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Should I Lease or Buy?
Should I lease or buy? A question asked by many consumers. In this column, I'll be referring to a vehicle manufacturer?s purchase/finance arrangement and comparing it to a manufacturer type lease. This lease is the most popular and the most consumer-friendly lease today.
This type of lease outlines the:
- Purchase price
- Interest rate
- Cost of borrowing
- Monthly payment
- Term (i.e. number of payments)
- Kilometer allowance
- Excess kilometer charge
- Damage responsibility
- Your optional buyback
- Any additional charges
Only a New-Car Dealer can offer this ?full disclosure? manufacturer lease or purchase finance rates. If you decide to deal through a third party broker it creates an additional level of expense to the transaction and ultimately, you, the consumer incur the additional costs.
As a general rule, your monthly payment will be lower on a lease then it will be with a purchase/finance arrangement. However, manufacturers have recently extended these finance terms for as long as 72 months, with very low factory subvented interest rates; resulting in a narrower payment gap.
Before making your decision, you should ask yourself the following: ?Will my lifestyle change (i.e. family size, career requirements, needs, desires) and when? How long do I want to drive this vehicle? What monthly payment can I afford? What is my vehicle of choice and the approximate kilometers I will drive it?
There are no specific requirements for down payments in either a lease or a purchase. Down payment requirements depend on your credit rating and your capacity to pay.
Ownership should not be the only issue, as that option exists should you decide to purchase that leased vehicle (at its pre-determined lease-end value) at the end of your lease term.
Leasing is popular, primarily because of lower payments. Most leases are for 36-48 month terms. Generally, the longer the lease term, the lower the monthly payment.
A clear advantage with leasing is that the manufacturers take all the residual risk (they guarantee the vehicle?s value at the end of the lease). As such, these residual values are fixed and non-negotiable. If the manufacturer forecasted this value too high, they?ve lost, not you. If they?ve forecasted it too low, you?re the winner ? by either exercising your option to purchase, or by applying your equity towards a new purchase/lease with your original New-Car Dealer.
Ask your New-Car Dealer to give you a comparison of the interest rates, term and payments available on both the purchase/finance option and the lease option on your vehicle of choice. The effective purchase price for either should be the same.
Think of leasing as an alternative form of financing. Now, compare. Whether you lease or buy, your payment is made up of the following components ? interest and principle (depreciation), plus taxes.
Remember that 100% of your taxes are paid for up front and amortized over the term of your financed purchase. In effect, you finance the PST and GST for the term of the loan. Therefore, you pay interest (if any) on these taxes.
With leasing, taxes are only paid on your down payment and on your monthly payment. Taxes will also be payable if you exercise your option to purchase. You can trade in your vehicle on either a lease or purchase and save the GST and PST on its trade-in value.
Whether you purchase or lease, you?re still responsible for repairs and maintenance (that are not covered under warranty), insurance and licensing. Early termination of a lease may cost you, so be careful when selecting your lease term. As a rule there are no provisions for an extension to your lease term. A 36-month lease fits well within most manufacturers? comprehensive warranties. Consider factoring in to your comparison the cost of an extended warranty with the finance option.
Charges in a lease associated with excess kilometers should not be thought of as a penalty. It?s simply allowing for additional depreciation. This excess kilometer charge varies with each manufacturer, so if mileage is an issue, you should shop around. It can vary from 6¢ to 18¢ per kilometer. If for example, you drove an extra 10,000 kilometers at 8¢ per kilometer, a charge of $800 plus taxes would apply. That?s a bargain!
If you qualify, you may deduct the business portion of your vehicle expenses, subject to limitations, whether you lease or purchase your vehicle, when filing your annual tax return.
Leasing, today is a consumer-driven product brought about by affordability issues, high taxes and the desire for more comfort, performance and safety benefits at a lower monthly payment. In fact, manufacturers have attempted to limit leasing due to the ?billions? of dollars they?ve lost in residual value guarantees.
With today's low finance rates (in some cases 0%), or if you plan to keep your vehicle five years or more, purchase financing is hard to beat.
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