Buying A Car

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. Leases are typically available for periods of 24, 36, or 48 months. You make monthly payments during the time in which you use the car.

What you pay for when you lease

With a lease, you basically 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. For instance, if the price of the new car is $35,000, and the dealer estimates that car will be worth $15,000 at the end of the three-year lease term, the $20,000 difference represents the cost of the car that you will be responsible for.

Did you know? If you own a business, a portion of your leasing payments may be eligible as a business expense.

You will be charged interest on that amount (plus any applicable fees), less any down payment you contribute when you enter into the lease. You can enter into a lease without putting any money down; however, making a down payment will lower your monthly payments.

Tip: Don't be shy about negotiating the price of the new vehicle. The lower the original cost, the lower the payments you'll be responsible for. Try to get a lower price than the suggested retail price of the car. The U.S. site, Auto Lease Guide, is a great source for tips on getting a good deal. Check out autos.ca for a Canadian lease calculator.

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). With a lease, however, your monthly payments will often be lower than loan payments because you are only paying for the vehicle's use for a defined period of time.

You may also save on taxes when you lease, since you pay tax only on the monthly lease payments, not on the full value of the new car. If you were to purchase a new car and borrow the full amount (including applicable taxes), you would end up paying interest on those taxes.

Tip: When leasing, look for cars that hold their value — those that depreciate the least. This will result in lower costs to you over the life of the lease.

Since car lease payments are calculated using the difference between lease price and residual value, a higher residual value will result in lower payments for the same lease price. On the other hand, the more a car is known to depreciate, the lower the lease-end residual will be, resulting in higher lease payments.

Browse auto magazines, and check some of the sites mentioned above for more information on the kinds of vehicles that hold their value.

In the short term, leasing will probably cost you less than buying. 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.

Although leasing may seem financially attractive, especially if you do your research and negotiate well, there are a number of 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. Tip: Consider adding coverage, such as "gap" insurance, which is intended to cover this potential expense.
• Since you don't own the leased car, you are not allowed to paint or otherwise change its condition.

Although leasing may seem like an easier way to get your hands on that new vehicle you've been eyeing, many of us are still attached to the idea of ownership and building equity.

In many ways, ownership is a financially simpler option than 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. The checklists below can help you get started.

Look into leasing if you...

• Prefer lower monthly payments
• Don't want to tie up your money (maybe you prefer to have capital on hand to invest or to use in your business)
• Don't want the hassle that ownership brings — carrying a debt, buying and selling the car
• Prefer the comfort of a new vehicle every three or four years

Stick with buying if you...

• Plan to use your car for the longer term (three years or more)
• Generally drive more than 24,000 kkilometres a year
• Want the freedom to alter the appearance of your car
• Are attracted to the idea of ownership