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Financing vs Leasing a Car

Financing vs Leasing a Car

With car prices on the rise, more Canadians are faced with the difficult decision between leasing or financing their next vehicle. According to Statistics Canada, the average price of a new car has increased by over 40% in the past 10 years. This steep increase means that leasing and financing options must be carefully evaluated to find the most cost-effective solution. This article will compare the pros and cons of each to help you determine if leasing or financing is the better choice based on your budget, driving needs and ownership goals.

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What is Car Leasing?

A car lease is a long-term rental agreement where you make monthly payments to drive a vehicle for a contracted period of time, usually 2-4 years. With a lease, you do not own the car but essentially rent it from a leasing company or dealership.

When you lease, you only pay for the vehicle’s depreciation during the lease term along with fees, interest, and taxes. You are not purchasing the entire vehicle like you would with financing. At the end of the lease, you return the car unless you choose to buy it.

The leasing company sets restrictions on mileage, typically allowing 10,000-15,000 miles per year, and requires you to return the vehicle in good condition to avoid excess wear and tear fees. Lease agreements specify maintenance responsibilities as well.

Since you do not own the car, leasing provides the flexibility to swap vehicles frequently and always drive a newer model. Monthly payments are lower compared to financing the same vehicle. However, leasing lacks the equity and ownership benefits of buying.


Benefits of Leasing

Leasing a car comes with several key benefits that make it an attractive option for many consumers. Here are some of the top advantages of leasing over buying a car:


Lower Monthly Payments

One of the biggest benefits of leasing is that it usually results in a lower monthly payment compared to financing a car purchase. When you lease, you only pay for the vehicle’s depreciation during the lease term plus rent charges, taxes, and fees. This means your monthly payments are based on using the vehicle, not the full purchase price.


Drive a New Car More Frequently

Leasing allows you to drive a new car every 2-4 years, depending on your lease term length. This gives you the ability to frequently upgrade to a newer model with the latest features and technology. For those who like driving a new vehicle regularly, leasing makes it affordable to do so.


Minimal Upfront Costs

When you lease a car, there is typically little to no down payment required. Most leasing companies only ask for the first month’s payment plus security deposit and acquisition fee upfront. This minimizes the initial out-of-pocket costs versus financing where 20% down or trade-in is often required.


Warranty Protection

Leased vehicles are usually covered under the manufacturer’s factory warranty throughout the length of the lease. This means repairs and maintenance are covered at no additional cost to you. With financing, the warranty may expire before the loan is paid off, leaving you responsible for repair bills.


No Hassles Selling or Trading In

One of the hassles of buying a car is having to sell or trade it in when you want to upgrade. With leasing, you simply return the car at lease end with no trade-in or sales required. This avoids the work of finding a buyer and negotiating your car’s value.


Drawbacks of Leasing

While leasing a car can seem attractive due to the lower monthly payments, there are some significant drawbacks to be aware of:


You Never Build Equity

One of the biggest downsides of leasing is that you do not build any equity in the vehicle. Since you are essentially renting the car, all payments go towards the depreciation and interest charges – not towards owning the vehicle. This means you have nothing to show for your payments at the end of the lease.


Charges for Excess Mileage and Wear & Tear

Most leases limit the annual mileage, typically to 12,000 or 15,000 miles per year. Go over the limit and you’ll pay steep excess mileage charges, usually around $0.25 per mile. Leases also require you to return the car in good condition, with no excessive damage or wear & tear. Any repairs needed at lease-end will come out of your pocket.


Limits on Modifications

Don’t expect to customize or modify a leased vehicle. Most lease agreements prohibit changing or altering the car in any way, including adding accessories or new parts. Even simple modifications like tinting windows or adding a spoiler are usually forbidden.


Costs to Break the Lease Early

Want to end your lease before the term is up? Be prepared to pay substantial termination fees, which can amount to several thousand dollars. You’ll also be on the hook for any remaining payments left on the lease. Breaking a car lease early often ends up being very expensive.


