Area of Law: Consumer Law
Answer # 804
Buying or leasing a new vehicleRegion: Ontario Answer # 804
Buying or leasing a new vehicle each has its own advantages and disadvantages. Depending on your preferences and particular financial situation, one option may be more or less suitable for you. Although leasing usually has the short-term benefit of lower monthly payments, buying has the long-term benefit of full vehicle ownership.
What is leasing?
Leasing a vehicle can be compared to a long-term vehicle rental. By signing a lease contract, you are agreeing to pay an amount each month for the use of the vehicle over a specified number of years. The number of years you agree to is called the “term” of the lease. During the lease, you do not own the vehicle. At the end of the term, you may have the option to simply stop making payments and return the vehicle to the leasing company, or you may be able to fully purchase the vehicle for a specified price.
How are the monthly payments calculated?
Your monthly lease payments will generally be equivalent to the vehicle’s depreciation, which means the decline in the value of the vehicle over time. So, for example, if the depreciation on a $30,000 vehicle over a three year lease term is $10,000, it means that three years later, the vehicle will only be worth $20,000. Your lease arrangement would finance that $10,000 depreciation by spreading out the $10,000, plus the interest, over the three year term in the form of your monthly payments.
Unlike leasing a vehicle, buying a vehicle means that you become the legal owner of the vehicle. Although you may have financed the vehicle through a bank, ultimately you will be the owner of the vehicle.
Advantages of leasing
Leasing is a better option than buying in three specific circumstances. First, leasing is beneficial for people who want to change their vehicle for a new vehicle every two years or so. Generally, leasing will be extremely expensive over the long run for someone who intends to keep the same vehicle for more than two years. Second, leasing may be a better choice if you are using the vehicle for business. By leasing, you can deduct the lease payments as an expense rather than deducting the depreciation which tends to be less.
Third, leasing is a more affordable short-term choice in many cases. Although leasing can become more expensive in the long run, your down payment will be less and your monthly lease payments will generally be lower than monthly loan payments on the purchase of a vehicle.
Disadvantages of leasing
Although leasing has its advantages, there are a number of drawbacks:
- You do not own the vehicle, and you may never own the vehicle unless you pay a large sum at the end of your lease, usually called a “buy back.” You are basically paying rent on the vehicle for a certain period.
- There may be certain restrictions on the use of the vehicle, and you may not be able to use it in another province or country.
- You may have to pay penalties at the end of your lease if you exceed the mileage limitations, and you will have to pay penalties if you want to end the lease early.
- You are obligated to maintain the vehicle in accordance with the maintenance schedule set out in the lease contract.
- If you decide that you do not want to continue leasing the vehicle, you are obligated to pay for the full term of the lease. If you try to break the contract, the leasing company will normally sue you.
- There are often “hidden” or “forgotten” costs at the end of the lease, such as administrative and “wear and tear” costs that could result in a lease costing more than you first thought.
Before signing a lease agreement, make sure you fully understand your obligations. Ask about a number of details, such as your responsibility on the residual value, gap insurance, residual value insurance to protect you if your vehicle depreciates faster than projected, and whether the lease is open or closed. For more information on leasing a vehicle, call the Automobile Protection Association, or visit apa.ca.
Advantages of buying
Although buying a vehicle may require a larger down payment and possibly higher monthly payments, your money will be going toward a vehicle that you will eventually own. Buying a vehicle has a number of other advantages, including no restrictions on how and where you can use the vehicle. If you are using the vehicle for business, you can deduct the depreciation of the vehicle and the interest on any money you borrowed to finance it.
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