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A friend of mine — we’ll call him Desmond — was telling me that he’s in the market for a new car. “Paying cash, financing or leasing?” asked I, not realizing that I was about to step into a pile of poop.
Whoa now buddy, renting isn’t stupid and neither is leasing, for the right person and the right reasons. (He might be considered stupid for buying a new car and taking the depreciation hit when he drives it off the lot, but I digress.)
Fact 1: When you lease a vehicle, you only pay for the vehicle’s depreciation over the term of your lease. To figure this out, take the residual value (the estimated value of the vehicle at the end of the lease term) and subtract it from the total purchase price. This is the amount on which your payments are based, plus the lease (read interest) rate you’re paying and applicable taxes.
Fact 2: At the end of your lease, you have the option of either buying the vehicle for the pre-determined residual, or returning it to the dealer.
Fact 3: A lease will mean substantially lower monthly payments because you are not making any payments on said residual value. That can free up cash flow for other things, like paying down debt that’s costing you more in interest. But you will have to come up with the residual value if you want to buy the vehicle out at the end of the lease. (Yes, you can refinance the buyout, but that’s gonna cost you in interest too.)
Fact 4: You will pay more to lease if you assume the same purchase price, interest rates and total number of payments plus the residual value. What a lot of people don’t get is that while you’re leasing you pay interest on the full value of the vehicle, including the residual value. When you use financing, the amount on which interest is being calculated is reduced at a faster rate so you end up paying less.
Fact 5: Leasing can work out to be a cheaper option. If the interest rate on the lease is lower, or if the term of the financing is longer, the lease will be less expensive. Shop smart. If lease rates are better than financing rates because manufacturers are subsidizing their leases, you’ll win on the lease.
Fact 6: If you are self-employed or have a company through which you are running your vehicle(s), leasing may offer a bigger tax payoff than financing.
Fact 7: Dealers may jack up the price on a car if they know you plan to lease. Don’t go in declaring how you’re going to pay for the car. As far as the dealer is concerned, you don’t have a trade in, you don’t need financing, and you don’t plan to lease. You’re just pricing out the car. If you’re prepared to spend a little money to get the best deal (about $ 40), go to carcostcanada.com for a wholesale invoice price on the car you’re looking at.
Fact 8: It’s your job to read and understand your lease, including knowing your mileage and wear limits, overage charges, termination charges and buyout fees. If you know you drive a lot and the kilometre allowance will be used up in no time flat, then reconcile yourself to buying out the vehicle and start saving the money you’ll need.