You’re ready for a new ride, but determining if you should lease or buy a car can be a tricky decision. Each option offers its own benefits — added flexibility versus no mileage restrictions — and will really come down to what you need in a vehicle. Consider the differences between financing a car versus leasing one before you make a final decision.
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It depends on your individual situation. Generally, leasing might be best if you plan on getting a new car in a few years. Buying might be a better choice if you want to make alterations to the vehicle or if you want to own your car. To decide which is better for you right now, you need to understand how leasing and buying works.
When you lease a vehicle, you’re essentially borrowing it for a few years. Your contract allows you a predetermined number of kilometres each year — typically around 25,000 — and charges a fee if you go over. (Note that you may be able to negotiate a higher mileage limit with your dealer.) You also can’t make any alterations on the car and the car has to remain in good condition. At the end of the lease, you may have the option of buying the car or starting a new lease. If you decide you want to buy a different car instead, you can do that too.
When purchasing a vehicle, you can pay for it upfront or use a car loan. Most car loans use your car as collateral until your pay off the principal with interest. However, you’ll still own your car outright — your lender will simply have a lien against it should you default on the loan. And when you buy a car, you don’t have to worry about mileage restrictions, alterations or keeping your car in good condition, because you’re the owner.
Leon, an Ontario resident, runs a successful cleaning business known for using plant-based, non-toxic cleaners. He wants to buy a car to travel between job sites and is hoping to find an affordable model that will make less of an environmental impact than a traditional vehicle. After doing some research, Leon picks out a 2020 Ford Fusion Hybrid SE with an MSRP of $29,375.00.
Below is a breakdown of Leon’s possible costs if he leases or buys the vehicle, given similar rates and terms. Note that he’ll have to pay around $180.00 to register his car with the provincial government – this includes the cost of license plates, a sticker and a vehicle permit. If he chooses to lease, he could end up paying extra if he exceeds his yearly mileage limit or puts excess wear and tear on the car.
| Purchase price of new vehicle | $31,000.00 |
| Deposit | $6,200.00 |
| Funding type | Auto loan (term loan) |
| Loan amount | $29,140.00 |
| Interest rate (APR) | 5.90% |
| Loan term | 5 years |
| Additional fees |
|
| Payment amount | $562.00 monthly or $259.09 biweekly |
| Total loan cost | $33,720.00 with monthly payments or $33,681.70 with biweekly payments |
| Value of the vehicle | $31,000.00 (purchase price) |
| Deposit | None required |
| Funding type | Auto lease |
| Interest rate (APR) | 5.90% |
| Loan term | 5 years |
| Additional fees |
|
| Payment amount | $547.00 monthly or $252.00 biweekly |
| Total lease payments by the end of the term | $32,820.00 with monthly payments or $32,760.00 with biweekly payments |
*The information in this example, including rates, fees and terms, is provided as a representative transaction. The actual cost of the product may vary depending on the retailer, the product specs and other factors.
| Buying | Leasing | |
|---|---|---|
| Who owns the car? | When you buy a car, you own it — your lender only has a lien against the vehicle should you fail to repay. Because of this, there are no limits on how long you can keep your car or how much you can drive it. | A lease is more like an extended rental period. However, most lease contracts give you the option of buying at the end of term, sometimes at a discounted rate. |
| What are the upfront costs? | Usually a down payment of 10% to 20% of the car’s value as well as registration costs, fees and taxes. | It may include a down payment, a security deposit, an acquisition fee, the first month’s payment and other taxes and fees. |
| How large are the payments? | Car loan payments can be quite hefty, especially if you choose a shorter loan term. You’ll be paying back both interest and principal, so be sure to calculate how much it might cost you. | Since you aren’t paying for the car itself, your payments will be smaller. Lenders charge interest as well as fees for vehicle depreciation and mileage, should you go over your limit. |
| Do you need to worry about maintenance? | Yes, but not for return value. By conducting regular maintenance and avoiding excessive wear and tear, you can keep your car functioning for years to come. You can also improve its trade-in value, should you want to buy a new vehicle. | Yes. Beyond regular maintenance, you’ll need to pay for any excessive wear and tear that happens to the car during the lease period. |
| Are there mileage limits? | No. Since you own the car, you can drive it as much or as little as you want. | Yes. Most lease contracts limit you to a certain amount, usually around 25,000 kilometres. If you go over this, you’ll likely have to pay a charge per mile. |
| Can you end the contract early? | Yes. As long as you have the money to pay back your lender, you can pay off your loan at any time. However, be aware of any closing costs or prepayment penalties your lender might charge. | Yes, but there will likely be high fees and charges attached to ending your contract ahead of schedule. |
| What happens at the end of the loan term? | You’ll own your car, free and clear. You can sell it or keep it, whichever you choose. | If you have an open-end lease, you must purchase the car. If you opted for a closed-end lease, you can walk away from the term, either buying or leasing a different vehicle instead. |
Breaking a finance contract typically involves paying the remaining balance upfront as well as any early termination fees. So, if you have 8 months left on a lease that costs you $400/month, you would have to pay 8 X $400 = $3,200 plus additional fees to break the lease. The same reasoning applies for car loans.
Many lenders may be hesitant to allow the transfer of finance contracts, because such contracts were based on the original applicant’s credit history and personal situation.
If you want to transfer a car lease or loan to another person, that person will usually have to apply for financing just like you did. If approved, the lender will essentially use the new car loan to pay off the old one, thus transferring the debt to the new loan holder.
Transferring isn’t cheap. Lease transfer fees can run around $200-$500, plus you’ll have to pay for the car’s depreciation over the full course of your lease (because your monthly payments were calculated with this in mind). Additionally, you and the new car owner/lessee will have to sign all the necessary paperwork to make the transfer official.
Keep in mind the following risks that could interfere with your plans to transfer:
Transferring an auto finance contract is tough given lenders’ restrictions and the high costs involved, so make sure you understand exactly what your contract allows before entering into an agreement.
Opting for a lease can offer the flexibility and luxury that many drivers crave at a fraction of the cost of actually buying a car. But with limited return on value — and no property left over once the lease is up — it’s often considered a more expensive move. Buying a car won’t allow you to upgrade every few years, but it will give you access to a stable vehicle that you can drive wherever you want, however you want.
The best decision will depend on your financial needs. You can compare your car loan options against manufacturer lease deals to see which gets you the best bang for your buck.
