When you lease a car, you pay for the portion of its value that you "consume" during the term of the lease.
You get to use the car during the term of the lease but won't own it at the end of term. You have the option to buy it at that point by making an additional payment).
There are certain conditions on how you can use the car during the term of the lease (maximum mileage and wear-and-tear).
When you borrow, you're making use of a secured term loan. You can get car loans from 2 sources:
After the money you borrow is deposited in your account, you'll buy the car from a dealership and start making fixed monthly payments to your lender.
The loan's term is usually 36 or 48 months, but can be as high as 60 months. The term depends on the car's price, condition, and durability / model.
Like other term loans, car loans can have fixed or variable interest rates.
A down payment will reduce the principal of the loan. It comes out of your savings.
DURING THE TERM OF THE LOAN
You should perform regular maintenance of your car - for safety reasons and because it will cost you less in repairs over time.
Loans do not impose any limitations on how you use the car.
Car loans are usually 'open'. This means that you can repay all / part of the loan's principal at any time.
AT THE END OF TERM
You've repaid the loan and you own the car without any additional payments.
When you lease, you make a financial arrangement with a lender affiliated with the car dealership / manufacturer.
The car dealership will sell the car to a leasing company (called the "lessor"), which leases it to you (the "lessee") in exchange for a fixed monthly payments.
Lease terms are usually 24-36 months.
You can make a down payment to reduce the monthly payment (and therefore the cost of the lease).
DURING THE TERM OF THE LEASE
You are required to perform regular maintenance, as set out in the lease contract.
There will likely be a mileage limitation (maximum number of kilometers you can drive during the lease)
To cancel a lease early, you will likely have to pay a lump-sum to cover the remaining lease payments.
AT THE END OF TERM
At the end of the lease's term, you can either purchase the car (at its current value) or return it to the lessor and negotiate a new lease, on a new car.
1. The leased car's purchase price at the end of the lease’s term is called residual value.
2. If you do not purchase the car, what happens next depends on the type of lease you signed.
On this page, we talk about car loans and leases. These concepts apply to other vehicles, like motorcycles, snowmobiles, boats, etc. The availability and features of products used to finance other vehicles may be slightly different.
Thinking about getting a car?
You'll need to make several decisions.
When you borrow to buy a car, you pay for its entire value.
After you pay off the loan, you own the car (if you buy it for cash, you own it immediately).
There are no limitations on how you can use the car during the term of the loan.
Before you sign a lease:
New cars lose about 20% of their value in the first year of ownership and up to 60% of their value in the first five years, so a used car is almost always going to be less expensive to buy.
The answer depends on what time horizon you have in mind and your financial situation, as well as your lifestyle choices.
Time horizon and finances
1. A short-term perspective favours a lease.
2. In the medium term, the difference between a lease and a loan is not significant if:
3. In the long run, leasing tends to be more expensive than buying the car, financing it with a loan, and keeping the car for many years.
The lower cost of borrowing in the long term is due largely to the rapid rate at which cars depreciate.
Other things to consider are incentives on the purchase and your credit score.
Incentives (special promotions which lower your cost) differ depending on how you finance the purchase.
Your credit score will likely need to be better if you'd like to lease a car than to get a car loan.
Whether you lease or borrow, there are a few things you'll have to consider if you use a car.
There are different ways to finance a car if you can't afford to pay the full price. You can lease or you can take out a loan.