Buy a car or lease it? That’s the question!
Should you buy or lease your car? This is one of the great debates of our time, on a par with chicken and egg, or whether golf is a real sport. The positions may be starkly drawn between the proponents of leasing and the fervent buyers, but it's in the details and nuance that the best answers lie.
But first things first: leasing and financed buying are often pitted against each other along the passive/active divide. But both options are debts contracted with a view to acquiring a vehicle, and therefore an asset. Only the terms of the agreement differ.
Let's take a closer look.
1- Buying is for those who keep their vehicle for a long time
True, but not necessarily. First and foremost, buying gives the owner flexibility. There are no annual mileage restrictions, and you can modify the vehicle as you own it, but the real advantage is financial: at the end of the loan, you only have to pay for maintenance and fuel.
When a purchased car is well preserved, its resale value also tends to be better than that of a leased car, for which you will have had to assume the end-of-contract costs.
And even if the cost of borrowing for a new car is generally higher than for a lease, a cash deposit at signing can be advantageous in lowering the monthly purchase installments and giving the future owner greater negotiating power.
2- Leasing is for people who want to change cars often
True, but not necessarily so. Leasing is first and foremost an insurance policy against excessive depreciation of a vehicle's value.
Being able to drive a new car for four years can give some drivers an invaluable sense of security, as well as making monthly payments more flexible. Dealers are also more flexible when it comes to negotiating a lease contract: interest rate, equipment, annual mileage, payment amounts, purchase options, etc.
At the end of the contract, you'll have to repay the debt either by returning the car to the dealer or by paying the balance of the contract (the balance of the negotiated market value). Remember that a lease is actually a 36- to 48-month lease, but the actual amortization period is 65 to 85 months.
3- The crux of the matter: interest rates
Lease financing interest rates generally range from 2% to 4%, depending on the model chosen, the credit file and the term of the contract. In a stable economy, the purchase rate would be between 2% and 5%.
These rates fluctuate, of course, but are also negotiable from dealer to dealer.
In the end, it costs between $5500 and $11,000 a year on average to own a car, including financing, fuel, registration, maintenance and insurance. This is not an expense to be taken lightly, especially at a time when transportation has become the second biggest expense for a greater proportion of Canadian households in recent years.
The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This blog was written, designed and produced by Pierre Dauth, Investment Funds Advisor with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this blog comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities. Mutual Funds are offered through Investia Financial Services Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.