How does leasing a car work?

Leasing is becoming more and more common. On the surface, it's easy to see the reason: It allows drivers to get into a brand new car for a lower up-front cost than purchasing it. Depending on your needs and preferences, it could be the right choice for you. However, it's important to know all of the details, and that's why we're here.

What is a car lease? Should I lease or buy a car?

A car lease is a contract that provides you with the use of a car for a set period of time, usually two to four years. However, this isn’t the same as car ownership. You are essentially entering into a long-term rental; and at the end of the contract, you must return the car or purchase it.

Leases typically require a down payment and then monthly payments, the latter of which includes interest, taxes and the expected depreciation costs of the car.

Whether you should lease or buy is up to you, based on your budget and needs. Read on for more info on leasing to help you decide.

What sort of leasing options are there in Canada?

Leases in Canada fall into three categories:

The standard lease is as described above. So long as you pass a credit check, you agree to a term of two to four years, offer a small down payment, and then continue monthly payments for the remainder of the contract. Once it’s over, you return the car to the dealer.

A lease takeover is exactly what it sounds like: You adopt another driver’s lease agreement. This can be much cheaper than a regular lease—especially if there’s an extra cash incentive. But we highly recommend checking out the car to make sure it’s in good condition and not close to the annual mileage limit.

Leasing to own changes the agreement so that the driver is paying towards eventual ownership. The approval process tends to be easier than a regular lease, but the cars may be older.

The perks of leasing a car

As we said, the main draw of a lease is that you’ll find yourself in a brand new car for a lower initial price than buying it. Because you’re probably not taking out a loan for the car, your monthly payments will be less, too.

Those that feel the need to change cars every few years will appreciate the leasing approach. This way, you’re able to swap out one car for another every few years, whether it’s a different trim of your existing car or a whole different model.

The other main bonus is a relatively stress-free few years of driving. A new car will come with a warranty, and you’ll likely be returning it before the warranty ends. Some leases include the regular servicing as part of the monthly payments too, so there’s little in the way of additional costs over the course of the contract.

The drawbacks of leasing a car

Easily the biggest drawback of leasing is that, unless you choose the lease-to-own route, you don’t have any equity at the end of the term. Over a 10-year period, leasing multiple cars will likely cost you more than owning one car, even factoring in the wear and tear on the owned one.

Another important aspect to consider is mileage. Most contracts have a strict annual limit—usually around 25,000 km—and going over this can cost you dearly.

Similarly, if you want to walk away from a car lease, it will cost you the remaining balance on the contract. Same with if you decide to buy out the rest of a contract.

Learn even more about leasing, credit and finance with this informative article.

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