Leasing vs. Financing
Is it better to lease a new vehicle or finance one? While leasing could be the best option for one person, it might not be right for another. When you lease a vehicle, you purchase the use of that vehicle for a specified period of time. At no point are you the owner of the vehicle, yet you are responsible for the vehicle's maintenance, along with your auto insurance premiums and registration costs. You're also subject to a number of conditions regarding the distance you can drive the vehicle without penalty.
Is a lease right for me?
Ask yourself the following questions before making the decision to lease:
- Do you want to own the vehicle? With a lease, you are not the owner. Rather, you pay for the use of the vehicle for a specific period. However, you are solely responsible for its condition. At the end of the lease, if the lessee is not satisfied the vehicle has been properly maintained, you could be penalized.
- How far do you drive annually? Mileage limits are imposed by the lease agreement, and excess mileage charges can substantially increase the amount you owe at the end of the lease. So, if you tend to drive beyond the annual limits stated in the lease agreement - usually 25,000 to 30,000 km - you should consider conventional financing as your best option.
What you need to know
What's in a lease?
Just as you would negotiate the financing of a car, almost everything in a lease is also negotiable including:
- Asking price
- Residual value
- Excess mileage charges
- Purchase option price
As a down payment, most leases require the first month's payment and a security deposit equal to one monthly payment. This security deposit may or may not be refundable. You should also be prepared for some upfront charges, like air conditioning and tire taxes.
Here are some helpful tips to keep in mind when negotiating the terms of your lease:
- Try to match the term of the lease with the length of time you plan to use the car - a two or three-year term is ideal.
- Aim to keep the lease term shorter than or equal to the length of the manufacturer's warranty. This will assist in limiting the amount you may be required to pay in maintenance expenses.
- Don't compare leases solely by the monthly payment. Since different leasing companies offer different deals, you should examine all the conditions and requirements - including the annual driving distance and limit, penalties for early termination and how 'normal wear and tear' is defined.
Conditions of a lease
Since you are not the owner of a leased vehicle, there are many conditions you must abide by. For example, you are not normally permitted to modify a leased vehicle. Any modifications contrary to the lease agreement will cost you.
You are also responsible for any damage to the vehicle in excess of 'normal wear and tear.' Be sure you are clear on the lessee's definition of 'normal wear and tear,' so you are not subject to inflated charges at the end of your lease.
Many leasing companies offer insurance plans to cover the difference between the replacement cost and what you owe on a lease, in case your vehicle is stolen or written off in a collision. You should check with your insurance company to see if they can offer you more competitive coverage.
Terminating a lease
With most leases, you are not allowed to purchase the vehicle or terminate the lease prior to the lease term's expiry.
If you choose to terminate a lease prematurely, you can expect to pay a hefty penalty. Some lease companies will charge anywhere from six months to a full year of lease payments as the penalty for early termination.
Types of leases
Close End Lease: The lessee is not responsible for the value of the vehicle when the lease term is expired. Also called a net-net, operating or walk away lease.
Open End Lease: The lessee is responsible for the value of the vehicle at the end of the lease term. Also called a finance or capital lease.
Capitalized Cost: The total cost of a lease, including the price of the vehicle and any applicable fees, taxes and other costs upon which the term of the lease is calculated.
Capitalized Cost Reduction: Cash down payment made at the start of the lease term, in order to reduce the size of monthly payments over the term of the lease.
Gap Insurance: Many leases offer insurance plans to cover the difference between the replacement cost and what you owe on a lease, should the vehicle be stolen or written off in a collision. Also called a deficiency liability waiver or guaranteed asset protection.
Full Disclosure Lease: A lease whereby key pieces of information are available to the lessee.
Lease: An alternate method of financing a new vehicle. The buyer purchases the use of a vehicle for a specified period, rather than purchasing the vehicle itself.
Lease Rate: Term used for the finance rate the lease payments are based upon. Usually appears as a decimal (e.g., 0.006). To arrive at an annual percentage rate, multiply this figure by 2,400. For example: 0.006 x 2,400 = 14.4%.
Lease Term: The length of time for which the lease is in effect - usually two, three or four years. It will be stated in the lease agreement.