The Benefits Of Lease Or Finance For A Car

Should I Lease Or Finance My Car? 

As handy as having a car is in getting from point A to point B, it can be expensive machinery, and only some people can afford to buy it outright. That's why there's a wide array of payment options available, such as lease or finance, to make it easier to access.  

But how do you know whether you should lease or finance a car? Read on to learn more about the benefits and drawbacks of lease or financing a car so you can make the right financial decision for you.  

What Is Leasing? 

Leasing is a financial agreement where an individual or business can use something in exchange for regular payments. In this case, an individual will agree to use a car in exchange for monthly payments to the lessor, often the car dealership or a leasing company, for a set amount of time.  

Much like renting an apartment, you do not own the vehicle and are subject to several terms and conditions in exchange for using the vehicle in question. Some things typically included in a lease agreement include:  

Length of Lease Term: Car lease agreements typically last for a fixed term, generally two to five years. During this time, you are responsible for making monthly payments and keeping the car in good condition per the lease agreement's terms.  

Your Auto Insurance Requirements: There are specific car insurance requirements that leased vehicles require, as well as additional coverage options that the leasing company may recommend. These may include comprehensive and collision coverage to protect the leased vehicle against damage and gap insurance to cover the difference between the car's value and what you owe on the lease in case of a total loss.  

Mileage Restrictions: When leasing a car, you may have an annual mileage limit. This prevents excessive wear and depreciation on the vehicle, ensuring that it retains its value throughout the lease term. In most cases, exceeding the maximum mileage limit on your leased vehicle can result in additional fees or penalties at the end of your lease term.  

Monthly Payments: This is the monthly fee you pay to cover the vehicle's depreciation, financing, and other costs associated with leasing it.  

The Car's Residual Value: This refers to the car's estimated value at the end of the lease term. This value is used to help calculate the amount you pay each month at the start of the lease agreement. Generally, vehicles with higher residual value at the end of the lease term will have lower monthly payments because the depreciation of the car's value over the lease term is lower. Therefore, it is important to consider the residual value when choosing a car for leasing to ensure you get the best deal.  

Upfront Costs: When leasing a car, you may need to make an initial payment, which includes a down payment, security deposit, and applicable taxes and fees. The amount can vary depending on the leasing company and the terms of the lease agreement.  

General Wear and Tear: While you will be responsible for maintaining the leased vehicle, some wear and tear are expected from regular use, which is accounted for in the lease agreement. However, excessive wear and tear beyond normal use may result in additional charges at the end of the lease term. It's important that you carefully document the vehicle's condition at the beginning and end of the lease to avoid any disputes.  

Early Termination Fees: Your monthly payments have been set for a particular period of time, and the lease expects you to be using that vehicle for that set time period. You may be subject to early termination fees if you terminate your lease early.  

How do Car Leases Work? 

There are three main types of car leases: standard leases, lease to own, and lease takeovers. A standard lease contract typically involves a fixed monthly lease payment for a set period, usually two to three years, with predetermined mileage limits. However, lease-to-own options provide the opportunity to purchase the vehicle at the end of the lease period. In contrast, lease takeovers involve assuming someone else's lease agreement for a remaining period.  

No matter which type of lease you have, you are renting a vehicle for a set period of time. When your lease ends, you generally have a few options: return it, renew your lease, lease a new vehicle, or buy the vehicle.  

What Is Financing? 

Financing refers to the act of providing funds and involves obtaining capital through various means such as loans, investments, or sales revenues. In the case of your car, financing is often obtained through car loans from banks or credit unions or through in-house financing agreements offered by the car dealership.  

Much like leasing a car, you make monthly payments for a fixed amount of time, depending on your financing arrangements. However, unlike renting a car, financing allows you to own the vehicle outright after the agreed-upon term eventually.  

What To Consider When Deciding Whether To Lease Or Finance A Car 

Both leasing and financing aim to provide you with a vehicle subject to certain conditions and a set payment schedule. The critical difference between leasing vs. financing is what happens at the end of the contract.  

However, there are several other pros and cons when deciding to lease or finance a car.  

Advantages Of Leasing A Car 

Deciding to lease or finance a car is tough and shouldn't be taken lightly. The proper research and consideration of many factors should help you make an informed decision. Some benefits of leasing vs. financing a car include the following.  

You Get to Try Out Different Vehicles: Can't make up your mind about what type of car you want? With car leases, you can test different vehicles to see which suits your needs and preferences.  

Drive New Vehicle: When you lease a car, you are often allowed to drive a new vehicle every few years, allowing you to experience the latest features without the long-term commitment of ownership. This can be especially appealing for individuals who enjoy having the most up-to-date vehicle options available to them.  

