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Leasing vs. financing a car: What’s better for your money?
Learn the factors to consider when it comes to deciding whether to lease or finance a car.
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 leasing versus financing a car before you make a final decision.
Should I lease or finance a car?
When you’re deciding whether to lease or finance a car, the best option for you will depend on your preferences. Generally, leasing might be best if you plan on getting a new car in a few years. Financing a car that you can own might be a better choice if you want to make alterations to the vehicle and will save you money if you plan on owning a car over the long term. To decide which is better for you right now, you need to understand how leasing versus financing works.
Leasing a car
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 km — 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.
Financing a car
When purchasing a vehicle, you can pay for it upfront or finance it. 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.
Leasing benefits and drawbacks
Pros
- You’re driving newer model vehicles, so it won’t likely require big repairs
- It requires less money upfront and often has lower monthly payments
- No need to worry about selling the car once the lease expires
- You may have the option to buy your car at the end of the lease
Cons
- It limits the number of miles you can drive and must be properly maintained to avoid paying extra fees
- You’ll be unable to make any alterations to the car
- You don’t have equity in the car and usually can’t use it for trade-in value
Financing benefits and drawbacks
Pros
- You own your car outright and can use it for trade-in value when you sell
- Buying is considered the most cost-effective option by many experts
- You can drive as many miles and can customize your car without penalty
Cons
- Financing may cost more money upfront, and longer loan terms mean more interest
- The value of the car depreciates in time, making your investment less valuable
- You’re responsible for repairs when the warranty expires
Example costs: Car lease vs. finance
Meet Kate, an Ontario resident, who’s looking to get a car with less of an environmental impact than a traditional vehicle. After doing some research, she picks out a 2020 Ford Fusion Hybrid SE with an MSRP of $29,375.00.
Below is a breakdown of Kate’s possible costs if she leases or buys the vehicle, given similar rates and terms. Note that she’ll also have to pay around $180.00 to register her car with the provincial government, which includes the cost of license plates, a sticker and a vehicle permit. Also keep in mind that, if Kate chooses to lease, she could end up paying extra if she exceeds her yearly mileage limit or puts excess wear and tear on the car.
Example costs of leasing vs financing a car
| Financing | Leasing | |
|---|---|---|
| Purchase price of new vehicle | $31,000.00 | $31,000.00 |
| Down payment | $6,200.00 | None required |
| Loan amount (after tax) | $29,140.00 | N/A |
| Interest rate (APR) | 5.90% | 5.90% |
| Term length | 5 years | 5 years |
| Additional fees |
|
|
| Payment amount |
|
|
| Total cost by the end of term |
|
|
| *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. | ||
It looks like Kate will spend around $900 less on a car lease over five years than she if she financed the car over five years. But before you start thinking car leases are more cost-effective, consider what happens next.
After the five year mark, Kate would have to start paying for another car lease or loan, which means she’ll still be making monthly payments towards a car. On the other hand, if she had financed the car instead of leasing, she would own the car outright at this point, and no longer be bound to making monthly car payments.
If Kate keeps the financed car for another few years after she’s done paying off the car loan, she’ll end up saving thousands of dollars in car payments. Even when you factor in the additional maintenance costs required to keep an older car running smoothly, it’s still much more cost-effective for Kate to finance a car and keep it for several years after paying off the loan, than it would be to continually lease a car.
Deciding between leasing and financing? Compare auto finance options
What is the difference between financing and leasing a car?
| Financing | 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. |
8 factors to consider when deciding if it’s better to lease or finance a car
- Limited miles on a lease.
Lease agreements usually allow you to drive a certain amount of miles annually, so consider your commute and any trips you’ll take with your car. A lease may not be suitable if you travel frequently.
- Trade-in value on a financed car.
If you own a car and are planning on buying a new one, you can typically trade it in to the dealership for a down payment on a new vehicle. However, your vehicle may not be worth as much as you think, especially if it’s an older model.
- Lease tax deductions for business use.
If your car is mainly used for business, you could write off both lease and car payments as tax deductions.
- Good credit can get you better finance rates.
If you have great credit, but not a lot of money for a new car, leasing a vehicle can get you a better car for less money. With good credit you could get more affordable monthly payments on a lease than you would on a car loan.
- Secured loans are best for poor credit.
If you have negative marks on your credit, consider using a secured loan to buy a car. You’ll get lower rates and have a better chance of approval by taking out a loan in which your car is used as collateral.
- Leases get you newer cars for less money.
If you like having the latest vehicle on the market, a lease allows you more flexibility to upgrade every few years. And depending on your contract, you can trade in your older lease and get a newer model for the same monthly payments.
- Leases don’t allow car modifications.
If you think you’ll add a new exhaust system or racing stripes to your car, consider buying. Lease agreements restrict you from making any modifications and will charge fees if you do so.
- Lots of wear and tear? Consider financing.
Lease agreements typically have a “wear and tear” clause stating that the person leasing will be responsible for any damages that exceed average wear and tear — such as stains, dents, rips and scratched rims. Therefore, drivers who park on city streets, drive with dogs in the car or are generally tough on cars should consider financing instead so they can own the car outright.
Can I break or transfer a lease contract if I change my mind?
Breaking a lease 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 can also apply to car loans.
The other option is to transfer your car lease to someone else who is willing to take it over. However, many lenders may be hesitant to allow lease transfers, 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 may 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). Make sure you’re truly saving money before you move forward and terminate the agreement.
Keep in mind the following risks that could interfere with your plans to transfer:
- If any transfer paperwork is missing or filled out improperly, the transfer could be invalid, and you could still be on the hook for payments even if you don’t have the vehicle anymore.
- Your lender may outright prohibit the transfer of an auto finance contract.
- Your contract could stipulate that a transfer can’t take place until a certain amount of time has passed.
- Some lease contracts may hold the original lessee responsible if the new leaseholder fails to make payments.
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.
What kind of car finance options do I have?
- Secured personal loan. A secured personal loan lets you use the car as collateral, giving you lower monthly payments. This is different from a car loan because your loan funds can be used for more than just the purchase of a vehicle.
- Unsecured personal loan. An unsecured personal loan can be used to finance a vehicle — or anything else you want to buy. These loans are flexible, but they usually come with higher fees and rates because it’s riskier for the lender.
Bottom line
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.
Frequently asked questions on leasing vs. financing
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