Buying vs. Leasing a Vehicle in Canada

Guidance for choosing the right option for your financial situation and needs

When acquiring a vehicle in Canada, you have two primary options: buying or leasing. Both approaches have unique benefits and drawbacks, and understanding the fundamentals can help you make an informed decision that suits your financial situation and lifestyle.

Buying a vehicle involves paying the full purchase price either upfront or through a financing plan, which typically includes a down payment followed by monthly installments over a specified period. Once you’ve paid off the loan, the vehicle is entirely yours, and you can keep it for as long as you like, sell it, or trade it in for a new one.

Leasing is renting a vehicle for a fixed period, usually two to four years. During the lease term, you make monthly payments to use the car. At the end of the lease, you have the option to return the vehicle, buy it at a predetermined price, or lease a new one. Leasing allows you to drive a new car every few years without the long-term commitment of ownership.

Key Differences Between Buying and Leasing

• Ownership: When you buy a car, you own it outright after the loan is paid off. With leasing, you never own the vehicle unless you choose to buy it at the end of the lease term.
• Monthly Payments: Lease payments are generally lower than loan payments for a car purchase because you’re only paying for the vehicle’s depreciation during the lease term, not its entire value.
• Mileage Limits: Leases often come with mileage restrictions, typically ranging from 16,000 to 24,000 kilometers per year. Exceeding these limits can result in additional fees. Buying a car does not have mileage restrictions.
• Customization: When you own a vehicle, you can modify and customize it. Leased vehicles must be returned in their original condition, barring normal wear and tear.

Long-term Costs: Buying a car can be more cost-effective in the long run, especially if you keep it for many years. Leasing can lead to continuous payments if you keep leasing new cars.

Pros and Cons of Leasing vs. Buying a Vehicle

Deciding whether to buy or lease a vehicle involves weighing various advantages and disadvantages. Here’s a closer look at the pros and cons of each option:

Buying a Vehicle

Leasing a Vehicle

Understanding these pros and cons can help you determine which option aligns best with your financial goals, driving habits, and personal preferences.

Buying vs. Leasing: Impact on Your Budget

Choosing between buying and leasing a vehicle can have varying financial impacts over different time frames. Understanding these impacts can help you make a decision that aligns with your budget and financial goals.

Short-Term Impact

Buying a Vehicle

• Initial Costs: When buying a car, you’ll need to cover a down payment, taxes, registration fees, and possibly other upfront costs. This can be a significant initial outlay of cash.
• Monthly Payments: Loan payments for a purchased vehicle are generally higher than lease payments, impacting your monthly budget more substantially in the short term.
• Immediate Financial Flexibility: The higher initial and monthly costs can reduce your short-term financial flexibility, making it harder to allocate funds to other expenses or savings.

Leasing a Vehicle

• Initial Costs: Leasing typically requires a lower down payment and lower upfront costs compared to buying. This can be more manageable for your immediate budget.
• Monthly Payments: Lease payments are generally lower than loan payments, which can make it easier to manage your monthly cash flow.
• Immediate Financial Flexibility: Lower monthly payments and initial costs can provide more short-term financial flexibility, allowing you to allocate funds to other priorities.

Medium-Term Impact

Buying a Vehicle

• Ongoing Costs: You’ll need to budget for insurance, maintenance, and potential repair costs. As the car ages, maintenance expenses can increase.
• Trade-In Value: If you decide to sell or trade-in your vehicle before it’s fully paid off, the value you receive can help offset the cost of your next vehicle. However, depreciation will reduce the car’s value over time.
• Loan Termination: Once the loan is paid off, you’ll no longer have monthly payments, freeing up significant funds for other uses.

Leasing a Vehicle

• Ongoing Costs: You’ll need to budget for insurance and potentially some maintenance costs, although many leases include maintenance within the warranty period.
• Transitioning Leases: At the end of a lease term, you’ll need to decide whether to lease a new vehicle, buy the leased vehicle, or explore other options. Transitioning to a new lease typically involves new initial costs and continuous monthly payments.
• Lease-End Charges: Be aware of potential lease-end charges, such as fees for excess mileage or wear and tear, which can add to your costs.

Long-Term Impact

Buying a Vehicle

• Total Cost of Ownership: Over the long term, buying a vehicle can be more cost-effective, especially if you keep the car for many years beyond the loan term.
• Equity and Asset Value: Once the loan is paid off, you own the car outright, and it becomes an asset that can be sold or traded in the future.
• Impact on Credit Score: Successfully paying off a car loan can positively impact your credit score, which can be beneficial for future financial endeavors.

Leasing a Vehicle

• Continuous Payments: If you continually lease new vehicles, you’ll always have a monthly payment, which can add up over time and never result in ownership.
• No Long-Term Asset: Leasing does not provide you with an asset at the end of the term, meaning you don’t build equity in a vehicle.
• Impact on Credit Score: Regularly making lease payments on time can positively impact your credit score, but there’s no significant long-term benefit like owning a fully paid-off car.

