Ownership is the primary difference between car finance and car lease agreements. When you finance your car, every payment you make goes toward owning the car. Once the loan is paid off, you have 100% equity. As a result, loan payments are generally higher than lease payments because you’re covering the entire value of the car.
When leasing a car, you have to return the car to the dealer at the end of the contract. The payments you make each month cover the depreciation of the car’s value. Leasing is a lot like renting. Essentially, you’re paying to borrow the car and have the option to buy the car once the term is up.
In general, monthly lease payments are less expensive than financing. However, lease agreements come with annual kilometer restrictions, early termination stipulations, and accumulative wear and tear charges. Therefore, you must take these costs into account when you’re deciding whether to lease or finance.
How Does Car Financing Work?
When it comes to car finance, you need to enter into a contract with a lender where you agree to pay off the loan over a fixed period of time. Dealerships work with a variety of lenders who are well suited to working with individuals in various financial situations. Once the loan is approved, you are responsible for making every monthly payment on time and in full. Once the term of the loan finishes, the vehicle officially belongs to the borrower.
Approval rates are usually based on a borrower’s financial situation. However, financing is a great way to rebuild your credit. Furthermore, lenders will often offer options to refinance and trade-in the vehicle before the loan is up.
How Does Car Leasing Work?
Leasing a vehicle requires that you make regular payments on a car over a short-fixed term (typically 2-4 years). Once the lease term is over, you have to return the vehicle to the dealer. The main benefit of car leasing is that you don’t have to pay for the car’s complete value. Instead, you only have to pay for the value of the car you’ve used. Therefore, you’re really just paying the depreciation cost. As a result, the monthly payments for leasing a car are usually lower than financing payments.
The Difference Between Leasing and Financing
When you finance a car, the entire cost of the vehicle, including the fees and taxes, is spread out over the term’s length. Therefore, the shorter the term, the higher the monthly payments will be. Conversely, the longer the term, the smaller the monthly payments will be. However, on average, car loans range from six to seven years.
When you lease a vehicle, the monthly payments are calculated based on the car’s residual value (the value of the vehicle that will be leftover once the lease is finished) and the car’s total sale price. Once the term on the leased car is up, you have to either buy-out the vehicle or return it and take out a lease on a different car. According to Canadadrives.ca, most Canadians who lease don’t buy the car. Instead, they replace it with a new car and a new lease, which restarts the payment process.
Financing or Leasing: What’s the Best Option for Canadians?
Leasing a car is a convenient option for Canadians who don’t want to own a vehicle and want lower monthly payments. Furthermore, the leasing process is appealing to people who like to change their cars every few years to the models that are newer and fall within the warranty period.
That being said, over time, the cost of leasing several vehicles will eventually be higher than the cost of owning a car. By financing a car, you have the freedom to use the vehicle at your convenience and don’t have to worry about how much mileage you use. With a leased car, you have to stay within set kilometer-limits. If you go over these limits, you will receive a hefty fine.
Therefore, one option is no better than the other. Instead, it depends on your current financial circumstances and driving needs. For instance, if you plan on driving a lot, financing a car is the better option. However, if you don’t plan on driving a lot, leasing is a good option.
