So you’ve compared features, safety ratings, and gas mileage, and now you’re ready to get your new ride. You’ve narrowed your choices down from so many makes and models, but there’s still one question you can’t answer: leasing vs. buying a new car, which is better for you?
Deciding how to finance this large purchase in your life is just as important as figuring out your car insurance coverage. There are some obvious advantages to each option: buying a vehicle will cost more every month, but by the end of the term you’ll own the car. Leasing on the other hand has a significantly lower cost per month, but there won’t be anything to resell once your contract is up.
Don’t ask yourself whether buying or leasing is better for you, ask which do you need more: increased cash flow or equity? Let’s take a closer look at the less-obvious benefits and drawbacks of leasing vs buying a new car.
Leasing vs. buying a new car
Let’s assume, for the sake of simplicity, that the car you want costs $20,000 CAD.
If you’re considering buying the car, think about the following:
- Consider the depreciation of the type of car you’ve selected; you’ll only create equity for yourself if the cars value doesn’t drop below what you owe for it.
- If you don’t have the funds to make an outright purchase, then you’ll need to take out a loan.
- There are several types of auto loans, but here we’re talking specifically about new car loans.
- If you secure a loan with no down payment, you’re going to have to pay off the full $20,000 (plus interest) over the term of the loan.
- So don’t be fooled into thinking zero down payment is a bonus – if you don’t have any money saved to put down, then yes it’s helpful. Otherwise, we recommend paying what you can to decrease the interest you’ll rack up over time.
- Your monthly payments will depend on two main factors: down payment and interest rate.
- Typically when buying a new car, your monthly payments will be higher but you can get a much better interest rate than when you’re leasing a new car.
- Although the monthly financial burden of owning is more than leasing, it’s a short-term expense with ownership at the end of the tunnel.
At the end of the day, buying is a huge financial commitment and not ideal for everyone’s financial situation. (And don’t forget to include your insurance coverage in your budget estimates!) Consider buying vs leasing your new car if your income is stable and/or increasing, your monthly expenses are under control, and your savings are building.
Now let’s say you’re thinking about leasing that $20,000 new car instead…
- Instead of borrowing the amount required for the purchase of the car, you’re only borrowing the amount the car will depreciate over the term of the lease.
- That’s the essential different between buying and leasing a new car – you’re not buying the whole thing.
- That means if the car’s value is expected to depreciate 50% over a three-year lease, you only need to finance $10,000 over the lifetime of the agreement.
- Even if the lease term is shorter than the loan term, financing $10,000 instead of $20,000 will result in much lower monthly payments.
- The lower payments really help with cash flow and could give you some tax benefits if you’re self-employed.
- You’re also not shouldering the increasing maintenance burden of an aging vehicle.
- This all sounds great for your wallet, but be warned that leasing interest rates are typically much higher than financing.
- Leasing agreement also come with early termination fees and annual kilometre limits, but you often get the chance to purchase the vehicle at a discounted rate at the end of your term.
- There’s a lifestyle benefit of having a vehicle short-term, too. In 3 – 5 years time, you may have a growing family, a different job, or live in a different city that requires a different type of vehicle.
- Car enthusiasts also enjoy leasing as they can upgrade to a new make and model much more frequently than with ownership. (Mechanics that buy and resell might be the exception.)
Although maintaining this cycle means the payments never stop, you do get to enjoy the best years of a car’s life while lightening the monthly financial burden. Consider leasing vs financing if your monthly expenses are high, your savings are low, and your cash flow is strained at the moment.
The overlooked cost of leasing vs. buying
Everyone pours over price comparisons, interest rates, and down payment deals, but people often overlook a big factor in the decision—the cost of your car insurance coverage.
Deciding on leasing vs. buying a new car does not have a direct impact on your insurance premiums, but it can change the type of insurance you need.
When you lease…
- The leasing company technically owns the vehicle and will probably require you to get both collision coverage and comprehensive coverage.
- You may be required to increase your third-party liability coverage to $2 million CAD, which most lease agreements require.
- The leasing company will also be listed on your insurance policy so that, in the event your car is written off in an accident, they will be paid.
- You may want to consider securing gap insurance (see below), although some lease agreements include it.
When you own…
- Comprehensive coverage is optional for you; you only have to secure the mandatory car insurance (in Ontario). Financing agreements require you to get collision and comprehensive coverage, as well.
- You are only required to obtain $200,000 in third-party liability insurance (the mandatory minimum in Ontario and Alberta).
- You may want to consider securing gap insurance (see below).
Insurance when leasing vs. buying.
If you’ve bought a brand-new car, then you might want to consider a depreciation waiver. It’s only offered to the first owner of the insured vehicle so that the owner can be reimbursed for the market value that the owner actually paid—not just the replacement cost, which includes the depreciation calculation as well.
“About 85% of new car buyers will use some sort of financing to pay for their vehicle, according to credit reporting company Experian.” – CanadianUnderwriter.ca
If you’re leasing a brand-new vehicle, then it would be wise to add a depreciation waiver to your policy. With that in hand, your claim payout will include what you owe to the vehicle’s owner, not just the depreciated financial value.
How do I calculate my monthly car payments?
In order to do a proper comparison, you need to know how much you’ll be paying per month if you’re leasing vs buying a new car.
The Government of Canada has this handy calculator that allows you to enter the selling price, down payment amount, interest rate, and other factors.
We’ve gone ahead and calculated some scenarios for you based on our example above of a pre-tax selling price of $20,000 CAD with a 0% down payment:
- 3-Year Lease + 1.5% Interest = $641.60 / Month
- 5-Year Lease + 1.5% Interest = $390.72 / Month
- 3-Year Loan + 0.5% Interest = $559.85 / Month
- 5-Year Loan + 0.5% Interest = $337.59 / Month
*Taxes are included in this calculation.
Calculate your own custom scenarios here.
The verdict on leasing vs. buying a car
If you’re leasing, you’re paying less every month and you don’t have to worry much about maintenance, but those monthly payments are for the rest of your life.
If you’re buying, you’re going to pay more in the short-term but will eventually come out ahead with a vehicle you own or can resell (if you take good care of your vehicle and resist the urge to upgrade.)