New Family Car. Lease or Finance?

So, you’re thinking about buying a car. In Canada, owning a car – especially for families – is often considered something of an essential. That becomes easy to understand when you consider the climate in the country, as well as its sheer land size. So, for most families, owning a car is vital to easy, safe, and problem-free transport.

 

If you’re thinking of buying brand new, then you should expect the price tag that comes along with it. Unless you’ve been saving up aggressively for the past few years, it’s possible that you might not have the funds you need to pay for the value of the car upfront.

 

So, what options do you have? In Canada, you can purchase a car through financing, or you can choose an auto lease. Both of these choices ultimately give you a car you can use, but ownership and payment will work differently, which is why it’s important to weight them against your situation.

 

What is a Car Lease?

 

A car lease is essentially a rental contract that lets you use a car over a designated period of time. During this term, you’re required to pay monthly fees as your lease payments. At the end of the contract, you surrender the car or choose to renew the contract so you can rent the car out for another term. Car lease contracts usually have smaller fees compared to a finance. But the catch is that you will never own the car at any point in the contract term.

 

What is Car Financing?

 

Car financing is more like a loan. You look for a lender and borrow the money to pay off the total cost of the car. You then issue monthly payments to amortize the vehicle over a period of time. Like most other loans, there will be an interest fee charged on the total cost. In effect, the car and the monthly payments will be much more expensive compared to a lease. But you can rest assured that every penny you pay will go towards your full ownership of the vehicle.

 

The Pros and Cons of Financing vs Leasing

 

As you might have expected, there are unique benefits and downsides to each of these options. Understanding how they work and how they might challenge your monthly budget should make it easier to choose the right option for you.

 

Car Leasing

 

PROS

 

1. Lower monthly payments
2. Fewer expenses for repairs
3. Drive a new car more often
4. No need to liquidate an outdated vehicle
5. Easier application process
6. Little or no downpayment required

 

CONS

 

1. You won’t end up owning the car
2. Strict mileage limits
3. Insurance is on you
4. You’ll have to lease a new car at the end of the contract

 

The most prominent advantage of leasing a car versus having it financed is that you’ll pay a smaller monthly fee. In effect, you’ll never have to pay more than the car is actually worth because you’re not buying it. At the end of the contract, you have the option to renew your lease or terminate and lease out a new car. So, you’ll be able to drive a new vehicle more often. Of course, because it’s a lease, you also won’t have to worry about having to liquidate the car once you find that it no longer meets your needs or standards.

 

It’s fairly easy to get approved for a car lease because you’re only renting the car, not purchasing it. But even then, there are some aspects that might make it a poor choice for some individuals. For instance, insurance is still yours to pay. If the brand-new car you’ve leased out is still under a warranty, then you won’t have to worry about repair payments. But general upkeep and maintenance is still an out of pocket expense.

 

Another thing you might want to consider is that with a lease, you may be charged a fee if you exceed the mileage limit for your contract. And of course, the biggest drawback of all is that after making all of those payments, the car will not be yours.

 

Car Financing

 

PROS

 

1. All payments go towards fully owning your car
2. Collateral not necessary
3. Less payments in the long run
4. Option to sell
5. No mileage limit

 

CONS

 

1. More expensive monthly payments
2. Failure to pay can damage your credit score
3. Higher interest charges
4. Down payment required

 

Anyone who’s looking to get an investment should definitely consider financing a car instead of leasing it. Working similarly to a traditional loan, car financing means having a lender buy the car for you and then paying them off over a period of time. While an interest rate will be baked into your monthly payments making the charge more expensive than a lease, you will end up owning the car once you’ve settled all payments.

 

Of course, once you own the car, it’s yours to decide how to use it. Some owners enrol their cars into a ridesharing platform, while others use it as a taxi cab service. There’s also an option to sell. While you might not be able to get the full amount that you paid for the car, you can still win back some of the money you spent on it. If it’s in good condition, it’s possible to sell it for up to 60% of its original cost.

 

On the downside, there’s the potential for high interest rates, and of course, the down payment. In some cases, Canadians might not even have the amount needed to secure equity of the vehicle, which can be the reason that pushes most to simply lease a car instead. But if you have the opportunity to set aside your down payment, it’s always a better idea to have your brand-new family car financed instead.