LEASE

When you lease a car, you pay for the portion of its value that you "consume" during the term of the lease.

You get to use the car during the term of the lease but won't own it at the end of term. You have the option to buy it at that point by making an additional payment).

There are certain conditions on how you can use the car during the term of the lease (maximum mileage and wear-and-tear).

LOAN

When you borrow, you're making use of a secured term loan. You can get car loans from 2 sources:

A lender affiliated with the car dealership / manufacturer.
An independent financial institution, such as your bank.

After the money you borrow is deposited in your account, you'll buy the car from a dealership and start making fixed monthly payments to your lender.

MONTHLY PAYMENTS

Monthly payments are a blend of interest and principal repayment (including GST/HST on the entire purchase price).
The car becomes collateral for the loan and your lender can take it away (repossess) if you fail to make monthly payments.
You make the first payment approximately 1 month after you sign the loan contract.

The loan's term is usually 36 or 48 months, but can be as high as 60 months. The term depends on the car's price, condition, and durability / model.

Like other term loans, car loans can have fixed or variable interest rates.

DOWN PAYMENT

A down payment will reduce the principal of the loan. It comes out of your savings.

Lenders usually require a down payment of 15% to 25% of the car's value.
GST/HST on the down payment will be blended into your monthly payments and spread over the term of the lease.

DURING THE TERM OF THE LOAN

You should perform regular maintenance of your car - for safety reasons and because it will cost you less in repairs over time.

Loans do not impose any limitations on how you use the car.

Car loans are usually 'open'. This means that you can repay all / part of the loan's principal at any time.

AT THE END OF TERM

You've repaid the loan and you own the car without any additional payments.

You can keep driving it until repairs are too costly.
Or you can sell it in the used car market.

LEASE

When you lease, you make a financial arrangement with a lender affiliated with the car dealership / manufacturer.

The car dealership will sell the car to a leasing company (called the "lessor"), which leases it to you (the "lessee") in exchange for a fixed monthly payments.

MONTHLY PAYMENTS

Monthly lease payments include depreciation (how much the car’s value has decreased since purchase – due to use / wear and tear / other damage) and interest charges (called the 'money factor').
You'll pay GST / HST sales taxes on each monthly payment.
You make the first payment when you sign the contract - for the month ahead.

Lease terms are usually 24-36 months.

DOWN PAYMENT

You can make a down payment to reduce the monthly payment (and therefore the cost of the lease).

It’s a payment you make out of your savings when initially taking out a lease.
A down payment for a car lease is called a "capital cost reduction".
You will pay GST / HST on any capital cost reduction you make.

DURING THE TERM OF THE LEASE

You are required to perform regular maintenance, as set out in the lease contract.

There will likely be a mileage limitation (maximum number of kilometers you can drive during the lease)

To cancel a lease early, you will likely have to pay a lump-sum to cover the remaining lease payments.

AT THE END OF TERM

At the end of the lease's term, you can either purchase the car (at its current value) or return it to the lessor and negotiate a new lease, on a new car.

1. The leased car's purchase price at the end of the lease’s term is called residual value.

It's calculated by subtracting the car’s depreciation throughout the lease’s entire term from the car's original price.

2. If you do not purchase the car, what happens next depends on the type of lease you signed.

Open-end: The car is sold by the lessor to reclaim its value. If it sells for more than its residual value, the lessor will compensate you for taking good care of the car. If it sells for less than its residual, you will compensate the lessor. Cars are typically sold at wholesale prices - you're not guaranteed to get the best price.
Closed-end: You return the car to the lessor and pay any penalty fees for mileage accumulated above a pre-set limit (driving more kilometers than stipulated in your lease contract) and physical condition (damage to the car). The mileage charge is usually 15-20 cents per kilometer.
Closed-end leases are more common.

Lease / loan (car)

Back to Loans

On this page, we talk about car loans and leases. These concepts apply to other vehicles, like motorcycles, snowmobiles, boats, etc. The availability and features of products used to finance other vehicles may be slightly different.

Thinking about getting a car?

You'll need to make several decisions.

LOAN

When you borrow to buy a car, you pay for its entire value.

After you pay off the loan, you own the car (if you buy it for cash, you own it immediately).

There are no limitations on how you can use the car during the term of the loan.

when negotiating a lease

Before you sign a lease:

Negotiate the price of the car with the dealer before disclosing your intention about financing (lease or loan). Then ensure the dealer uses this negotiated price in their lease calculations. The price of the vehicle is referred to as the "net capitalized value" in a lease.
Make sure that the dealer subtracts any manufacturer credits / rebates from the net capitalized value.
Verify the money factor (interest rate) in the lease contract.
Before you enter into a lease agreement, it is important to consider whether, at the end of term, you wish to buy the car or lease a new one. If you lease a model with a higher buyback / residual values, your monthly lease payment will be lower.
Ask to see the conditions of the lease and check whether there are any fees payable at the end the lease - for example, for exceeding mileage restrictions. You may be able to purchase additional mileage up front, at a lower cost than paying a fee at the end of the lease.
Don't lease a vehicle for longer than its manufacturer's warranty. After the warranty has expired, you will have to cover the cost of damages out of your own pocket.

