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Is Leasing or Financing Better?

So you're looking at a new car. Financing or leasing are both great options. This article covers everything you need to know about leasing and financing so you can decide which is better for your lifestyle.

Let's get to it. So, what's actually better... FOR YOU?

The short answer is that there's not too much difference between the two ways to pay. Both ways, you are signing a contract to make a specified number of payments over a contract term. But there are some of the key differences:

Ownership

The main difference between leasing and financing is who actually owns the vehicle. You are the registered owner when you finance a vehicle. With a lease, the leasing company holds title.

Interest Calculation

When financing, you pay a monthly interest charge that covers the cost of borrowing the money over the term of your contract. The calculation on a lease is a little more complex; however, it effectively works the same. You pay monthly interest based upon the average lease balance over the term. You will pay less interest on a lease over the course of your contract. But again, you're only paying for the years you use the car - not the entire vehicle.

Interest rates also vary between lease and financing. Manufacturers will sometimes offer better rates on financing versus leasing. Other times will offer superior lease rates. A good rate can save you bigtime.

Equity vs. Negative Balance

One of the most often overlooked advantages of a lease is the ability to walk away from the vehicle at lease end. This can be a great bonus if the residual value (and the price to purchase the vehicle) is more than the vehicle’s actual market value. Sometimes, a car's value just doesn't hold to what the manufacturer has predicted - if there's a glut of minivans on the market, for example, or if you were one of the unlucky purchasers of a VW in 2009-2015. With a lease, the customer can return the vehicle to the dealership at the end of the agreement, thereby avoiding the negative equity.

However, this goes both ways! If the vehicle's market value is greater than the price to purchase the vehicle (residual value), that equity is yours. You can either buy it out (and refinance it) or even trade it in and use the equity as a downpayment on your next vehicle! This can easily happen if you stay below your allowed mileage - you may find you have a tidy sum to fold into your next vehicle.

Financing doesn't give you this flexibility. If your vehicle isn't worth what the payout is when you decide to trade it in, you still need to make up this shortfall or add it to what will be owing on your next vehicle.

How Does Financing Work?

The main benefit of financing is that you own the vehicle outright after your finance term, and no longer have a car payment. When financing, every payment you make goes toward owning the vehicle, once the loan is paid off you own the vehicle outright and have 100% of the equity. Because of this finance payments can be higher than lease payments on the same vehicle.

Here's a breakdown:

  • Slightly higher weekly or bi-weekly or monthly payments.
  • Longer contract length, generally up to 84 months.
  • You purchase the car in full and borrow from a lender to cover the total cost of the vehicle plus interest.
  • Your monthly payments go towards paying down the loan and interest.
  • At the end of the financing term, you own the vehicle outright.
  • You can customize or modify your vehicle any way you like (hello carbon fiber rear spoiler and body kit).
  • If you expect to drive the vehicle for years to come, you will save money by not having a monthly car payment once you've paid it off.
  • It's good to note, that while there are no mileage restrictions when you finance, ultimately you end up paying for any additional mileage because your resale value will be lower.
  • You can easily pay down or pay out your finance contract to reduce interest paid. However, this is not much of an advantage if you have taken advantage of a lower interest rate.

How Does Leasing Work?

The most popular benefit of a lease is that you can switch vehicles more often. Similar to a cell phone plan that allows you to get a new phone after the term, you can regularly upgrade your vehicle. This lets you have the best technology and the benefit of always having the vehicle under warranty.

Many people opt for a lease to get into a car they otherwise could not afford. A $500 finance payment will buy you less than a $500 lease payment. Others opt to save some cash on a monthly basis by opting for aa lower lease payment over a finance payment on the same vehicle.

This flexibility is a great bonus for growing families, or driver's who want to stay on top of rapidly changing tech, or those who just need lower monthly payments.

Here are a few of the key things you need to understand when considering a lease:

- In a lease, you make payments on the vehicle over a shorter period (usually 2-4 years) and then have the option to return the vehicle, buy it outright, or even refinance it. Leasing means you only pay for the car’s value that you use: you never own the vehicle.

- When leasing a vehicle, the leasing company needs to predict what the vehicle will be worth in the future. To do this accurately, they give you a certain amount of kms that you may drive each year. It is important that you can meet these terms. It not, a charge will be levied at the end of the lease. However, most leasing companies allow you to increase the amount of mileage allowed if you know your annual mileage is generally over the set amount. But keep in mind, this will decrease the end value, and therefore increase the monthly payment.

