To Buy or Lease, that is the Question!

Many people are turning to long-term leasing as an alternative to purchasing a car. The Quebec Consumer Protection Office has prepared a document on the subject. Below is a condensed version of it to help you compare the two options and make your choice.

Who Should Lease?

In general, a long-term lease offers significantly lower monthly payments than a conventional bank loan. So it's an ideal choice for people with a limited monthly budget who don't want to buy a used car. It can also be used to acquire a superior class of vehicle with monthly payments roughly equivalent to those of a bank loan. However, note that leasing a car generally works out to be more expensive than buying.

Compare the Cost Of Leasing or Buying

To truly compare the two options, start with the assumption that you will become the owner of the car at the end of the lease, exactly as you would if you purchased and financed it over the same period.

Leasing Costs

Add up the total monthly lease payments, the residual value of the car (i.e., its market value at the end of the contract) and taxes. And don't forget that you might have to finance the car's residual value over a certain time period—24 months, for example—unless you manage to save up the necessary amount during the lease period, so allow for the financing charges in your calculations. Also include the down payment, if there is one, and any applicable taxes.

Buying Costs

Next, determine how much it would cost you to purchase the same car, including taxes, if you decided to finance it for the same period as the lease. Calculate the total of all your monthly loan payments as well as your down payment, if there is one.

Now compare the two totals. Note that, with the exception of special promotional offers for specific models, leasing is generally more expensive than buying. So now you'll know exactly what to expect if you take the lease route.

Look Before You Lease

You can negotiate a car's lease price, just as you can with a purchase price. Don't settle for just the amount of the monthly payment. Find out the price used to determine the payments and try to bargain with the dealer. If you trade in your old car or make a down payment, you should see a reduction in your monthly payments.

Read the Contract Carefully

Make sure you know exactly what you're getting into before you sign a lease. Carefully read all the key points in the contract and be sure you understand them.

Do You Want a Purchase Option?

Most contracts offered by car dealerships or leasing companies include a purchase option so you can decide whether or not to buy the car during the lease period or at the end of it.

Pay Attention to the Residual Value

Another thing to look for in a lease contract is to have the residual value guaranteed by the lessor, not you. The residual value of the vehicle (i.e., its market value at the end of the lease) could end up being lower than the lessor had estimated, which would represent a loss. You don't want to be held responsible for this difference in value and have to reimburse the lessor. Most contracts today make the lessor responsible for residual value.

What Loss Do You Incur In Case Of Theft or Accident?

You can expect to have to pay something if your vehicle is stolen or in an accident and written off before the end of the contract. In such cases, the lessor is entitled to seek reimbursement from you for the financial loss, but cannot apply a penalty. Be sure to have all loss/theft provisions in the contract carefully explained to you.

A Word Of Caution About Cancellation

Be aware that you cannot terminate a lease contract whenever and however you like. Although the law does not allow the lessor to charge you a penalty, the lessor is entitled to reimbursement for monetary loss actually incurred if, for any reason, you return the vehicle before the end of the lease. For more protection, you may want to have a sub-lease option included in your contract.

Can You Buy the Car Before the Lease Ends?

Yes, you can, but be prepared to pay a higher residual value than the amount specified in the contract, i.e., the residual value at the time.

Is There a Kilometre Limit?

Lease contracts usually specify a maximum of about 20,000 to 24,000 km per year. Beyond that, you will have to pay anywhere from 4¢ to 12¢ per kilometre, if you choose not to buy the car.

Agree On "Normal Wear and Tear"

At the end of the contract, the vehicle must be returned to the lessor with only “normal wear and tear.” Because this term is somewhat vague, be sure you are clear on the lessor's interpretation of it before you sign the contract. Have the car inspected and evaluated by an independent expert before returning it. In case of a disagreement with the lessor, an expert evaluation will lend weight to your position.

What About Maintenance and Warranties?

With a leased car, you receive the same warranty protection from the manufacturer as if you had purchased the car. Similarly, you are responsible for maintaining the car as if you owned it and paying for maintenance and repair work. You may even have a specific maintenance schedule to follow. As a rule, you can have this work done at any dealership you wish; you don't necessarily have to go to the one where you leased the vehicle.

Are There Any Restrictions: One Driver, One Country, Etc.?

You can lend another person your leased car as well as drive it outside the country, unless your contract states otherwise. Be sure to find out before you sign.