A new car or a used car?

New cars lose about 20% of their value in the first year of ownership and up to 60% of their value in the first five years, so a used car is almost always going to be less expensive to buy.

But you need to check the technical condition of the car, and its history (for accidents, major repairs, and maintenance record). A reputable seller should be able to provide this information. It may be possible to get a car-history report from an independent provider, like CARFAX Canada or VinAudit Canada. Experts recommend a technical inspection by a certified mechanic.
Some forms of financing and incentives may only be available for new cars.
If you’re not buying it for cash, you should line up your financing ahead of time when you shop for a used car. Financing rates for used cars are higher than for new cars – because if you don’t make payments and the lender takes away your car, the older the car, the less value it has.
Experts suggest that recently leased cars may be good opportunities. They have lower mileage and are usually in decent condition (because of the conditions and limitations in leases). In addition, the car may be still be covered by the manufacturer’s warranty.

Lease or loan?

The answer depends on what time horizon you have in mind and your financial situation, as well as your lifestyle choices.

Time horizon and finances

1. A short-term perspective favours a lease.

Monthly lease payments will be smaller than monthly loan payments (for the same car).

2. In the medium term, the difference between a lease and a loan is not significant if:

In the lease scenario, you drive the car without exceeding the mileage restrictions / causing excessive wear-and-tear, and trade in for a new lease every few years.
In the loan scenario, you sell the car (or trade it in) at the end of the term of each loan.

3. In the long run, leasing tends to be more expensive than buying the car, financing it with a loan, and keeping the car for many years.

Over the car's entire lifespan, leasing a car and then buying it at the end of its lease is more expensive than taking out a loan, with comparable term and interest rate, to finance the purchase.
Leasing a new car and negotiating a new lease at the end of term, over and over, is the most expensive option in the long run.

The lower cost of borrowing in the long term is due largely to the rapid rate at which cars depreciate.

In fact, just by driving out of the dealership's parking lot, a car can depreciate by 20% of its purchase price.
Remember, when you lease, part of your monthly lease payment is an expense for depreciation. Because cars depreciate so quickly, much of the car's depreciation is absorbed throughout the lease's term (which is relatively short compared to the car's lifespan). At the end of the term, the car isn't worth nearly as much, but it's still in drivable condition and will continue to be for many years.
When you own a vehicle you absorb the depreciation over the car's entire lifespan.

Other things to consider are incentives on the purchase and your credit score.

Incentives (special promotions which lower your cost) differ depending on how you finance the purchase.

When you buy a car, dealers and manufacturers often offer purchase price rebates or reduced interest rates on loans - but only on certain vehicles they particularly want to sell. What are "zero-percent" loans?
You may not receive the manufacturer’s rebates or other incentives when you lease.

Your credit score will likely need to be better if you'd like to lease a car than to get a car loan.

If you don't make payments on the loan, the lender gets your car. But with a lease, the lessor already owns the car as part of the lease terms, so if you stop making payments they don't have any additional recourse to you.
FYI. Dealers evaluate your credit history and score differently than other lenders. They pay more attention to past car loan payment history - you benefit if you had a car loan before and made payments on time. They will also look at your debt-to-income ratio (it’s all your monthly debt payments divided by your monthly gross (before tax) income).

Lifestyle

A lease allows you to drive a new model every 2-3 years, depending on your lease's term (if you return the car at the end of the lease and negotiate a new lease). New models will have the latest safety features and will be under manufacturer's warranty so you won't need to worry too much about repairs.
A loan is better if your goal is to own your car, use it the way you want (for example, drive a lot), and avoid the hassle of getting a new car and financing every 2-3 years. You shouldn't mind driving and taking care of an aging car.

do you really need a car?

Whether you lease or borrow, there are a few things you'll have to consider if you use a car.

Additional expenses in your budget - including auto insurance, gas, licensing fees, regular maintenance, and possibly repairs.
Cars depreciate (lose value) quickly and need to be replaced. Many people replace cars every 5 to 7 years though it’s entirely possible that a well-maintained car with modest mileage can last twice as long.
Do you have any savings available for a capital cost reduction / down payment - which will reduce your monthly lease payment / loan’s principal.
Will you be able to make future lease / loan payments for the entire of the term - is your income stable enough?

what's the difference and HOW DO THEY WORK?