Warranty Coverage: One benefit of leasing vs. financing a car is that because you'll be driving newer models of vehicles, you'll be covered under the manufacturer's warranty in case something breaks down.  

Lower Monthly Costs: Leasing a car often means lower monthly payments than financing a car purchase. So, if your budget is tight, it would be more economical to lease rather than finance a car.  

Good For Low Annual Mileage: If you need access to a vehicle but don't need to go far or drive it to many places, leasing a car may be more cost-efficient. Leasing allows you to have access to a reliable vehicle without the need to worry about maintenance or the long-term commitment of ownership.  

Disadvantages of Leasing A Car 

With every decision comes a balance of positives and negatives. A choice may look great in one aspect but may have an impact. This is crucial to understand when deciding to finance or lease a vehicle. The cons of leasing a car include:  

It's Not Yours: While you have the right to drive it, you can't modify it to your liking and are responsible for every scratch, scrape and dent that goes above and below normal wear and tear. While you may have the option to buy it after your lease ends, there is no guarantee that you will want to or that your leasing company will offer you a reasonable purchase price.  

Mileage Restrictions: Your leasing contract has a set number of kilometres that you can not exceed without incurring extra fees. This is to prevent potential damage to the vehicle from excessive driving, and your lease may charge you for the additional mileage you drive.  

Extra Charges: In addition to your monthly car lease payments, you may incur extra leasing costs from excessive use or damage done to the vehicle. You also often have to pay a security deposit, which you may not get back depending on the vehicle's condition, as well as any outstanding fines or fees at the end of the lease term.  

Unending Monthly Payment: By continuously leasing vs. financing a car, you will always have monthly payments that never end. This can result in a lifetime of financial obligation and limit your ability to build savings for other goals.  

Penalized for Ending Lease Early: Ending your car lease early will result in expensive penalties. Because the lender expects you to have the vehicle and pay for that set period, early termination incurs fees that compensate for the financial loss they incur due to the shortened lease duration. Additionally, terminating a lease contract prematurely can result in a bad credit score and make it more difficult to secure future leases or auto loans.  

Advantages of Financing Car 

If leasing a vehicle has too many cons, financing a vehicle instead may be a better option. Some benefits of financing a car are:  

You Own It: Financing a car means that it's yours, even when you still have monthly loan payments, and after you pay off the end of your loan term, you own it outright.  

Drive, Where, When, and How Often You Want: Because any damage or mileage clauses don't constrain you, you can do whatever you want with your vehicle. If you want to drive across Canada twice a year, you can do so! You can use your vehicle as much as you want without restrictions.  

Make it Your Own: When you finance, you own the care in question and can make it your own. This means if you want to add a remote starter, change the paint colour, or upgrade the sound system, you have the freedom to do so without any restrictions.  

Tax Deductible: Suppose you finance your vehicle and use it for business reasons. In that case, you can deduct the interest on your car loan and the depreciation and operating expenses from your business taxes. This can potentially save you a significant amount of money on your annual tax bill.  

Cheaper in the Long Term: Because you often hold on to your car long after you finish paying it off, so long as it's in good condition. You don't have to worry about expensive monthly car payments eating into your budget. This allows you to save money in the long run and allocate those funds towards other financial goals or necessities.  

Disadvantages of Financing Car 

As we mentioned above, all decisions have benefits and cons. Financing a car is no exception. Some cons to funding a car include the following:  

Higher Monthly Payments: Financing your car means high monthly payments compared to leasing a vehicle. That's because the loan payment is based on the total cost of the car, whereas leasing only requires you to pay for the depreciation during the lease term.  

Rapid Depreciation: The value of your car drops by 20% as soon as you drive it off the lot. When you finance your vehicle, you will owe more than the car is worth, which can put you in a difficult position if you need to sell or trade it in before paying off the loan.  

You're Responsible for Regular Maintenance Costs: Because you own the vehicle, if it becomes damaged or breaks down through no fault of your own, you may be on the hook for the repair costs. Additionally, you are responsible for all associated maintenance costs and vehicle upkeep.  

Deciding Whether to Lease or Finance a Car 

When you are considering whether to lease or finance your car, consider the following things:  

• The monthly payment amount you can afford  
• How much driving you do/how many kilometres do you drive annually  
• How long do you plan on using your vehicle  
• Is having vehicle equity important  
• Can you afford a down payment  
• Is there a particular brand/model you want  
• Can you take care of/maintain a vehicle  
• Is having a new car important to you  
• Type of payment you can make  

All these things can impact whether you should lease or finance a car. If you have any questions on how lease vs. financing a car will impact your car insurance policy, talk to your Morrison Insurance broker.