Before you jump into a lease agreement, it pays to understand what's involved. It also pays to do some thinking about what you want from your vehicle and what you're comfortable with.

What you pay for when you lease

A car lease is a legally binding agreement that sets out the terms and conditions for using a new vehicle for a defined period of time (typically 24, 36, or 48 months). Basically, you pay for the use of a vehicle you don't own. At the end of the lease term, the car is returned to the dealer, or you can purchase the vehicle at an agreed-upon price.

When you lease, you pay off only a portion of the car's value - often referred to as the "amortization amount." This figure is arrived at by subtracting what the car is expected to be worth at the end of the term from the purchase price of the car. In contrast, when you buy a vehicle outright and take out a car loan, your loan payments go toward the full cost of the car (interest plus principal).

In the short term, leasing will probably cost you less than buying. But the longer the term of the lease, the higher your carrying costs and the less attractive leasing becomes. If you intend to lease your vehicle for more than three years, buying may be the better choice.

Weigh the pros and cons

Although leasing may seem financially attractive there are things you should be aware of.

• Most leases limit the number of kilometres you can drive; anything over this amount can lead to stiff overcharges.
  
  
• Terminating a lease agreement before it's expired will result in penalties.
  
  
• If you are involved in an accident or the car is stolen, insurance payouts may fall short of the balance due on the lease.

In addition, many of us are still attached to the idea of ownership and building equity. Ownership is financially a simpler option versus buying a short-term stake in a car. Ownership also means that you're not limited by how far you can drive your car, what colour you can paint the vehicle, and other leasing restrictions.

What this all points to is that the leasing vs. ownership decision is also a question of lifestyle. Knowing who you are and what type of arrangements you're comfortable with can help you decide what's right for you.

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