Let's face it. Owning a vehicle is rarely a profitable venture. Ninety-nine percent of vehicles purchased today will lose between 20 to 40 percent of their value the minute they are driven off the lot.
Many people purchase a car simply to get around and to avoid walking or having to take the bus. Other people truly enjoy driving and buy a vehicle because they love getting behind the wheel. Either way, it's no big surprise to most people that the vehicle they drive today will eventually be retired to a dusty, sunbaked junkyard on the outskirts of town.
With this in mind, many people struggle with whether they should lease or purchase their next vehicle. However, regardless of whether you decide to lease or finance, it is important to know that most financial institutions look at the following four factors when evaluating your vehicle finance application:
1. Vehicle to be purchased: what is the age, price, wholesale value and mileage of the unit?
2. Down payment: how much cash and/or trade equity do you have in the deal?
3. Applicant information: where do you work, how long have you worked there, do you rent or own, and what is your annual income?
4. Credit history: how does your credit file look both before and after the purchase if they fund you?
But now we are back to the looming question: should you lease or finance? Ultimately, the answer depends on what is most important to you as a buyer as everyone has different wants and needs. When deciding whether to lease or buy a vehicle, there are several factors that one must take into consideration.
Let's explore leasing first. When you lease a vehicle in Canada, what you are really purchasing is the use of the vehicle for a specified period of time and for a specified monthly payment. At no point are you the owner of the vehicle, but you are still fully responsible for the vehicle's maintenance and overall condition until you return it.
With a lease, you will be subject to several additional conditions regarding the amount of kilometres you can put on the vehicle, or costly penalties will kick in. As well, at the end of the lease, if the leaser is not satisfied that the vehicle has been properly maintained, you could also be penalized.
When considering leasing a vehicle in Canada, the first and most important question you should ask yourself is: how far do I drive annually? Mileage limits are a standard condition of most lease agreements, and excess mileage charges can substantially increase the amount you owe at the end of the contract. So, if you normally drive beyond the annual limits stated in the lease agreement, usually 25,000 to 30,000 kilometres, conventional financing is probably a better option for you.
Still not sure if leasing a vehicle is right for you? Ask yourself the following questions:
1. Do you enjoy driving a new vehicle every two or three years?
2. Do you want lower monthly payments?
3. Do you like having a vehicle that has the latest safety/technological features?
4. Do you like having a vehicle that is always under warranty?
5. Do you drive a lower than average number of kilometres each year?
6. Are you willing to pay a little more over the long haul to get these benefits?
If you answered yes to three or more of the above six questions, and you understand how leasing works, then leasing is probably your best bet.
With a lease, your monthly payment is calculated by three main factors:
1. The annual percentage rate.
2. The total amount financed.
3. The term of the contract (usually between 24 and 60 months).
Looking to obtain a competitive lease finance rate? Consider the following:
1. Your priority should be to select a newer vehicle that fits both your lifestyle and your budget.
2. When it comes to your down payment, bigger is not necessarily better.
3. Your credit worthiness: the higher your credit worth, the lower the interest rate will be, and the more likely lenders will be to approve you.
The above three factors will increase your chances of getting approved, lower your total interest cost, and in some cases, reduce your monthly payments.
If you do decide to lease, keep these points in mind:
1. Try to match the term of your lease with the amount of time you plan to use the car. A two or three year lease term is ideal for most people.
2. Aim to keep the lease term shorter than or equal to the length of the manufacturer's warranty. This will assist in limiting the amount you may be required to pay in maintenance expenses.
3. Do not compare leases only by the monthly payment. Since different leasing companies offer different deals, you should examine all the conditions and requirements of the deal, including the annual driving distance limit, penalties for early termination, and how normal wear and tear is defined.
Do you like the idea of customizing and owning your own vehicle?
Do you prefer paying off your loan and being payment-free for a while?
Are you okay with higher monthly payments and the unexpected cost of repairs after the warranty has expired, but not okay with the risk of possible lease-end charges?
Do you drive above average kilometres per year and are expecting a lifestyle change in the near future?
If you answered yes to most of the above questions, financing is your best option.
With financing a vehicle in Canada, your monthly payment is calculated by three main factors:
1. The annual percentage rate.
2. The total amount financed.
3. The term of the contract (usually between 24 and 84 months).
When trying to acquire a competitive finance rate, consider the following:
1. Your priority should be to select a newer vehicle that fits both your lifestyle and your budget.
2. When it comes to your down payment, bigger is not necessarily better.
3. Your credit worthiness: the higher your credit worth, the lower the interest rate will be, and the more likely lenders will be to approve you.
The above three factors will increase your chances of getting approved, lower your total interest cost, and in some cases, reduce your monthly payments.
By far the greatest benefit of buying a car is the fact that you will actually own it one day, and in turn, you will one day be free of car payments. The vehicle is yours to sell, and you are not locked into any type of fixed leasing period. If something changes in your life, and you need to rethink the vehicle you are driving, you can just sell the vehicle at any time without the consequences associated with leasing.
When you buy a car, the insurance limits on your policy are typically lower than if you lease because the insurance company classifies you as a pleasure use driver, rather than a business use driver. In addition, if you own the vehicle, you are free to rack up the mileage without financial penalties and frustrating restrictions.
The most obvious downside of owning versus leasing a vehicle is that you will most likely have a larger monthly payment. Furthermore, dealers often require a sizeable down payment, so the initial out-of-pocket cost is usually higher when buying a car as well.
Normally, as you pay off your car loan, you are building equity in the vehicle. Unfortunately, however, this is not always the case. When you purchase a car, your payments reflect the total cost of the vehicle and are usually amortized over a three to seven year period. But depreciation can take a nasty toll on the value of your car, especially during the first years of ownership. As a result, buyers who put down modest down payments can end up financing a considerable portion of the vehicle and can even find themselves in a negative equity situation, where the vehicle is worth less than what the owner still owes on it.
Much like the monthly payments of a mortgage, monthly car payments are divided between paying principal and interest. In the first few years of paying off a car loan, the majority of each car payment usually goes toward interest rather than principal. With the value of new vehicles depreciating about 20 to 40 percent in the first couple years of purchase, a car owner can be hit with a double loss in equity. Not only has the value of the car gone down, but because the monthly payments were going mostly toward interest rather than principal, the buyer is now left with very little equity in the vehicle.
The other possible downside to financing a vehicle in Canada is that car owners will soon find themselves behind the times. With rapid technological advances, a vehicle purchased with today's bells and whistles probably won't be all that attractive to buyers in five years from now, right around the time the car is paid off.
In short, the decision to lease or buy will always depend on your personal preferences and circumstances. What's right for you can be completely wrong for another person. No one can tell you which option is best for you unless they have a complete understanding of your particular situation, wants and needs, and no one knows those better than yourself.
If your objective is to be free of car payments one day and you actually want to own the vehicle, buying/financing may be your best option. If, however, your goal is to drive a new set of wheels every two to four years and minimize your monthly costs, leasing a car is probably the best route for you.
By arming yourself with information about these two main financing options in Canada, you now have the confidence you need to walk into any dealership showroom and drive out satisfied.
Good luck with your next lease or purchase!