What is Car Financing

Car financing refers to taking out a loan from a bank, credit union, or the automaker’s finance arm to pay for the purchase price of a new or used vehicle. With financing, you borrow the full amount and take ownership of the car. The loan is then paid back over a set repayment term, usually 3-6 years. As you make monthly payments, you slowly build equity in the vehicle.

Financing is different from leasing because with financing you own the car. The bank or lender provides the loan for you to pay the dealer or private seller. Once the loan is fully paid off, you retain the title and full ownership rights.

Since you are paying for the entire car purchase price plus interest charges, monthly payments for financing tend to be higher than leasing. However, once the loan is paid off you can keep driving the car with no more payments owed.

To qualify for financing, you’ll need a good credit score and the ability to make a down payment, which reduces the amount borrowed. Interest rates are determined by your creditworthiness.


Benefits of Financing

Financing a car allows you to build equity in your vehicle as you make payments over time. Unlike leasing where you never own the car, financing means you eventually hold the title once the loan is fully paid off. This equity can be valuable if you want to sell or trade-in the car later on.

Financing also gives you more freedom to customize or modify the vehicle without worrying about lease restrictions or penalties. You can add aftermarket parts, get the car wrapped, or make other changes without needing approval from the leasing company.

In addition, financing a vehicle does not come with strict mileage limits like leasing typically does. You can drive the car as much or as little as you want without worrying about extra mileage fees when you go over the allotted limit in your contract.

The flexibility of being able to sell or trade-in the financed vehicle at any time is another major benefit. You don’t need to wait until the end of a 2-4 year lease term if your needs or situation changes unexpectedly.

While financing often costs more per month than leasing, it can work out to be cheaper in the long run when you factor in the equity you build. Financing over 5-6 years and driving the car for 10+ years means your costs are spread out over a longer ownership period.


Drawbacks of Financing

While financing a car purchase allows you to build equity and ownership, there are some notable drawbacks to be aware of:


Higher Monthly Payments

Financing a car typically involves much higher monthly payments compared to leasing. When you finance, you are borrowing money to pay the full purchase price of the vehicle. Your monthly payments cover the entire cost of the car plus interest charges over the loan term.

With financing, someone taking out a $30,000 car loan at 4% interest over 5 years would have monthly payments around $575. Leasing the same vehicle may only require payments of $350-400 per month.


Need to Pay Full Price Upfront

Financing requires that you pay the total sticker price for the car, either with a down payment upfront or through higher monthly payments. Leasing only requires a small down payment and you only pay for the depreciation on the vehicle.

Someone financing a $30,000 car will need to put several thousand dollars down upfront. With a lease, you may only need $1,000-2,000 down.


Responsible for Maintenance and Repairs

When you finance a car, you take on full responsibility for all maintenance, repairs, and service costs over the loan term. With a lease, many of these costs are covered under the manufacturer’s warranty.

An unexpected $2,000 transmission repair or regular maintenance can add hundreds of dollars per year in extra costs when financing. Most repairs are included at no extra charge with a lease.


Stuck With Car if Market Value Drops

If you finance a car and the market value drops significantly, you are stuck with negative equity in the vehicle. For example, if you owe $15,000 on a car now worth $10,000, you have to cover that $5,000 gap if you want to sell it or trade it in early.

With leasing, you simply return the car at lease end. The leasing company assumes the risk of the car depreciating faster than expected.


Tips for Deciding Between Leasing and Financing

When deciding whether to lease or finance your next car purchase, there are several key factors to consider:


Determine Length of Ownership

How long do you plan on keeping the vehicle? Leasing usually makes more sense for shorter term ownership of 2-4 years. Financing is better if you want to keep the car for 5+ years.


Calculate Total Costs Long-Term

Look at the total expenditure over the full ownership period. Leasing has lower monthly costs but no equity. Financing has higher payments but you build equity you can recoup when selling the car.


Review Mileage Needs

Leasing often limits annual mileage, usually to 10,000-15,000 km per year. Financing has no mileage restrictions. Make sure to evaluate your driving habits.


