To lease or to own? That's the question facing every driver in the market for a new car. The issue is surprisingly divisive, with die-hard supporters on each side.
Lease-lovers adore getting a brand new, shiny car with the latest technology every few years, while owner-advocates are willing to pay higher monthly payments now, for the promise of paying $0 in the future.
Leasing a car means you only pay for the portion of the car you use. You pay the dealership to drive the vehicle for a predetermined amount of time, usually around two to four years. The payments are a mix of principal, interest and taxes. It's usually cheaper than taking a loan out to own the car because you're only paying the depreciation costs of the vehicle over the period of time you are driving it.
In contrast, when you buy a car, you take out a loan for the entire sticker price of the vehicle plus taxes minus your down payment. Your monthly loan payments will be higher than if you were leasing the same car. But the difference is, at the end of the day, when you've repaid your debt, you have an asset. That asset is yours to keep, sell or pass on.
Scotiabank proudly finances vehicles for consumers for several car manufacturers across Canada, including on an exclusive basis, for Mazda, Jaguar Land Rover, Volvo and Polestar.
Whether to own or lease depends on your lifestyle, cash flow and preference.
Pros of leasing a car
Let's talk about the emotional factor of leasing first. One of the main perks of leasing is you're potentially able to get a shiny new car for much cheaper than it would cost to buy one over the same term. Only you can decide how important this is to you. If you really love cars and are excited by the latest technology and top-notch performance, these factors may be worth more to you than owning a car.
The second benefit to leasing a car is that it's cheaper in the short term. If you have a tight or uncertain cash flow, you may appreciate lower monthly payments. In order to get similar low monthly payments from an auto loan you may need to extend the loan period to the maximum, sometimes up to eight years – which isn’t a great idea because of the added interest you’ll need to pay or you will need a large down payment to bring the finance amount down.
The third advantage is flexibility. If you move a lot or aren't ready to commit to a vehicle then why not lease it for three years until you're prepared to commit?
Leaseholders also love that they can just hand the car back at the end of the term and walk away. If you don’t want to deal with car maintenance over the long term or who do not want to haggle over trade-in values, leasing may be your best option.
Finally, most leases in the marketplace are typically referred to as ‘walk-away’ leases because the value at the end of your lease, known as the residual value, is guaranteed. Therefore, if you make your payments and return the car in good condition and within your kilometre allowance, you can drop the keys and walk away.
Downsides of leasing a car
But leasing may also have disadvantages, like the fact that you will always have a monthly payment. When you own a car, at some point your loan will be paid off and your payments will cease. So while lease payments may be cheaper in the short term, they almost always are more expensive over time because they never stop as long as you keep getting a new vehicle every 2-4 years.
The second drawback is that you have to return your car in roughly the same condition you bought it in. Most lease options allow for normal wear and tear during the term of your lease but may require certain items to be repaired or replaced if there is excess wear and tear. Ask your dealership to clarify what constitutes excess wear and tear as many have brochures available to help distinguish normal from excessive.
The costs to fix it and the hassle of doing so can really add up. There are some products the dealership can sell you when you originally lease the vehicle which can cover for some damages prior to the end of lease term. Make sure to ask a lot of questions about the cost as well as what would be covered versus what is not.
And depending on your lifestyle and how often you drive, you may exceed the allowable kilometre limits; a standard lease allows for 24,000 kilometres per year while some manufacturers offer low or ultra low kilometres options, which are generally around 15 to 20,000 kilometres annually. Those doing inner city driving should be okay within those limits, but those who are visiting friends and family who live further away may be hard pressed to stick to them. If you think you may go over your allotted kilometre allowance, there are options to purchase additional kilometres upfront; if not, you will get charged per every kilometre you go over your allowable limit.
Pros of buying a car
Some people just want to have a car and keep it for as long as possible until it starts needing costly repairs. If you simply need a reliable vehicle to get to work in and drive your kids around in, there's little point to owning a new car every few years. The best way to become payment free is to have a large down payment, find a low interest rate and choose the shortest financing period you can afford. You can check out our auto loan payment calculator to see the difference a shorter time period makes. If you don’t have a large down payment or are new to the market your deal may have programs available to assist as well.
Let's say you buy a $25,000 vehicle with $5,000 down at 2.99%. If your loan lasts three years, you'll end up paying around $1,090 in interest. If you push it to the maximum eight years, you'll end up paying $2,920, or 168% more.
Newcomers may also use auto loans to build their credit history - Scotiabank, for example, offers the StartRight Auto Finance program where you can qualify for a loan with no Canadian credit history.
Once your loan is paid off, and assuming you've chosen a well-made car that's built for the long term, you can easily drive it for years after the loan is paid in full. That's a long time without car payments and you can direct that cash flow elsewhere. Of course, you may get into an accident or need to make repairs, but the money to deal with that is almost always less than a car payment would be.
And since it's yours you don't have to fix anything on it that you don't want to and you can drive as many kilometres as you need. You also don’t have to worry about keeping it pristine if you don’t want, because it’s yours.
Downside of buying a car
Like anything you own, you’re responsible for it. Many cars, unfortunately, are not built to last forever and the maintenance can get expensive once your warranty expires. You may find that the maintenance costs for some of the larger mechanical repairs can become truly astronomical and may want to consider purchasing an additional warranty to extend the manufacturer’s warranty.
Another downside is the depreciation of your vehicle. Some cars have higher depreciation than others and this may affect whether you can trade in your vehicle or not, as you may have to pay off more of your loan to be in an equity position (your car is worth more than you owe). If you want to trade in or trade up, you might be surprised at how little value your car truly holds after a few years.
Up to you
Ultimately, leases are good for those who want more flexibility. They want to drive the latest vehicle, pay a reasonable monthly rate and trade it in for the next hottest thing in three years. Buying a car is good for those who like to keep their cars for a longer period of time or drive lots of kilometres each year. They're in it for the long-term and have the cash flow and motivation to pay off their auto loan as soon as possible. Check with your dealer and ask lots of question to see what the best option is for you.
Legal Disclaimer: This article is provided for information purposes only. It is not to be relied upon as financial, tax or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, and other investment factors are subject to change without notice and The Bank of Nova Scotia is not responsible to update this information. All third party sources are believed to be accurate and reliable as of the date of publication and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific financial, investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
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