Lease or Buy Your Car

With 1.68 million vehicles sold, Canadian new vehicle sales rose by 5.7% last year to the second highest level on record. After deciding what make, model and even colour options they were going to select, the vast majority of these buyers then faced the one question they weren’t really ready for: “Would you like to finance or lease this vehicle?”

When you compare the difference in price between these two options, you may be initially attracted to the lower monthly payment of the lease. At the same time, you’ve probably heard more than once that buying is the more financially responsible decision. The truth is, like many things in the financial planning world, it depends on your unique situation.

A lease option will consist of monthly payments that are, in theory at least, keeping more or less on track with the expected decrease in the value of the vehicle over the term of the lease. At the end of the lease term, you would have the option of purchasing the vehicle at the residual value or you can just walk away as you would have no asset to show for all of the payments that you’ve made. If you’re planning to keep the vehicle for a shorter period of time, the lower monthly payments will usually put you farther ahead. In many ways, you can consider a lease option a long term rental.

If you choose to purchase the vehicle and finance that amount, you should probably expect a slightly higher monthly payment. This is due to the fact that you are actually buying the vehicle and paying off your loan amount (plus interest) over a set number of months. To keep the monthly payment within reach, most finance options will still have a “balloon payment” owing after the end of your term. The vehicle will belong to you and you can choose to keep it or trade it in down the road. If for example you have a $15,000 balloon payment at the end of your term and the vehicle is worth $20,000, the $5,000 of equity would belong to you. While payments are higher at the start, you will eventually be left with a vehicle you own outright and something you can drive for $0 per month!

So how can you help make this decision? Start by deciding how long you plan to keep the vehicle. If you think that you’ll hold on to it for at least 1.5 times the length of the payment term, financing might be best. Estimate how far you drive each year, leases can carry expensive penalties if you go over the annual limits. Watch out for vehicles that are in high leasing demand as they may have worse than normal leasing terms. Consider what promotions the dealer has running for lease or finance rates. Pull out a calculator and run the numbers for both scenarios. Most importantly, don’t lease as a means to get a vehicle that you otherwise can’t afford.

As I said above, a lease will appear to be the cheaper option at the start but you will pay a premium over the long run. You need to honestly evaluate your situation and what will make sense for the long term. Take the time to run through all the options and decide which is truly best for you.

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Mutual funds products are offered through Investia Financial Services Inc.