Are you in the market for a new car in Canada? One of the most significant decisions you’ll have to make is whether to lease or buy. Both options have pros and cons, and deciding which is best for you can be tough.
This article explores the differences between leasing and buying a car in Canada. We’ll look at factors like cost, flexibility, and ownership and offer some guidance on how to make the best decision for your situation.
So, whether you’re a first-time car buyer or looking to upgrade your ride, read on to learn more about leasing vs buying a car in Canada.
What's in the Article:
- Leasing vs Financing Your New Vehicle
- Leasing Pros & Cons
- Financing Pros & Cons
- Is it better to lease or buy a car for tax purposes in Canada?
- What is the average car lease payment in Canada?
- Does leasing a car affect my credit in Canada?
- Do you pay tax on a leased car in Canada?
- Will You Lease or Buy Your Next Vehicle?
Leasing vs Financing Your New Vehicle
So you’ve found the perfect new set of wheels, and you may have the option to lease or finance a new vehicle. Most often, with used and previously leased vehicles, the dealer will only sell outright or through financing.
In either scenario, there are some things to consider, mainly the overall cost of either option.
The cost comparison between financing a vehicle and leasing largely depends on several factors, such as the vehicle’s price, the lease or loan terms, the vehicle’s residual value at the end of the lease term, the interest rates, and potential additional costs. However, here are key points to consider:
Financing a Vehicle:
- Total Cost: When you finance a vehicle, you’re buying the car and paying for the entire cost over the length of the loan, which usually leads to higher monthly payments than leasing.
- Ownership: Once you’ve paid off the loan, you own the car outright. You can choose to keep the vehicle, which could give you several years of driving without a car payment.
- Maintenance and Repair Costs: Financing a car means you’re responsible for all maintenance and repair costs, especially after warranties expire.
Leasing a Vehicle:
- Lower Monthly Payments: Leasing a car typically results in lower monthly payments than financing because you only pay for the car’s depreciation during the lease term, not its entire cost.
- Maintenance Costs: Leases often include maintenance costs, which could result in fewer out-of-pocket expenses during the lease term.
- Lack of Ownership: At the end of the lease, you must return the car unless you choose to buy it. Thus, you don’t build equity in the vehicle.
- Additional Costs: Leases can come with additional costs like overage charges if you exceed the mileage limit or wear-and-tear fees if the car is damaged.
Whether leasing or financing is more cost-effective depends on your personal situation and needs, including your driving habits, financial situation, and whether you want to own the car long-term.
Leasing Pros & Cons
Pros of Leasing a Car:
- Lower Monthly Payments: Because you’re essentially paying for the car’s depreciation during the lease term and not the total purchase price, monthly lease payments are often lower than loan payments.
- Less Upfront Cost: Leasing a car usually requires a smaller down payment than buying a car.
- Newer Models and Features: With a lease, you have the chance to drive a new car every few years, often with the latest technology and features.
- Maintenance Costs: Lease agreements often include routine maintenance. Additionally, because the car is usually under warranty for the duration of the lease, repair costs may be covered.
Cons of Leasing a Car:
- No Ownership: With a lease, you don’t own the car. It must be returned at the end of the lease unless you choose to buy it, typically at a price determined at the start of the lease.
- Mileage Restrictions: Lease contracts come with mileage limits. Exceeding these can lead to expensive overage fees.
- Wear and Tear Charges: Any damage beyond “normal wear and tear” might incur additional charges when the lease ends.
- Lack of Flexibility: Ending a lease early can come with hefty termination fees. You’re generally committed to the entire lease term.
- Missed Payment Penalties: If you fail to make timely payments, you may pay penalties. If you continuously miss payments, your vehicle may be repossessed.
Financing Pros & Cons
Pros of Buying a Car:
- Ownership: When you buy a car, you own it outright once the loan is paid off. This allows you to sell it, trade it in, or use it as collateral for a title loan.
- No Mileage Restrictions: Buying a car means there are no mileage limits. Going over the mileage limit can lead to significant charges when you lease.
- Flexibility: You can modify or customize your car as you wish and decide when and if you want to sell it.
- Long-Term Cost: Despite higher initial costs and potentially higher monthly payments, the total cost of buying a car can be lower in the long run, especially if you keep the car for many years after paying off the loan.
Cons of Buying a Car:
- Higher Monthly Payments: Monthly loan payments for buying a car are generally higher than lease payments because you pay off the entire purchase price.
