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    • The pros and cons of buying or leasing a vehicle

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    Is it time for you to get a new vehicle?

    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鈥檒l discuss some of the pros and cons of both so you can make the most informed decision about your next car.

    How financing a car works

    Financing a vehicle is a pretty straightforward process. Typically, you鈥檒l make a down payment of around 10 to 20 per cent of the value of the car. Then, you鈥檒l finance the remainder over two to six years.

    While you鈥檙e 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.

    How leasing a car works

    When you lease a car, you鈥檙e 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.

    Benefits of financing

    Financing tends to be more common than leasing because of one key factor - ownership.

    Once your auto loan is paid off, you鈥檒l own the vehicle outright and don鈥檛 have to worry about making any payments on it. The only thing you鈥檒l 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.

    Drawbacks of financing

    There are main drawbacks to financing:

    • You鈥檒l be required to pay interest on your auto loan
    • You technically don鈥檛 own the car until it鈥檚 paid off
    • You can enter a cycle of negative equity

    Firstly, with today鈥檚 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鈥檙e 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 you once you start putting more miles on it and its value goes down.

    Lastly, you鈥檒l also be responsible for all of the maintenance costs and repairs on the vehicle that are outside of the manufacturer鈥檚 warranty or any other coverage options you purchase.

    Benefits of leasing

    Leasing can be a good alternative to financing as you鈥檙e 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 , which falls well within most lease terms. You鈥檒l 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鈥檒l be able to turn in the car with no negative equity, assuming that you鈥檙e within your mileage limits and have kept the car in good condition. If you鈥檝e fallen in love with the car, you鈥檒l 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.

    Drawbacks of leasing

    The main drawbacks of leasing are:

    • You don鈥檛 own the vehicle, so you can鈥檛 customize it
    • Mileage overage can be expensive
    • Early termination fees

    If you go over your mileage limitations as agreed upon at the start of your lease term, you鈥檒l 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鈥檛 be able to customize your vehicle or do anything that would void the factory warranty.

    If you decide you don鈥檛 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).

    Is it better to lease or finance your vehicle?

    If you鈥檙e unsure of what car you really want and you don鈥檛 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鈥檛 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鈥檛 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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