Is it time for you to get a new vehicle?
About one-third of Canadians purchased their vehicle outright in 2021, according to a report from Insurance Insight. The other two-thirds of car buyers financed or leased their vehicles.
Both leasing and financing are programs that make owning a safe, modern vehicle more achievable. Leasing and financing have benefits and drawbacks, depending on your particular situation.
Below, I’ll discuss some of the pros and cons of both so you can make the most informed decision about your next car.
Financing a vehicle is a pretty straightforward process. Typically, you’ll make a down payment of around 10 to 20 per cent of the value of the car. Then, you’ll finance the remainder over two to six years.
While you’re paying off the auto loan, the lender holds a lien on the vehicle, allowing them to repossess it if you fail to make payments as agreed. Once the loan is paid off, full ownership of the vehicle is transferred to you.
When you lease a car, you’re essentially renting the vehicle and paying for its depreciation. Most lease terms range between one and three years, and typically only brand-new vehicles can be leased.
When your lease term ends, you can turn in the vehicle or may choose to enter into a new lease term on a newer vehicle.
Financing tends to be more common than leasing because of one key factor - ownership.
Once your auto loan is paid off, you’ll own the vehicle outright and don’t have to worry about making any payments on it. The only thing you’ll have to worry about paying out of pocket, once the vehicle is paid off, is the maintenance and repairs on it.
Financing your vehicle is also a good way to help build your credit, it will build a positive payment history and credit diversity (both of which are important factors behind your score).
Lastly, since the car is yours, there are no mileage restrictions or restrictions on vehicle modifications.
There are main drawbacks to financing:
Firstly, with today’s high interest rates, even those with a top-tier credit score are still looking at a minimum seven to eight per cent interest rate for financing a car. When you’re talking about eight per cent interest on a $40,000 car, it can really add up.
While ownership is often touted as the best reason to finance, the reality is that the bank can come and take your car if you stop making payments or run into financial hardship.
Depending on which way the car market turns, you could also end up in a cycle of negative equity, where youowe more for your car than it’s worth once you start putting more miles on it and its value goes down.
Lastly, you’ll also be responsible for all of the maintenance costs and repairs on the vehicle that are outside of the manufacturer’s warranty or any other coverage options you purchase.
Leasing can be a good alternative to financing as you’re only paying for the depreciation of the vehicle, based on the set amount of annual mileage that you agree to at the beginning of your lease term.
The average Canadian drives just 15,200 kilometres per year, which falls well within most lease terms. You’ll also be given the option to purchase additional mileage at the start of your lease term if you drive more than average.
At the end of your lease term, you’ll be able to turn in the car with no negative equity, assuming that you’re within your mileage limits and have kept the car in good condition. If you’ve fallen in love with the car, you’ll also be given the option to purchase the vehicle.
One of the best reasons to lease is that some automakers assume all maintenance costs and upkeep through their dealerships, which is essentially just oil changes and fluid top-offs. But check with the dealership and ask if they include maintenance as part of the lease agreement.
Lastly, your monthly payment on a lease will often be less than your monthly payment on a financed vehicle, making it a great way to get more car for your money.
The main drawbacks of leasing are:
If you go over your mileage limitations as agreed upon at the start of your lease term, you’ll be required to pay hefty penalties when you turn your vehicle in. This is why it can often be beneficial to purchase extra miles at the beginning of your term.
Additionally, you also won’t be able to customize your vehicle or do anything that would void the factory warranty.
If you decide you don’t like the vehicle and want to turn it in before the end of your term, you may also have to pay early termination fees. Some dealers may waive this fee, though, if you agree to lease another vehicle from them (for example, if you need to upgrade to a larger vehicle).
If you’re unsure of what car you really want and you don’t drive a lot of miles, leasing can be a great way to get into a new vehicle. Some dealer may assume responsibility for repairs and maintenance and you don’t have to worry about entering the cycle of negative equity.
That being said, if you drive a lot or you plan on making a large down payment on the vehicle, financing could be a better option as it provides a shorter path to outright ownership of the car and you won’t have to worry about mileage restrictions.
Is now the right time to buy a new vehicle, or should you wait? Keep on reading to find out!
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