Leasing a car can be a smart option if you’re not ready to commit to buying. It allows you to drive a new vehicle for a fixed period with lower monthly payments and a smaller down payment compared to buying. However, it’s essential to be aware of the pros and cons, as well as the steps involved, to ensure it’s the right decision for you.
What is a Car Lease?
A car lease is a contract that allows you to drive a new vehicle for a set period (typically 2 to 4 years) at an agreed monthly rate. Unlike financing, where your payments contribute to vehicle ownership, lease payments cover the car’s depreciation and your use of it. At the end of the lease, you either return the vehicle or purchase it at market value.
Pros and Cons of Leasing a Car
Benefits:
- Lower Payments: Lease payments are generally lower than loan payments because you’re only paying for the vehicle’s depreciation during the lease term.
- Flexibility: Leases last 2-4 years, allowing you to regularly upgrade to new models with the latest features.
- Maintenance: Many leases include a manufacturer’s warranty, often covering routine maintenance.
Drawbacks:
- No Ownership: You don’t own the car; once the lease ends, you have to return it with no equity toward a new car.
- Mileage Limits: Exceeding the mileage limit (typically 25,000 km/year) can lead to additional fees.
- Potential Long-Term Cost: Repeatedly leasing cars can cost more over time compared to buying a car outright.
Who Pays for Insurance on a Leased Vehicle?
When leasing a car in Canada, you’re responsible for the insurance premiums. Leasing companies usually require higher coverage limits, including liability, collision, comprehensive coverage, and often gap insurance, which covers the difference between the car’s value and the remaining lease balance if the vehicle is totaled.
Can You Return a Leased Car Early?
Yes, but it often comes with substantial costs, including:
- Early Termination Fees: You may need to pay the remaining lease payments, early termination fees, and any depreciation costs.
- Negative Equity: If the car’s market value is less than the remaining lease obligations, you might have to pay the difference.
- Lease Buyout: You can buy out the lease early, then sell the car, though this depends on the car’s market value.
- Lease Transfer: You can transfer the lease to another person, but this may involve fees, and the new lessee must be approved by the leasing company.
Buying Out a Car Lease in Canada
Buying out a car lease involves purchasing the vehicle at the end of the lease term or earlier. The process includes:
- Review the Lease Agreement: Check the residual value (the car’s value at the end of the lease) and any fees.
- Evaluate the Car’s Market Value: Compare the residual value with the car’s market value to see if it’s a good deal.
- Arrange Financing: If necessary, secure a loan to cover the buyout amount.
- Notify the Leasing Company: Inform them of your intent to buy out the lease.
- Complete the Paperwork: Sign the buyout form and loan documents, if applicable.
- Make the Payment: Pay the buyout amount through a lump sum or financed loan.
- Transfer Ownership: Receive the vehicle title and necessary documents from the leasing company.
- Register the Car: Register the car in your name and pay any applicable fees.
Lease vs. Finance
Here are key differences between leasing and financing a car:
- Ownership: Leasing is like renting, while financing leads to ownership once the loan is paid off.
- Payments: Lease payments are lower but don’t contribute to ownership. Finance payments are higher as they pay off the full car value.
- Mileage: Leases often have mileage limits, while financed cars don’t.
- Customization: Leased vehicles usually can’t be customized, but financed cars can.
- Resale Value: Leasing offers no resale value, while financed cars can be sold or traded in later.
Car Leasing Options in Canada
- Standard Leases: Drive a new vehicle with a small down payment and monthly payments. Return or upgrade at the lease’s end.
- Lease to Own: Make payments toward vehicle ownership, often with more lenient credit checks, but limited to used vehicles.
- Lease Takeovers: Assume someone else’s lease, often with lower upfront costs, but be cautious of potential vehicle condition issues.
- Used Car Leasing: Less common, but available, often with higher maintenance costs as the vehicle ages.
Can You Get a One-Year Car Lease?
One-year leases are rare and typically expensive due to high depreciation costs. Alternatives include long-term rentals or lease takeovers, where you assume the remaining term of another person’s lease.
How to Lease a Car in Canada in 9 Steps
- Check Your Credit Score: Aim for a score above 660 for easier lease approval.
- Create a Budget: Factor in all costs, including insurance, maintenance, and fuel.
- Find the Right Car: Research online to find a vehicle that suits your needs.
- Find the Right Dealership: Compare offers from different dealerships.
- Book a Test Drive: Ensure the car meets your expectations.
- Consider a Down Payment: It’s optional but can lower monthly payments.
- Review Your Lease Agreement: Examine all terms and conditions carefully.
- Start Making Payments: Make timely payments to avoid penalties.
- Remember Routine Maintenance: Keep the car in good condition to avoid lease-end fees.