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Leasing a Vehicle

There are pros and cons to leasing rather than buying a vehicle. Understanding your rights and obligations when you lease can help you make the right choice for you.

The Basics

Dealers who lease vehicles must be licensed and must comply with the rules about advertising and disclosing the condition of the vehicle.

Sometimes people decide not to buy a vehicle for their use but to lease one instead. The difference between leasing and buying is that when you lease you are not purchasing the vehicle. This means that none of the money you pay on the lease goes towards buying the vehicle. So if you are not buying the vehicle what are you paying for? Essentially you are paying for the right to drive the vehicle.

So how do dealers and others determine what to charge someone to lease a vehicle? There are two parts to the lease payment. First you will pay for depreciation. This is the difference between what the vehicle is worth now and what it will be worth at the end of the lease. What the vehicle is estimated to be worth at the end of the lease is called the residual value.

The second part is a finance fee. It is interest that you pay the dealer for the use of their money over the term of the lease. You pay interest to the dealer because for the period of the lease the dealer does not have the use of the money that was used to purchase the vehicle.

Although lease payments often are made monthly, sometimes you can negotiate a single lump sum payment for the whole term of the lease. In either case, at the end of the term, you usually will have an option (but not an obligation) to buy the car at its residual value.

Payments & Additional Costs

Both the amount that must be paid at the start of the lease and the amount you will have to pay for extra mileage must be in the lease contract you sign.

If you choose to lease a vehicle, it is especially important to be aware of all of the costs involved. Not all of them will be obvious in the ads that brought you into the dealership in the first place. For example, you may be required to come up with a large down payment in order to make your monthly lease payments as low as advertised. Also, you may be required to pay a security deposit and the first lease payment in advance. All applicable federal and provincial sales tax must also be paid.

Another possible unadvertised cost is a mileage charge for mileage over and above the mileage cap in your lease agreement. Because part of your lease payment will cover estimated depreciation on the vehicle, the dealer wants to make sure that you do not drive the vehicle more than a certain number of kilometres. If you do, the actual depreciation may be greater than estimated, and the dealer will charge you an extra mileage fee, based upon the number of kilometres by which you exceeded the cap.

Pros & Cons

The biggest advantage of a lease is that the lease payments are less than the payments you would make on a loan to buy the same vehicle. This is because when you take out a loan to buy a car you will pay not just interest on the loan, but also monthly amounts to pay off the purchase price of the vehicle. The same thing that makes a lease an attractive option is also the downside of a lease. You are not buying the vehicle so you will not own the vehicle at the end of the lease. Another way a lease can save you money is that there may be income tax deductions that are available, although this is not always the case and depends upon your personal situation.

The lease agreement must explain what is considered normal wear and tear and the payment you will need to make if there is excessive wear and tear.

A lease may also offer greater certainty about the cost of vehicle maintenance because often the vehicle will be under warranty for the whole period of the lease. Even so, when you lease you still need to take care of your car. Many people mistakenly think that since they don't own the vehicle they do not have to take care of it. However leases almost always have a clause that requires you to return the vehicle in "good working order" and with only "normal wear and tear".

Leasing may also enable you to drive a newer, fancier vehicle than you could otherwise afford. You don't need to worry about re-sale value or the hassle of selling when you want a new vehicle.

Ultimately your own situation will determine how advantageous leasing will be for you. You should consider...

Q

Can I afford to buy a vehicle with cash or by making monthly payments on a loan?

A

When you lease you are always paying interest as long as you drive the vehicle. When you buy a vehicle you only pay interest until you pay the vehicle off. Although the monthly payments for a lease are often less, buying is generally cheaper in the long run.

Q

Will I drive the vehicle for more than five years?

A

If you plan on doing this buying will be a better option unless you just cannot afford the higher monthly payments.

Q

Do I drive a lot?

A

The most common problem in leasing is excess mileage. Most leases have a mileage limit and if you exceed this your lease could cost considerably more, making it not such a good deal.

Q

Will I benefit from tax deductions?

A

If one reason you are leasing is because of income tax deductions you should make sure they are applicable in your particular situation and compare these to the tax benefits you could get if you took out a loan to buy the vehicle.

Lease Agreements

If you decide that leasing is your best option it is important to shop around and look for the best deal. This is especially true because lease agreements are very difficult to cancel. With a traditional purchase and new car loan, if you came into some extra money, you generally could pay off the balance owing on the loan with little or no penalty. Or, if you ran into some financial difficulty and couldn't make the payments, you would be able to sell the car and pay off the loan. A lease agreement may not give you these options.

Required Information

In addition to the information required in any contract to sell or lease a vehicle the following information must be in any lease agreement:

  • amount due at lease signing or delivery of vehicle
  • amount of monthly payment and the date in each month it is due
  • any other charges
  • total amount that will be paid over the term of the lease
  • the portion of the total payments that are finance charges
  • calculation of how the monthly payment is determined
  • rights and obligations if the lease is terminated early
  • amount to be paid by lesee if the lease is terminated early
  • explanation of what is normal wear and tear and any payments for excessive wear and tear
  • amount to be paid for excessive mileage
  • maintenance requirements
  • insurance requirements
  • purchase options

Before you Sign

The law requires certain information to be disclosed but you still need to read the lease to find this information.

Once you have decided to lease here are some things to do before you sign on the dotted line...

  • Negotiate the price of the vehicle, just as you would if you were buying it outright. The lower the price, the lower your lease payments will be.
  • Negotiate the interest rate. The lower the financing costs the lower your lease payments will be.
  • If you think that you will exceed the mileage cap, you should negotiate the price for extra kilometres at the beginning of the lease. Quite often, a mileage charge negotiated at the beginning will be less than if you wait until the end of the term.
  • If you do not intend to buy the vehicle at the end of the lease, negotiate as high a residual value as possible. Again, this will help keep your monthly payments down.
  • Watch out for what are called "open-ended" leases. These are where you guarantee the dealer a minimum residual value. This means that if the actual residual value turns out to be lower than what the dealer has estimated, you promise to pay the difference. This can be a major expense, and you should avoid any such promise. In a lease, you want to keep the option of simply returning the vehicle at the end of the term, with no further obligations.
  • Read the lease agreement carefully, to make sure that you are aware of all of the costs that you are responsible for. In particular, find out what your obligations will be for maintenance and repairs.

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