Money & Career

How to choose whether to buy or lease a car

Want to try life in the fast lane? Here are some tips on leasing vs. buying your next car
By André Giroux

1. The keys to car ownership
First, the obvious: If you choose to buy a car, be it a pink Cadillac or a Toyota Corolla, it becomes your property; but if you decide to lease, your lessor (typically a credit company affiliated with the manufacturer) owns the vehicle, and you're paying them for your ticket to ride. So what's the advantage to leasing? Your monthly payments will be less than what they would be if you bought the vehicle; but at the end of your lease, you must either return the car or pay a "buyback" fee (the value of the car at that point) to purchase it.

2. The deal with insurance
Regardless of whether you own or lease your vehicle, you're required by law to obtain third-party liability insurance and accident benefits. If you're leasing, you may wish to consider collision insurance, which covers damages to the car itself, since when it's time to return the vehicle, the lessor will accept only wear and tear due to normal usage.

3. What if your car gets damaged?
Say you're in a fender-bender or, worse, your car gets stolen. If you own the car outright, then any insurance claims will be payable directly to you. But if you're still paying down your car loan or leasing, claim funds will be payable to both you and your creditor or lessor. You'll have to come to an agreement on its distribution; but before negotiating, consult your insurance representative. You'll be better prepared if, for example, you know whether the insurance policy has a replacement-cost clause that entitles you to the value of your car if you had to buy it brand new.

4. Regarding maintenance
For the duration of a lease, no major modifications – such as painting the car a different colour – are allowed. When you return the vehicle at the end of the lease, it must be in good condition. To avoid any disagreements, have an independent inspection done by a garage beforehand.

5. What if you drive a lot?
Whether you buy or lease, the more mileage you rack up, the quicker your car's value depreciates. If you're a car owner, this means your resale value decreases. But it's more complicated if you're leasing; your lessor or the dealership safeguards itself against lost value through mileage allowance plans. Here are your usual options: You are usually offered a choice between base plans, allowing 80,000 km, 100,000 km or 120,000 km over four years, for example. There are no refunds for unused mileage. If you think you'll exceed these limits, you can purchase additional kilometres that are usually deducted from the buyback fee. Any mileage not covered by a plan is paid for when you return the car. This tends to be the costliest option, so it's preferable to pay for extra mileage in advance.

6. Time to put it in park?
Suppose you've got a baby on the way and you want to get rid of that little red Corvette earlier than you had planned. What are your options? If you own your car, you can sell it, but you must pay back your car loan in full. The only way out of a lease is to break it, in which case you'll be required to pay all of your remaining lease payments. Since breaking a lease will negatively affect your credit rating, you might first want to try the alternatives of subleasing or transferring your lease (the way you might with a rental apartment).

7. So, to buy or to lease?
If you have the money and you plan on keeping your vehicle for the long term, buying is the better choice because you're building up equity and, after interest is taken into account, it's a cheaper option than leasing. However, if a leasing program's lower monthly payments allow you to service another, more costly debt quicker, leasing may make more sense (and cents). At the end of the lease, you may be tempted to refuse the buy-back option, so as not to have to maintain and repair an "old" car, but in reality, these expenses can be much less than the monthly payments on a new car. Still, if you like to change your ride often, leasing is generally the best choice, but be aware that the shorter the lease term, the more you'll be charged per month, since a vehicle depreciates more quickly in the first years after it's purchased.

A word of advice: Scan newspapers and other ads for mention of preferred interest rates, which can greatly affect the cost of your car.

8. Still undecided?
Industry Canada has a handy online tool that can help you make up your mind.


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