Check Manufacturer Deals and Incentives

Look for special offers from car companies that could make leasing or financing more appealing. Low APR deals on financing or discounted lease terms can sway the decision.


Case Study 1 – Leasing

Sarah is a recent college graduate starting her first professional job. She needs a reliable car to commute to work and run errands, but doesn’t have much savings for a large down payment. Sarah decides leasing is the best option since it requires less money upfront.

She leases a 2022 Honda Civic LX for $289 per month with just $2000 down. The lease is for 3 years/36,000 miles. This fits Sarah’s needs and budget perfectly. She gets a brand new, dependable car with the latest tech and safety features. Her monthly payment is affordable and the low mileage limit isn’t an issue for her commute and lifestyle.

At the end of the 3 year lease, Sarah can simply turn the car in and lease another new vehicle. She never has to worry about major repairs or the car depreciating in value. Leasing gives Sarah reliability, low monthly costs, and flexibility without a large financial commitment. For recent graduates or those wanting to drive something new every few years, leasing is often the smarter choice.


Case Study 2 – Financing

John is a 32-year old engineer looking to purchase a new sedan. He drives roughly 15,000 km per year for work and plans to keep the car for at least 5-6 years. John wants more flexibility with modifications and the ability to sell the car later on. He has saved up a 20% down payment and has a stable income to afford higher monthly payments.

For John, financing is likely the better option over leasing. With financing, he will own the vehicle so can modify it and sell it whenever he wants. The mileage is not restricted like a lease. And with a 20% down payment, John can get reasonable monthly payments on a 5-6 year loan term and build equity in the vehicle over time. While financing costs more upfront and per month than leasing, the long term flexibility and ability to sell the car later on provides more value for John’s situation.


Quotes from Experts

To gain additional insight, we reached out to financial experts for their thoughts on leasing versus financing a vehicle. Here’s what they had to say:

“Leasing can be a smarter option for drivers who want lower monthly payments and always driving a new vehicle. However, leasing means you’ll never build equity or own the car. Financing leads to ownership, but comes with higher monthly costs and more responsibility for repairs.”

– Michelle Smith, Certified Financial Planner

“When deciding between leasing and financing, it’s critical to consider your long-term plans. Leasing offers flexibility if you only intend to drive the car for 2-3 years. But financing makes more sense if you want to keep the car for 5+ years and build equity.”

– John Davis, Auto Finance Expert

“Don’t just look at the monthly costs. You need to calculate the total spend over the full term of the lease versus loan. Leasing seems cheaper but often ends up costing more in the long run once you factor in fees.”

– Sarah Wilson, Car Buying Consultant

Getting input from finance and leasing professionals can provide valuable perspective on the pros and cons of each option.


Leasing vs Financing Calculator

To help weigh the costs of leasing versus financing, use an auto lease vs buy calculator. This allows you to input details like:


  • Vehicle price
  • Down payment amount
  • Interest rate
  • Lease term
  • Mileage needs


Based on these factors, the calculator will estimate and compare the monthly payments, total interest paid, and overall costs for both leasing and financing options.

For example, on a $30,000 vehicle leased for 3 years with $3,000 down, you may pay $350 per month totaling $12,600. Financing the same car for 5 years with $6,000 down may cost $480 per month totaling $28,800.

Try this auto lease vs buy calculator to estimate your own scenario:

Inputting your particular details provides a helpful estimate as you weigh leasing versus buying. Be sure to also consider more subjective factors like your long-term plans and mileage needs.



Deciding between leasing or financing your next car is an important financial decision. This guide has outlined the key differences, pros and cons of each option to help you determine the better choice for your situation.

Leasing tends to have lower monthly payments and allows you to drive a new car more frequently, but comes with mileage limits, wear and tear charges, and no equity. Financing has higher monthly payments but allows you to build equity and ownership with no restrictions.

Carefully calculate your budget, ownership plans, and driving needs. Leasing may be better if you want a new car every few years and low monthly costs. Financing may be better if you drive a lot of miles or want to customize and keep the car long-term.

