Lease vs Finance: Making Smart Choices for Your Investment

^{By Karen Barrett Bromwich+Smith Staff | 854 words | Reading Time:4 minutes | Date: 2023/11/17}

Decisions, decisions!  When purchasing a new vehicle there are many decisions to make, from the make and model to the price and color …. the list goes on.  One of the decisions may be whether to lease or finance your new vehicle. How do you choose?  

The best way to answer that is to review your current and future goals.  How long do you plan to keep the vehicle?  How many kms will you drive each year?  Could your lifestyle change significantly? For example, do you expect to move, or grow your “passenger” list?  Your answers to these questions will help you make this decision.  What is right for a friend or family member may not work for you.  

Car Financing 

Car financing refers to the process of obtaining a loan to purchase a vehicle. When you finance a car, you typically borrow money) to cover the cost of the vehicle. The loan is then repaid over a specified period, usually in monthly installments, which include both the principal amount borrowed and the interest charged by the lender. The vehicle serves as collateral for the loan, and once the loan is fully repaid, the ownership of the car is transferred to the borrower. 

Key points about car financing: 

• The borrower owns the car outright after completing the loan payments. 

• Monthly payments include both principal and interest. 

• The loan term can vary 

• Mileage limits and wear-and-tear are not typically restricted. 

Benefits of Financing 

• It’s possible to build equity if you keep the vehicle long enough 

• Being payment free after the loan is paid in full 

• Once the loan is paid off, you own the vehicle 

• No milage restrictions 

• Keep the vehicle for longer  

• No end of lease charges if you sell or trade in early 

• Tax deductions for self-employed are dependent on a few factors (speak to your tax accountant for complete details) 

• Insurance is unaffected whether financing or leasing 

Drawbacks of Financing 

• Unexpected repair costs once warranty expires 

• Challenges of privately selling or trading your vehicle 

• Typically, higher monthly payments as you are financing the entire purchase price plus taxes, interest, and other charges 

• Trading in your financed vehicle prior to the end of the contract term could result in negative trade equity (owing more than the vehicle is worth) 

• Value will depreciate even though you paid full price 

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Car Leasing 

Car leasing involves renting a vehicle for a specified period, usually two to three years, with the option to purchase the car at the end of the lease term. Instead of paying for the entire cost of the vehicle, you make monthly payments covering the car's depreciation during the lease term, along with interest and fees. At the end of the lease, you can choose to buy the car, return it and lease a new one, or simply walk away. 

Key points about car leasing: 

• You don’t own the car but has the option to buy it at the end of the lease. 

• Monthly payments are typically lower than loan payments because they cover depreciation, not the entire cost of the vehicle. 

• Lease terms often have mileage limits, and exceeding them may result in additional charges. 

• You are usually responsible for maintaining the vehicle in good condition. 

• Customization options may be limited, and there may be restrictions on modifications. 

Benefits of Leasing 

• When the lease term is up you can return the vehicle to the dealership 

• Have a vehicle that is always under warranty 

• Guaranteed residual value (what the vehicle is deemed to be worth at the end of the lease term) 

• Vehicle is cheaper in the short term 

• Drive a new vehicle every 24-48 months 

• Few upfront costs – first month’s payment, possibly a refundable security deposit and a few other fees 

• Lower monthly payments 

• You only pay for the vehicle’s depreciation during the lease 

• Tax benefits if you are self-employed (speak to your tax accountant for complete details) 

• Insurance is unaffected whether financing or leasing 

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Drawbacks of Leasing 

• You will always have a monthly payment 

• Milage restrictions with hefty charges if you go over 

• May appear cheaper in the short term but will be more expensive over time because you will have a perpetual monthly loan payment if you are getting a new vehicle every 24-48 months 

• Vehicle is to be returned in relatively the same condition as when you bought it aside from normal wear and tear  

• Leasing is basically the same as renting 

• No equity 

• Large penalties to break the lease 

• You don’t own the vehicle  

Leasing offers more flexibility if you want a new vehicle every couple of years.  Financing is good if you like to keep your vehicles for a longer period or drive a lot of KM’s each year Whether you decide to finance or lease, compare both options, do more research, talk to your accountant, or ask your Finance Manager if you aren’t sure which option is best for you.   

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By Karen Barrett - Auto Dealership Partner Specialist 

Karen has been in the finance industry specializing in automotive finance for over 2 decades.  Karen has seen many people overextend their finances due to a vehicle purchase they may not have fully understood.  She encourages everyone to read and understand any contract prior to signing it.  If you don’t agree or understand…. don’t sign!