Is it better to lease or buy your vehicle?

If there's one question I've been asked hundreds of times in my automotive career, it's this: “Is it better to finance or lease a car?”

I quickly realized that the concept of leasing remains quite vague for many people. I've often heard misguided statements such as, “I always lease because I can change vehicles whenever I want,” or “Leasing is cheaper than buying because the monthly payments are lower.”

"The reality is a little more nuanced, as you might expect. There are undeniable advantages to leasing, but to make an informed and truly advantageous choice, it's essential to understand the difference between leasing and financing, depending on your needs.

Basic principles

Financing works in much the same way as buying a house. A financial institution lends you the money you need to buy the vehicle, at a fixed interest rate and for a fixed term. Once the last monthly payment has been made, the vehicle is yours to keep, with no obligations to anyone else. You pay for the entire vehicle, including interest and taxes, but you become the owner.

Long-term leasing allows you to use a new vehicle for a fixed period—usually 2 to 5 years—by paying a fixed monthly lease payment, without becoming the owner. In other words, you pay for the use of the vehicle according to the rates chosen when you sign the contract. At the end of the term, you must return the vehicle or, if you wish, purchase it for the residual amount provided for in the contract.

The monthly payment is based on four main factors:

-The total price of the vehicle

-The interest rate offered by the lessor

-The annual mileage chosen 

-The residual value of the vehicle

Residual value?

The residual value is the estimated value of the vehicle at the end of the lease, as determined by the manufacturer at the time the contract is signed.

This value is used as the basis for calculating your monthly payments.

Financial institutions use several factors to determine this value: depreciation forecasts, resale history of similar models, market trends (popularity, reliability, demand for used vehicles), and economic conditions (interest rates, inflation, etc.).

They also rely on sources such as ALG (Automotive Lease Guide by J.D. Power) and Canadian Black Book, which publish residual value projections for each model sold in Canada.

Advantages... but also disadvantages

Leasing is particularly attractive because of its lower monthly payments, since you only pay for the use of the vehicle. Another notable advantage is that there is no resale to manage, since at the end of the lease, you simply return the car. In the event of depreciation, the guaranteed residual value protects the lessee, and if the vehicle is worth more, you can take advantage of the difference by trading it in.

Businesses also find it attractive from a tax perspective, as lease payments may be deductible depending on business use. Purchasing, on the other hand, offers few tax advantages, since the deduction is made gradually through depreciation and remains capped by the CRA. In addition, personal use creates a taxable benefit, which further reduces the tax advantage compared to leasing.

But leasing has its drawbacks: you don't own anything at the end of the contract and you often get caught in a cycle of continuous payments. Mileage limits and wear and tear costs can also add up. Finally, flexibility is reduced, as breaking a lease early is usually quite expensive, and shorter contracts increase monthly payments.

Lease Buyback

It is entirely possible, during or at the end of the lease, to purchase the vehicle. You simply need to pay the residual value specified in the contract, plus the applicable taxes (and any remaining payments, if there are any).

Most dealerships offer financing for lease buybacks, but be careful: this financing is generally subject to used-vehicle interest rates, which are often higher than those for new vehicles.

Considering this, if you plan to buy back your vehicle at the end of the lease, it is important to do the calculation before signing the contract to determine whether financing the purchase would be more advantageous than leasing followed by a buyback.

So, which one should you choose?

I’d love to conclude with a universal recommendation on the best choice between leasing and financing, but the truth is that there is no single answer.

Leasing offers several undeniable advantages: lower payments for the same term, peace of mind, always having a recent vehicle, and limited risk.

However, like any financial product, it requires a good understanding of its terms before signing, in order to avoid unpleasant surprises and unforeseen costs.

The essential thing is to choose the option that truly fits your lifestyle, your budget, and the way you use your vehicle.