- You need to ensure that the vehicle is returned in good condition or you may be liable for an Excessive Wear-and-Tear charge. This is good advice whether you are financing or leasing: ultimately you will pay for any excess wear-and-tear (due to a lower resale value) whether you finance or lease. So keep the lattes in a good quality to-go mug, and the kids markers at home.

- Your payments are generally lower on a lease contract since you are only making payments on the portion of the vehicle that you are using. Many customers love the idea of always being able to have a newer vehicle at a lower price.

- You will always have warranty on your vehicle. Most lease terms fall within the manufacturer’s warranty period so you can drive with peace of mind. It is important to remember that most leases do not include regular maintenance and you will need to look after this, regardless of leasing or financing.

In some circumstances you can write off a vehicle lease as a business expense. Rules vary and you should speak to an accounting professional.

- At the end of the contract you have flexibility. Lease end options allow you to refinance or buy out the vehicle, trade it in for a new lease, or simply walk away from the vehicle.

Let's sum it up:

  • Slightly lower weekly or bi-weekly or monthly payments.
  • Shorter contract terms - usually 2 to 4 years.
  • You only pay for the car’s value that you use, but you never own the vehicle.
  • Your monthly payments only go towards paying for depreciation and interest.
  • At the end of the leasing term, you have flexibility and many options.

Still unsure which option is best for you?

Take our quick lease vs finance questionnaire that will eliminate any uncertainty you may have!

Lease vs Finance Questionnaire

  1. How long do you plan to own your vehicle for?

  • Three years or less (Lease)
  • More than 3 years (Finance)
  1. What will you be using the vehicle for?

  • I use it on my daily commute (Lease)
  • 2nd vehicle or not driven consistently (Finance)
  1. How much do you drive on an annual basis?

  • Under 24,000 Kilometres (Lease)
  • Over 24,000 Kilometres (Finance)
  1. Are you okay with paying higher payments to own the vehicle outright?

  • I want the lowest possible payment for my vehicle (Lease)
  • I’m okay with higher payments if it means I’ll eventually own the vehicle (Finance)
  1. How essential is the latest automotive technology?

  • New technology is essential for me to feel safe and comfortable (Lease)
  • I don’t like constantly relearning new technology and features on my car (Finance)
  1. How thoroughly and consistently do you service your vehicle?

  • I follow all of the service recommendations from my service advisor (Lease)
  • I fall behind on service recommendations (Finance)
  1. Which do you find more stressful: preparing for a lease-end inspection, or driving an older vehicle without a manufacturer warranty?

  • Driving a vehicle without any warranty (Lease)
  • Getting my vehicle ready for the lease-end inspection (Finance)
  1. How much customization do you put into your vehicle?

  • Small additions like air fresheners and all-weather mats (Lease)
  • Big changes like an appearance package, tinted windows and rims (Finance)
  1. In general, do you worry more about monthly payments or staying up to date on service?

  • The idea of having higher payments or payments for a longer duration of time worries me (Lease)
  • I’m always worried about my next maintenance bill and prefer to wait as long as possible (Finance)
  1. How much money do you plan to use for a down payment?

  • $0 down or as little as possible (Lease)
  • I’ve saved up a few thousand dollars for this exact purpose (Finance)
  1. Are you planning on applying for a mortgage or any other large purchases in the near future that will depend on your debt-to-income ratio?

  • Yes I am (Lease)
  • No, I’m not (Finance)

Regardless of whether you lease or finance, if you drive a vehicle for 4 years, it will be worth 40-60% less than when you bought it based on resale value, popularity of model, condition, and mileage. With a lease, your payments cover the depreciation of the car for the duration that you drove it. With financing, your payments cover the total cost of the vehicle. At the end of a financing contract, the car with still be worth the same amount, however, you'll own the car.

Hopefully we've answered a few of your questions with this article and quiz. At the end of the day, if you find a vehicle that you love, that suits your needs, and fits nicely within your budget, you cannot go wrong. Whether you choose to lease or finance, there are millions of people behind you who have made the same choice. They're both great options to help you meet your transportation needs.

Give us a call 250-360-1111 or send us an email if you have further questions! We'd love to help!

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Check out these other articles you might be interested in:

How Much Car Can I Afford?

Should I Buy A New or Used Vehicle?