When a client is looking for a vehicle, one of the most commonly asked questions is “should I lease or finance my car?” According to Statistics Canada, the average Canadian puts 20% of their income towards an auto loan every year. Financing a vehicle is an option for Canadians who want to eventually own the car that they’re paying off. However, some Canadians are leasing their vehicles (essentially paying to borrow it in order to trade up once the lease is up), which is a popular alternative to financing. Whether you choose to lease or finance, each has its own pros and cons, which is why isure has compiled a comprehensive guide to help you make the decision that’s right for your budget and lifestyle.
What is car ownership?
Overall, car ownership gives you a lot of freedom. For instance, owners can typically utilize any coverage they want without consulting with the car dealership. According to Kristine D’Arbelles, senior manager of public affairs for CAA, “a financial risk comes with owning a vehicle.” Still, the main determining factors will be your lifestyle and money management. The main costs of owning a vehicle are gas, maintenance, the vehicle’s deprecation over time, parking and tires. Understanding the prices of some of these factors in your neighbourhood or near your workplace is important, as they will factor into your overall cost.
However, the steepest cost that comes with owning a vehicle is depreciation. Since a vehicle will continue to depreciate over the course of its life, owners have to pay out more over time as the expense to maintain the older model becomes more regular. To assist, CAA’s Driving Costs Calculator allows customers to weigh the pros and cons based on their personal situation. For example, if you are dealing with debt or other financial struggles, it may be more difficult to maintain owning the vehicle, even if it means 24/7 access to transportation. We recommend talking to a member of our isure team for specific questions about owner’s auto insurance, including how ownership will affect your premium rates.
So, if you are not sure that you want to buy a vehicle outright, there are a couple of options to vehicle ownership: Leasing or financing.
Should I lease or finance my vehicle?
The simplest explanation for the difference between leasing and financing a vehicle is ownership. With lease agreements, you return the car to the dealer at the end of the contract and your payments cover the depreciation of the car’s value. With finance agreements, every payment you make goes toward owning the car, and when the loan is paid off, you have 100% equity.
Here are key factors you should consider when choosing whether to lease or finance:
- Financial goal: If you plan to keep the vehicle you’re paying for, the long-term cost of leasing is always more than the cost of financing. The cost of buying one car and driving it for ten years is less expensive than leasing or buying four or five different cars over the same period.
- Investment goal: When financing, once you pay off your car loan (which is often a 48 to 60-month term,) you own the car. It’s an asset you can use toward trade-in value on a new automobile or continue to drive payment-free.
- Financial budget: Many people need to watch their bottom line and keep monthly expenses as low as possible. Leasing allows people to drive a new automobile for less than financing a new one.
- Value for money: The overall car cost of leasing versus financing can change based on the term. In the short term, with all things the same (term, price, interest rate, down payment) a monthly lease payment will be more than 30% less than a monthly finance payment. However, as the length of the term gets longer, things begin to balance out. Monthly payments can be fairly even for medium-term agreements. In the long-term, financing can actually be cheaper than leasing.
- Usage & need: If you don’t drive a lot, you don’t have to worry about kilometer limits.
- Lifestyle: If you like driving with the latest features and technology, leasing is a great way to get a new car every two to four years.
Leasing your vehicle
A lease agreement for your car is similar to a rental agreement for your apartment. When you lease a vehicle, you make regular payments on a car over a short-fixed term (typically two to four years) and then return the vehicle once the lease is up. Payments would have covered the depreciation of the car’s value while in your possession. An option to buy the vehicle outright at the end of the contract is possible, as well. Leasing, like renting a car for a long period of time, means you only pay for the car’s value that you use. Unlike financing or owning a vehicle, you’re only required to pay for the depreciation costs of a leased car. As a result, leasing a vehicle typically has lower monthly payments. There are several options when choosing the type of leasing arrangement: Standard leases, lease to own and lease takeovers.
Types of car leases
- Standard rental leases offer you the opportunity to drive brand new vehicles, so long as your credit profile is approved. You’ll be expected to make a small down payment, followed by monthly payments for the remainder of your car lease term. Once your lease term expires, you must return the car to the dealership. You then have the option to choose to extend the lease or trade in your current car for a newer ride.
- Leasing to own, on the other hand, gives you the option to purchase the vehicle once its lease expires. You’re required to make regular payments, often on a weekly or bi-weekly schedule. But rather than paying for only the use of the vehicle, your payments will help you accumulate equity. Credit checks are often skipped over in the approval process. The downside to this type of lease agreement is that you typically will not have the option to lease a newer vehicle.
- Lease takeovers can be a great opportunity to get a good deal on a lease by taking over someone else’s lease payments. The upstart costs and fees are lower, and often there is a cash incentive to taking over someone’s lease. With that said, there are also some risks to taking over a lease, such as inheriting vehicle condition and mileage overages, which may come as a surprise at the end of the lease if you don’t inspect the lease terms.
Downsides to leasing
One key distinction with leases is there are some restrictions. You are subject to a kilometre restriction, early termination fees and you may be required to pay for excessive wear-and-tear when returning the vehicle. If a leased car has accumulated a lot of wear-and-tear once the term is over, the borrower must settle with the leasing company to pay for the accidents, and these are typically resolved through the manufacturer instead of a local mechanic, which can sometimes be more expensive.
Leasing a vehicle also means you’re committed to the car and the payments until the lease is over. Returning it before the lease is up can be extremely costly. The penalties for terminating a car lease early could require you to pay for the remaining payments on the lease, an early termination fee or any negative equity left on the vehicle. An option for people who want to end a lease term early is to try and transfer the lease to a friend or family member. However, this option isn’t available to everyone. If you’re in a lease and want to get out early, buying out the leased car and trying to sell it yourself or trading it in could be the best option for saving as much money as possible through the turn-in process.
