Buying or Leasing a Car?

Many drivers are resorting to long-term leasing as an alternative to buying a car. Is it better to lease or to buy (i.e., finance) a vehicle? Revenue Canada’s rules ensure that neither option has more tax benefit than the other. So the decision depends on your situation, needs and cash flow. Be sure to compare the cost of each option over the term you expect to own the vehicle.

Leasing a car

Positives:

• The monthly payments on a lease generally are lower than on a car loan, so you can lease a more expensive model than you could afford to buy with conventional financing;

• You can move up to a new car relatively easily;

• You have consistent, predictable cash flow requirements;

• Most lease agreements include a purchase option so you can choose whether or not to buy the car during or at the end of the lease period.

Negatives:

• You do not build equity in the car; you are simply renting it for a set length of time and not acquiring ownership;

• Restrictions may apply on where you can drive the car (e.g., not outside Canada);

• Overall leasing costs are likely to be higher than purchase costs, since the former include financing, administration and other fees and penalties;

• You have to maintain the car according to the maintenance schedule set out by the lessor. This could cost you more money than if you were free to make those decisions on your own as a buyer;

• You could incur a hefty penalty if you exceed the typical 25,000 to 30,000 km annual limit on driving stipulated in the lease agreement. There may also be a penalty if you wish to terminate the lease early;

• At the end of the lease agreement, the car has to be returned to the lessor with only “normal wear and tear.” But unless you’ve agreed before signing the contract on what that means, you could be hit with a penalty based on an interpretation that differs from yours.

Buying with a car loan

Positives:

• You own the car, so there are no restrictions on its use;

• You build equity in the car (its value minus the debt you have paid off);

• The overall cost of conventional financing is generally less than the total cost of leasing the equivalent vehicle;

• You can use the car as collateral for a loan;

• You can sell the car or trade it in for a newer model

If you wish to drive a luxury car, are not concerned about having ownership and like to switch to a newer model every two or three years, then the lease option may appeal to you. However, the reason why leasing appears less expensive than buying is that you are not committing money to build up equity. When you service a car loan, you are paying off the debt, and therefore building up equity.

A best-of-both-worlds solution may be to purchase a “new used car.” A new car depreciates 25 percent or more the moment you drive it away from the dealership. So your best bet is to buy a used car that is a year or two old, but has been well-maintained and doesn't have a lot of km on it. Such a vehicle may look and run like It's new, yet its price is that of a used car.

For more valuable information contact www.prudentvaluecars.com