much more costly. Especially since the car loses value over time and you won’t end up getting back what you paid for the vehicle.
Tax Benefits of Purchasing and Leasing
If you own your own business, you may have heard that leasing a vehicle can have more tax benefits than purchasing one. The truth is, they both have tax benefits and while they may be structured differently, you can write off the cost of each if you are eligible. No matter which option you choose, they do work out to be the same over time.
Leasing
With leased cars, you are able to write off your monthly lease payments, however, there is a limit. You can only write off up to $800 per month plus taxes. The reason the CRA does this is that deduction benefits don’t outweigh those of purchasing a vehicle. With vehicle leases, you can’t deduct the down payment you put down as one lump sum. It has to be spread out over the time of the lease and is included in the $800 per month limit.
Purchasing
When it comes to tax deductions for purchased vehicles, these deductions are made over time. If you are eligible to write off vehicle expenses, you may have heard of something called the Capital Cost Allowance. The Capital Cost Allowance is a deduction that deducts from what you spent on your vehicle based on a rate that was set by the CRA, it accounts for depreciation costs.
How it works is, whether it is a new or used car, you can deduct from an amount up to $30,000 plus taxes. The first year that you purchase the vehicle you can deduct 15%, and every year after that you can deduct up to 30% until you claim 100% of the cost. Unfortunately, if your vehicle costs more than $30,000 you can;t deduct any amount above, you can however deduct the interest paid if you have a loan. You can deduct up to $300 per month in interest amounts. So, even though you can’t deduct your payment like a lease, you can still deduct the cost of the vehicle.
Penalties Involved in Both Leasing and Financing
While we have gone over the positives and negatives of leasing and financing, we haven’t really gone over the penalties involved if you break either of the terms.
Leasing
If you are considering leasing a car it is important that you go over your contract thoroughly and negotiate if you need to . There are a lot more stipulations involved with a lease agreement than those of financing to own. With a lease, you want to make sure the mileage that is allowed per year works out with lifestyle, if not there are penalties. These penalties usually get changed as a certain fee per km.
Another way to avoid any extra fees is to keep up on your vehicle's maintenance. This can be anything from getting your oil changes on time, to fixing any imperfections that may be considered as extra wear. If you return a leased vehicle in poor condition, especially if there is a maintenance stipulation in the contract, you could end up with a hefty penalty. If you have to resolve any major wear issues at the end of your term, this ends up going directly through the manufacturer instead of a mechanic of your choice which often results in higher maintenance costs.
Two of the biggest penalties when it comes to vehicle leases though, are missed payments and breaking the lease. When you miss a lease payment, in many cases you could end up losing your deposit and if you miss more than one you could end up getting the vehicle repossessed. If there ever comes a point you can no longer afford the lease, it is best to speak with your lease advisor and make arrangements. This could potentially save you a lot of money. This actually tires right in with breaking your lease since this is one of the ways that you would do that.
When it comes to breaking your lease, there are also large penalties involved. You may even be required to pay the residual value of the lease. For whatever reason you may need to break the lease it is important to review your contract and speak to your lease advisor and see what your options are. You may be able to trade the vehicle in for something cheaper or transfer the lease to a friend or family member.
Financing
When it comes to financing a vehicle, the only real stipulation is that you make your payments on time. If you are unable to often you can reach out to your lender and come up with a short term solution to get through until you are able to. Often if you do this, lenders can be more accommodating than you may think. In general, they still want to make their money so they are willing to work with you.
If you end up missing payments, you will likely end up getting your vehicle repossessed. This is because a vehicle loan is considered to be a secured loan and the vehicle is the collateral. If you just make late payments this could result in late fees and charges. Either way you could end up paying a lot more for the vehicle than what it is worth, This could also potentially damage you long term as well because it will negatively affect your credit score making it more difficult to get more financing in the future, and even if you do, it could potentially be at a higher interest rate than you are used to.
Why You Would Choose to Lease Instead of Purchase
When it comes to leasing, there are a few reasons why you might choose to take this path. For one, the payments are cheaper. It is also an ideal option if you want to keep upgrading your vehicle every few years. Many people like to do this and keep the same car, just get a newer make and model when the lease expires. It is less costly this way than purchasing a new car every few years. Leasing may also be ideal for someone having difficulties affording purchasing a car.
Really, leasing a vehicle can be a great option for some. The car insurance costs are the same as when you purchase a new vehicle, and you can even get gap insurance (replacement insurance) just like you would with a new vehicle purchase.
If you do decide to lease a vehicle, it is important to remember that you should look over the lease contract very carefully and negotiate if you need to. The reality is, a leasing company wants you to lease the vehicle and lease it for its full term. They also want the vehicle back in good condition so they can lease it again. So, if you keep these things in mind and take care of the vehicle, leasing may be the best option for you.
