Deciding to Lease or Buy

Leasing vs. buying

By Alberta Motor Association

Leasing is based on the concept that you pay for the vehicle’s depreciation during the time you drive it. When you lease, you are essentially renting the vehicle for a number of years. You have the option of making a down payment to reduce the size of your monthly payments, and pay a money factor, which is similar to interest on a loan.

The money factor is calculated by expressing the interest rate as a decimal, i.e. 10 per cent = .1, then dividing that number by 24. You can also get the amount by multiplying the money factor by 2,400 to convert it to an approximate annual interest rate.

Leasing may be for you if you like to drive a new car every few years, want to keep your payments lower, and don’t mind the restrictions included in most lease arrangements.

Buying a car may be more expensive initially, but you’ll end up with equity in your vehicle, i.e. an asset you can sell. From a dollars and cents standpoint, you are usually better off buying rather than leasing.

Pros and Cons of Leasing

Advantages:

  • Lower down payment if desired
  • Lower monthly payments
  • New vehicle every few years
  • Eliminates trading in and selling the vehicle

Disadvantages:

  • Confusing process
  • Restrictions/conditions/penalties placed on use
  • Potential to cost more than conventional financing
  • No equity at end of term

Loans vs. leasing

When you compare lease payments with loan payments, that monthly figure shouldn’t be your only consideration. Remember that at the end of a 36-month lease, you either give back the vehicle, or buy it out. The residual value owing on the vehicle is often quite high. You may have to finance the remaining amount over another three or four years, at which time, the vehicle maybe be six or seven years old when it’s paid off.

Use the federal government’s website to help you decide whether you should finance or lease with their calculator.

How long should your lease be?

Lease agreements range anywhere from two to five years. A three-year lease may be the best option for a number of reasons:

  • Many manufacturers offer three-year warranties, which means with a three-year lease, your vehicle will always be under warranty.
  • A four or five year lease means you may have to pay for repairs and consider an extended warranty for added protection if the vehicle is only covered by a three-year warranty.

Payments can be lowered even more with an extended lease, but by extending a lease, you’ll end up paying more in the long run for something you’ll never own.

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