Are you in the market for a new set of wheels?
New car inventories throughout the country are still low compared to pre-pandemic highs, which could limit your options. With limited options, it’s important to understand the pros and cons of leasing vs buying a car in Canada if you want to make the most cost-effective choice.
Below, I’ll compare some of the benefits and drawbacks of leasing and buying cars based on the following criteria:
- Your budget
- Cost of insurance
- Your driving habits
- Exclusive options
- Vehicle equity
- Personal vs work vehicle
- Maintenance considerations
- Car value depreciation
- Low-emission vehicle tax credits
I’ll also share a few helpful tips on how to get the best deal on your next car, so you can get the most value with your hard-earned money. Let’s dive in!
For reference, here’s a table outlining the key differences between leasing and buying a car:
|Leased Vehicle||Purchased/Financed Vehicle|
|Ownership||You don’t own the vehicle. Payments made are equivalent to renting an apartment.||Each payment contributes to your equity in the vehicle. Payments made are equivalent to making mortgage payments on a house.|
|Insurance||Must meet minimum insurance requirements outlined by the dealer.||Greater flexibility to choose your own policy terms.|
|Down Payment||Initial payment goes toward the lease term and is determined by the dealer.||Down payment goes toward the value of the car, and contributes to your equity in the vehicle.|
|Maintenance||Leased vehicles are typically covered by a comprehensive maintenance package offered by the dealer.||Aside from the manufacturer’s warranty, vehicle owners are typically responsible for repairs and maintenance.|
|Used vs New Vehicle||Leased vehicles are almost always brand-new vehicles.||You can purchase or finance new and used vehicles.|
Car dealerships typically offer two options to consumers – leasing or buying/financing their vehicle.
Most people are familiar with the simple concept of buying or financing a car. If you’re buying a lower-cost vehicle, you may pay for it upfront in cash or with a certified cheque.
Alternatively, you may offer a down payment (usually 10-20%) and finance the remaining amount. Once the financed amount is paid off, the car belongs to you outright.
Leasing a car is quite different, though.
When you lease a vehicle, you don’t technically own the vehicle (and you never will). Here’s how leasing a car works:
- You visit a new car dealership and browse their available vehicles for lease
- Once approved for the lease, you’ll make an initial down payment toward the lease contract
- The cost of your lease contract depends on the value of the car, mileage, and contract length
- After your initial payment, you’ll make monthly lease payments until your contract ends, and you return the vehicle to the dealership
The main difference between leasing and buying a car is equity and ownership.
If you finance to own a car, each payment will contribute to your equity in the vehicle. You don’t build any equity in a car when you lease it. It’s like renting a home. Once the contract is up, that’s it. The money you put into lease payments is gone.
The past couple of years have been marked by high inflation and interest rates, directly affecting the new and used car markets.
Turo Canada recently released the data from its second annual Car Ownership Index, which surveyed 1,500 participants. The survey revealed that 39% of Canadians are hesitant to buy or lease a vehicle in 2023, primarily due to high inflation.
If you have plans to buy or lease a vehicle in this market, you should carefully consider the following factors.
Your budget and overall financial situation is a significant factor when deciding to buy or lease a vehicle. If you’re working with a limited budget, purchasing a used vehicle may be more cost-effective, as you’ll find more options.
For example, you can visit a local used car dealer, Kijiji, or Facebook Marketplace to find cars under $15,000. If you’re just looking for a cheap car to get you from point A to B, this is generally the more responsible decision.
When leasing a vehicle, you’ll be exclusively looking at brand-new cars, as dealers don’t lease used cars.
Similar to financing a car, you’ll be required to make an initial payment. However, this payment doesn’t contribute to your ownership of the car. It’s just an initial payment on your lease term.
Lease payments on a brand-new car are almost always higher than finance payments on a used car valued at half the price.
Payments made on a brand-new car lease are going to be comparable to finance payments on the same brand-new car.
That being said, if you’re looking at a brand-new car anyway, you may find it more affordable to lease a car. The initial lease payment will likely be lower than making a 20% down payment if you were to finance the same new car.
Overall, buying a car offers greater flexibility in finding a vehicle that fits your budget.
If you’re leasing or financing a car, you’ll always be required to purchase full-coverage auto insurance for the duration of the lease or finance term. Since the car doesn’t belong to you, dealers and financial institutions must ensure that their asset is covered in case you’re involved in an accident.
The main difference is that when you complete your payment term on a financed vehicle and pay it off in full, you’re free to choose your own insurance policy.
This means that you can opt out of your costly full-coverage policy for something cheaper.
Another thing to consider is that leased vehicles are often newer models, which can incur significantly higher insurance costs than purchasing a used vehicle.
Overall, purchased vehicles may have lower insurance costs than leased vehicles, as the owner can personalize their policy to fit their budget.
When you lease a vehicle, you’ll be given limited mileage. The average three-year lease allows the driver to put 36,000 miles on the car, which allows you to drive an average of 1,000 miles per month.