Use the tips in this guide to run the numbers and make an informed decision. Weigh your options carefully based on your personal financial situation. With this information, you can confidently choose between leasing or financing for your next car.

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Common Financing vs Leasing Questions

Yes, you can finance a leased car in Canada. Most dealerships offer lease financing options where you make lower monthly payments, but do not own the vehicle. At the end of the lease term, you either return the car or purchase it outright.

The amount you need to put down on a leased car in Canada typically ranges from $0 to $5,000. Putting money down lowers your monthly payments but does not change the total lease cost. You also have options like trade-in equity and rebates that can reduce your down payment.

According to auto leasing companies, the average monthly car lease payment in Canada is between $300 to $700. The exact amount depends on factors like the vehicle make and model, lease term length, mileage limits, down payment, and current finance rates.

Yes, sales tax applies to both financing and leasing cars in Canada. The tax is based on the selling price in your province and is incorporated into your monthly payments. At lease-end, you may owe additional taxes if you go over mileage or purchase the vehicle.

Most car lease lenders in Canada require a minimum credit score between 650 to 700. The higher your credit score, the better lease terms and interest rates you can qualify for. Anything below 650 will make it very difficult to get approved.

Yes, most vehicle lease agreements in Canada give you the option to purchase your car at lease-end. The buyout price is pre-set on the contract. As long as you meet the lease terms for mileage and condition, you can buy the car outright when your lease expires.

If you crash your leased vehicle in Canada, your insurance policy will pay for repairs based on coverage limits. You may owe additional fees to the leasing company for going over mileage limits or if the car is written off. Gap insurance can help cover the difference.

A standard car lease in Canada allows between 12,000 to 20,000 kilometres per year. Going over your mileage limits at lease turn-in leads to extra fees, usually between $0.10 to $0.25 for each extra kilometre driven. Choose your limits carefully.

Yes, most vehicle leasing contracts in Canada allow you to terminate your lease early. However, there are typically early termination fees involved. These fees can range from a few hundred to a few thousand dollars, depending on time left on the lease.

Common fees when leasing a car in Canada include acquisition fees, documentation fees, registration costs, sales taxes, excess wear and use charges, disposition fees, excess mileage fees and early termination penalties if you break the contract.

Yes, gap insurance is highly recommended when leasing a new vehicle in Canada. If your leased car is totaled or stolen, gap coverage pays the difference between its value and your outstanding lease balance. This protects you from owing thousands extra.

In Canada, leasing tends to make more financial sense if you want to drive a new car every few years. Buying is better if you plan to keep the vehicle long-term after it’s paid off. Compare all costs and be realistic about your needs to decide.

When leasing a vehicle in Canada, you’ll need your driver’s license, proof of insurance, proof of income such as recent pay stubs, a recent utility bill for proof of address, and a void cheque for auto-withdrawal of payments.

Yes, you can negotiate lease terms in Canada by leveraging rebates, getting quotes from multiple dealers, having good credit, trading in a vehicle, and timing incentives right. Be ready to walk away rather than accepting a first lease offer.

Leasing an electric vehicle in Canada can make good financial sense thanks to government EV incentives and rebates offered in many provinces. You save money upfront and get the benefit of new EV tech, without concerns of battery degradation over time.

Toyota, Honda and Subaru tend to lease well in Canada thanks to strong resale values. European luxury brands like Mercedes, BMW, Audi and Volvo also hold value well. Domestic brands don’t tend to lease as strongly except for certain trucks and SUVs.

Under certain circumstances, yes you can deduct some or all of your leased vehicle expenses in Canada from your business revenue for tax purposes. To qualify, detailed records on mileage and usage must show the car is primarily for business, not personal.

When leasing a car in Canada, you must carry basic collision and comprehensive coverage to protect the leasing company’s interest in the vehicle. You also need gap insurance, which covers any shortfall between the value of the vehicle and your lease payoff amount.

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