- More Upfront Cost: Buying a car usually requires a larger down payment than leasing.
- Depreciation: Cars depreciate over time; the most rapid depreciation happens in the first few years. If you sell your car, it’s likely to be worth significantly less than when you bought it.
- Maintenance and Repair Costs: Once any warranty expires, all maintenance and repair costs are your responsibility. These costs tend to increase with the age of the car.
- Potential Penalties from Financing: If you fail to make payments or some other situation arises, you may have to pay penalties on your car loan. If you default on your loan, you own the vehicle, so you must make amends with the loan company, which may mean selling it.
Is it better to lease or buy a car for tax purposes in Canada?
In Canada, whether you should lease or buy a car for tax purposes depends on your situation, especially if you use the vehicle for business purposes.
For personal use, you will pay sales tax on the total amount of your payments. With leasing, you will pay tax on the payments, whereas, with financing, you’ll pay the tax on the vehicle, due at the time of the sale.
You could look at it like you are financing some of the tax payments too, which would collect some interest.
The tax implications for personal use are generally less significant and largely depend on individual financial situations.
If you’re using the car for business, leasing and buying can offer tax deductions, but the rules differ.
Leasing: If you’re leasing a car for business in Canada, the lease payments can generally be deducted as a business expense. However, the deduction is capped if the car is a luxury vehicle.
Buying: If you’re buying a car for business use, you cannot immediately deduct the total purchase price. Instead, the cost is capitalized and depreciated over several years according to the Capital Cost Allowance (CCA) rules set by the Canada Revenue Agency (CRA). Like with leases, there are limits on the amount that can be deducted for luxury vehicles.
Also, when financing, interest fees are deductible.
Please note that the CRA has specific rules defining what constitutes business use and what percentage of use can be claimed.
What is the average car lease payment in Canada?
The average monthly payment for a leased car is around $500 but can be up to $1000 or more. (1)
The average lease payment can vary significantly based on several factors, including the vehicle’s make and model, the lease agreement terms, your credit score, and any promotions the dealership offers.
In general, it’s been observed that monthly lease payments are often lower than loan payments for the same vehicle since lease payments are generally based on the vehicle’s expected depreciation over the lease term, not its full purchase price.
Does leasing a car affect my credit in Canada?
Yes, financing or leasing a car can affect your credit score in Canada, just like in many other countries. Here are the main ways leasing can impact your credit:
- Credit Inquiry: When you apply to lease a car, the leasing company will likely perform a hard credit inquiry. This can temporarily lower your credit score by a few points.
- Debt-to-Income Ratio: The monthly lease payment is a new financial obligation that could potentially affect your debt-to-income ratio. This ratio is a factor that lenders often consider when assessing creditworthiness, although it’s not directly included in your credit score.
- Payment History: Your payment history on the lease will be reported to the credit bureaus. If you make all your payments on time, this could help improve your credit score over time. However, if you miss payments, it can negatively impact your credit score.
- Credit Mix: Having various credit types, including a car lease, can positively affect your credit score because it shows lenders you can manage different types of credit.
Do you pay tax on a leased car in Canada?
Yes, you generally must pay taxes on a leased car in Canada. The specifics can vary by province as each has its own tax rates and regulations, but here are the common types of taxes you might encounter:
- Sales Tax: In most provinces, sales tax (such as the Goods and Services Tax (GST) and Provincial Sales Tax (PST), or the Harmonized Sales Tax (HST) in certain provinces) is applied to each monthly lease payment. This is different from buying a car, where the sales tax is usually applied to the full purchase price of the vehicle upfront.
- Other Taxes: Depending on the province, additional taxes or fees may exist. For example, there could be a specific tax for leasing a vehicle in some areas.
Will You Lease or Buy Your Next Vehicle?
The decision to lease or buy your next vehicle in Canada is a personal one, deeply influenced by your financial circumstances, lifestyle needs, and personal preferences.
Leasing may be an attractive option for those who enjoy driving a new vehicle every few years, value lower monthly payments, and don’t mind not building equity.
On the other hand, buying could be a better choice if you plan to keep your vehicle for many years, prefer not to have mileage restrictions, and see value in owning the car outright after loan payments.
While the financial aspect is crucial, consider practical and emotional factors. It’s all about finding the balance that works best for your situation, even if you want the cheapest Telsa model in Canada.
Whatever path you choose, read all the terms carefully and seek advice when necessary. Here’s to finding the perfect fit for your automotive needs in Canada!