This may be fine if you just use the car to commute to and from work. However, it limits you from taking long road trips or using your car to make side money as an Uber or Lyft driver.
Most dealers offer the option to purchase additional miles upfront, which can significantly increase your lease payments. You’ll be charged a flat fee for each additional mile if you go over the allowed mileage.
On the other hand, purchased vehicles have no mileage limits (even if they’re financed). This makes them a better choice for people planning to put more miles on their cars.
Purchasing or financing a vehicle allows you to drive as much as you want while leasing a vehicle incurs mileage restrictions.
If you’re leasing a vehicle, you can forget about any customization. Since the car doesn’t belong to you, you’re not allowed to customize the body, frame, or engine in any permanent way. You’ll be limited to simple cosmetic modifications that are easily reversed, such as:
- Custom wheels (you must return the car with its original wheels)
- Vehicle wraps and decals (must be removed before returning)
- Window tinting
- Seat covers
Attempting to modify the engine, exhaust, or suspension on a leased vehicle violates your terms, will void the warranty, and could have considerable consequences.
The dealer will charge you extra to remove and replace modified parts with original parts and may also impose additional depreciation fees, which can add up to thousands of dollars or more.
If you plan on customizing your car significantly, I suggest buying or financing your car. You’ll be free to customize it however you see fit. Just keep in mind that some modifications could void the manufacturer’s or dealer’s warranty, so weigh the options carefully.
Although leased cars are typically brand-new models, they will also be the more standard models. This is especially true for high-demand models, which may already have a long wait-list of eager buyers.
If you’re looking for an exclusive limited-release vehicle, you’ll usually need to purchase or finance it.
When you purchase a vehicle or complete your finance term, you own it outright. This means that you can sell your vehicle for its full cash value or use it as collateral for a loan.
You’ll never be able to build equity in a leased vehicle, though. Payments made on a leased car are essentially thrown out the window, and you’ll never see the money again.
Even financed vehicles offer significantly more flexibility than leased vehicles. For example, if you’ve paid off half of your vehicle, you can use your equity in the vehicle towards a trade-in.
If the vehicle you’re swapping for is cheaper than the car you’re trading in, you can use the extra amount to reduce or eliminate your down payment.
Overall, owned and financed vehicles offer more financial flexibility to leverage the value of your vehicle.
Are you planning to use the vehicle personally as a daily or weekend driver? Or will it serve as a commercial work vehicle?
Commercial vehicles typically see more use, which means it’s all too easy to surpass your lease’s mileage limit and incur additional charges from the dealer.
Additionally, leased vehicles must be returned in good condition. Commercial vehicles are more likely to get scratched, dinged, or dented. You’ll be liable to pay for all of this cosmetic damage when you return your lease.
If you’re leasing a car mainly for your business, you can actually take off a portion of your lease payments when you do your taxes. The catch is you can only deduct up to $800 per month plus HST. So, you’re looking at about $9,600 max a year that you can write off.
One thing to keep in mind though, there’s a tax rule from the CRA that puts a cap on deductions for what they call “luxury” cars. This also applies to lease payments.
One of the nice things about leasing a car is that the dealer usually covers maintenance as part of your lease contract. This means that you won’t have to pay for oil changes, tire rotations, or mechanical issues that come up (unless you directly cause them).
When you purchase a car, you’ll be responsible for all of the maintenance and repairs outside of the manufacturer’s warranty. The only exception to this is if you purchase an additional maintenance package from the dealer, which will be added to the cost of your purchase.
Leasing a car could be a better option if you’re looking for stress-free maintenance and repairs.
With the exception of rare supercars and timeless classics, almost all cars depreciate over time. Leased and purchased cars depreciate, and there’s no way to avoid it.
The difference is when you pay for depreciation.
Estimated depreciation is included in the cost of your lease term, which means you pay for the depreciation monthly.
When you purchase a vehicle, you’ll “pay” for the depreciation later in the form of a lower resale and trade-in value.
Overall, vehicle depreciation affects owned and leased vehicles the same.
To incentivize new car shoppers to purchase low and zero-emission vehicles, the CRA is offering a tax credit (up to $5,000) to taxpayers who purchase or lease a brand-new qualifying vehicle.
The difference is that shorter-term leases may not qualify for the full tax credit. For example, a 48-month lease may qualify for the full $5,000 credit, while a 24-month lease may only qualify for half of the tax credit.
Both purchased and leased vehicles are eligible for green vehicle tax credits. However, short-term leases may limit how much of the credit you can receive.
Purchasing or financing a vehicle will give you more options in terms of the cost of the car, your insurance policy, the mileage you can put on it, and how it can be customized.
That being said, leased vehicles tend to be more hassle-free in terms of maintenance, which may make them a good choice for those who don’t drive as frequently. Just remember that they’re essentially rentals, which means you won’t get any of your money back in the future.
Whether you’re financing or leasing a new car, having a good credit score can reduce your rates and help you get a better deal. Check out my simple guide on how to improve your credit score by 100 points next!