Leasing a vehicle is a convenient option for Canadians who aren’t interested in owning a vehicle and want lower monthly payments. The leasing process is also appealing to people who prefer newer vehicle models every few years (and with a full warranty period in place.)
Financing your vehicle
Now, when it comes to the choice between lease or finance, financing a vehicle means that you are basically asking someone else to buy the vehicle for you; you are essentially taking out a loan to pay for the full value of the entire vehicle. You will then pay off the entire car loan back to the bank, dealership or credit union (plus interest) over a pre-determined amount of time. The terms of this car loan will be negotiated by both parties. When you finance a vehicle, you’re given the freedom to use the car at your convenience, regardless of the mileage used. Additionally, borrowers who finance a vehicle aren’t required to return their vehicle because once it’s paid for, it’s yours to keep.
Applying for a car loan
With finance agreements, every payment you make goes toward owning the car, and when the loan is paid off, you have 100% equity. Loan payments are usually higher than leasing, since you’re covering the entire value of the car. Dealerships have relationships with lenders who can work with individuals facing a wide variety of financial situations. Financing is also a great tool for rebuilding credit, and options to refinance and trade-in the vehicle before the loan is up are available. For people who finance and want to return their vehicle due to financial or lifestyle changes, options, like re-financing and trading in the vehicle, are common and easy to do.
You’ll need to make sure you have the following requirements ready before filling out any financing forms. You will need to be 18 years of age or older in order to apply, as well as provide:
- Government-issued identification
- Proof of income
- Proof of residency/current address
- Social insurance number
- Down payment, if any (cash is preferred but some places allow credit cards)
- Credit score/consent to a credit rating check. People who show that they can be trusted with credit (by having money saved up and paying dues on time) will have a higher credit score. Companies that offer vehicle loans will typically base their loaning decision off of your credit history.
One of the perks to financing a vehicle as opposed to leasing is lower insurance rates. With a car loan arrangement, you can usually get lower insurance rates. Speak to one of our isure representatives for more details!
How much should I be paying to finance?
Once you’re approved for auto financing, it’s your responsibility to make all monthly payments on time and in full. If you finance a car, the entire cost of the vehicle, including fees and taxes, is stretched out over the length of the term. The shorter the term length, the higher the monthly payments, and vice versa. From a budgeting point of view, this is an excellent way to finance a car without stressing your wallet. Generally speaking, you can finance a car for any amount of time, depending on what you negotiate with your chosen lender. However, in 2015, the average length of a car loan was five and a half years. Since then, car loan durations have popularly gotten even longer, up to six or seven years.
When you agree to finance a vehicle, the vehicle is used as collateral while you’re making your monthly payments. Any late payments could result in hefty fees and increased interest rates. Any missed payments could result in repossession of the vehicle and serious credit score damage. Another financial penalty for financing is getting stuck into a lengthy contract and owing more in payments than the actual worth of the vehicle.
Finally, financing a car is the best option for people who are looking for flexibility in their deal. Getting a car loan from a bank or dealership you trust will often mean that you can negotiate things, like the interest rate, length of the loan and frequency of payments. You will sometimes have the freedom to pay the full amount and end the car loan early. With all that being said, financing a car is definitely the way to go if you plan on owning it long-term. You will have complete freedom over all the decisions related to the vehicle and will have no restrictions when operating it. The longer payment period might seem daunting, but having the option to negotiate a low and agreeable interest rate will more than make up for it!
Lease or finance: The effect on your insurance
Your decision to lease or finance does not have a direct impact on your insurance cost. However, when leasing, you will need to meet the leasing company requirements. For example, the company loaning you money for the vehicle will dictate required auto coverage/policies. Since your leasing company still owns the vehicle, you will need to have certain coverage in place to protect the vehicle. Leasing companies will require you to have comprehensive insurance and collision insurance. Collision coverage will protect the vehicle from damages, accidents and fund repairs if the driver is at fault. It will also need to carry a certain amount of third-party liability coverage and specific policy endorsements.
Your decision to lease or finance could have a slight impact on your coverage needs. Additionally, insurance requirements may be more restrictive without ownership of the vehicle. This restriction may require you to buy a lower deductible, resulting in a higher premium than owning the vehicle. We recommend speaking with a member of our isure team for additional information.
Whether you own, lease or are being loaned your vehicle, collision coverage is a factor that you should take into consideration. Although collision coverage is not mandatory, it provides extra protection. Whether you decide to lease or finance, the dealership will likely include collision coverage, given the steep costs for replacing a leased or loaned vehicle. Additionally, if you have the OPCF 27 endorsement, it will apply as collision coverage. OPCF 27 is also known as “Legal Liability For Damage To Non Owned Automobiles.” It provides you with car insurance when driving vehicles you do not own. It protects you against damage or loss to vehicles your rent, as well as borrow information on collision coverage for an owned vehicle.
Leasing or buying a vehicle are both options that come with a different set of advantages and disadvantages, and making the right decision is entirely based on your personal needs and situation. So, which is the best choice? Lease or finance? There really is no clear-cut answer. If you’re the type of person who likes having a brand new car every few years, then leasing is a much better option financially. If you intend to purchase a car and drive it until it dies, then taking out a loan to finance your car makes more sense. Whichever option best suits your needs, our isure brokers can help you get the best insurance rates for your new ride.
Stay safe on the roads!