When shopping for a vehicle, you have three options: lease, finance, or pay cash. All options offer advantages and disadvantages. What option is best for you will depend on your personal preference and situation. Leasing can provide significant benefits and be a more cost-effective way to drive a newer and nicer vehicle. However, when you are leasing a car, you are essentially renting the car from the dealership for a period of time. But at the same time, leasing is an excellent option if you do not want to make a long-term commitment to one vehicle.
This article breaks down leasing its advantages and disadvantages to help you with your car shopping journey.
What Does It Mean to Lease a Car?
When you lease a car, you enter into a contract with a dealership to make monthly payments to drive the car for a specified amount of time. After your lease contract is up, you return the vehicle to the dealership. If you love your vehicle, you could decide to buy out the lease. A lease buy-out could include:
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The residual value of the vehicle.
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Any outstanding balance on the lease.
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Potentially any applicable taxes.
Alternatively, if you enjoy leasing vehicles, you could enter into another lease on a newer vehicle.
What Are Lease Contracts?
Leasing a car requires you to enter into a lease contract with the dealership. Lease contracts are usually 24-48 months or two to four years. The lease contract will include your mileage allowance, wear and tear clause, and payment terms for the lease.
Residual Value
The residual value estimates what the vehicle is worth at the end of the lease contract. The residual value helps to determine what your monthly lease payments will be. Also, if you were to buy out your lease at the end of your contract, the residual value would be the price you would pay for the vehicle.
Down Payments
You can make a down payment on a car lease, which would result in lower monthly payments. However, this is not necessary because leasing a car is not the same as buying a car. The dealership can provide you with two lease quotes, one with a down payment and one without. You can then assess the two options by comparing the amounts you would pay over the lease. Also, if your leased car were stolen or totalled, you would most likely not get the down payment amount back.
Mileage Allowance
The mileage allowance is an important factor to keep in mind when leasing a car. Mileage allowance is the allotted amount of kilometres (km) you can drive your leased car each year. The standard allowance ranges from 12,000 to 24,000 km. If you are over your mileage allowance at the end of your lease, you will be charged per additional km. The standard amount in Canada is 10 to 20 cents.
What Are the Pros & Cons of Leasing a Car?
- You can drive a new car every few years.
- With lower monthly payments than financing, you can drive a more expensive car.
- You can avoid costly repairs because leased cars usually have a factory warranty.
- The future depreciation of the car does not affect you, so you do not have to worry about the car’s trade-in value or market value.
- If you are a business owner, leasing offers significant tax advantages.
- You only pay for the portion of the value of the vehicle you use, not the value of the entire vehicle’s price.
- You will always have monthly payments. In comparison to financing, you cannot pay off your loan and own the vehicle.
- The vehicle must be kept in excellent condition. When your lease ends, there could be extra charges for any wear and tear.
- Mileage allowance. There could be extra charges at the end of the lease if you go over your mileage allowance.
- If you want to trade in your vehicle before the lease is up, you could face penalties because you are in a contract.
- You can not add modifications to the vehicle. You can add accessories like ski racks and rims while completing your lease agreement. All added modifications must be valued at the time of the lease and can not be added after the fact.
What Are the Tax Advantages of Leasing a Car if You Own a Business?
Vehicle leasing offers significant advantages for business owners. You can deduct up to $800 per month for the business-related amounts of your lease payments plus HST. This deduction works out to be about $9,000 worth of expenses that you can deduct annually.
Continue your car shopping research and find out how much you should spend on a car and what you should consider when buying a car.
At VINN, we work directly with you to guide you through the process of finding a new car. Our vehicle experts will work with you to ensure that you get the best value for the right car, and you can also browse our inventory.
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