Lifestyle and Usage Considerations

When deciding between buying and leasing a vehicle, it’s essential to consider your lifestyle and how you plan to use the car. Different factors can influence which option is better suited to your needs.

Annual Mileage

If you drive a lot, buying might be a better option since there are no mileage restrictions. High-mileage driving can significantly reduce the resale value of a purchased car, but it won’t incur additional fees as it would with a lease. Conversely, leases typically come with annual mileage limits (e.g., 16,000 to 24,000 kilometers per year). Exceeding these limits can result in additional fees. If you have predictable, lower annual mileage, leasing can be advantageous.

Personal Preferences for Customization

Ownership allows you to modify and customize your vehicle to fit your personal tastes and needs without any restrictions. This is ideal if you enjoy personalizing your car. Leased vehicles need to be returned in their original condition, barring normal wear and tear. Customizations are generally not allowed, making leasing less suitable for those who want to modify their car.

Length of Vehicle Ownership

If you prefer to keep a car for many years, buying is likely the better option. The longer you keep the car after the loan is paid off, the more cost-effective it becomes, as you won’t have any monthly payments. Leasing is ideal for those who enjoy driving the latest models and prefer to switch vehicles every few years. It offers the flexibility to upgrade to a new car at the end of each lease term without the hassle of selling or trading in an old vehicle.

Future Financial Planning and Stability

Buying a car is a long-term commitment. It can be more cost-effective if you plan to keep the vehicle for an extended period. However, the higher initial and monthly costs require careful financial planning. Leasing offers more short-term financial flexibility with lower initial and monthly payments. It can be a good option if you prefer to allocate your funds elsewhere or if you anticipate significant changes in your financial situation in the near future.

Potential Changes in Lifestyle

If you anticipate major lifestyle changes (e.g., starting a family, or moving to a different region), buying a vehicle gives you the freedom to adapt without worrying about lease terms and restrictions. Leasing can be less flexible if your lifestyle changes significantly during the lease term, such as the financial impact of a divorce. Early termination of a lease can result in penalties, so it’s important to consider your plans before committing to a lease.

Considering these lifestyle and usage factors can help you determine whether buying or leasing a vehicle aligns better with your personal preferences and future plans.

Tax Implications and Incentives of Leasing or Buying a Vehicle in Canada

Tax implications and incentives can play a significant role in deciding whether to buy or lease a vehicle in Canada. Understanding these factors can help you maximize savings and make a more informed decision.

Tax Benefits for Business Owners

Buying a Vehicle

• Capital Cost Allowance (CCA): Business owners can claim depreciation on purchased vehicles through the Capital Cost Allowance. The CCA rate varies depending on the type of vehicle.
• Interest Deduction: Interest paid on a loan to purchase a vehicle for business use can be tax-deductible, subject to certain limits.
• Operating Expenses: Expenses related to operating and maintaining the vehicle, such as fuel, maintenance, and insurance, can also be deducted.

Leasing a Vehicle

• Lease Payment Deductions: Business owners can deduct the full amount of their lease payments for vehicles used for business purposes, up to a certain limit set by the Canada Revenue Agency (CRA).
• Operating Expenses: Similar to purchasing, operating expenses for a leased vehicle used for business can be deducted.

Provincial and Federal Incentives for Electric and Hybrid Vehicles

Buying a Vehicle

Incentives: Various provincial and federal programs offer incentives for purchasing electric and hybrid vehicles, which can significantly reduce the upfront cost.

• Federal Incentive: The federal government offers incentives of up to $5,000 for eligible electric and hybrid vehicles.
• Provincial Incentives: Provinces like Quebec and British Columbia provide additional rebates for electric and hybrid vehicle purchases.

In addition, some regions offer tax credits or rebates that can further reduce the cost of ownership for eco-friendly vehicles. Our EV survey of over 600 Canadians indicated the majority are considering a gas vehicle for their next purchase, potentially missing out on Federal and provincial incentives as well as the long-term cost of ownership benefits of EVs.

Leasing a Vehicle

Many of the same provincial and federal incentives apply to leasing electric and hybrid vehicles, reducing the monthly lease payments and overall cost. Also, as electric vehicle batteries come down in price and offer increased range, leasing allows you to take advantage of advancements in electric vehicle technology by upgrading to newer models more frequently.

Buying vs. Leasing a Vehicle: Resale Value and Depreciation

The concepts of resale value and depreciation are crucial in the decision-making process for buying versus leasing a vehicle. They impact the long-term financial outcomes and can significantly influence your choice.

Understanding Vehicle Depreciation Rates

Buying a Vehicle

• Depreciation: New vehicles typically lose a significant portion of their value within the first few years. On average, a new car can depreciate by 20-30% in the first year and around 15% per year after that.
• Resale Value: The resale value of a vehicle depends on factors such as make, model, condition, mileage, and market demand. Higher depreciation rates can lead to lower resale values, affecting the return on investment when you decide to sell or trade in the vehicle.

Leasing a Vehicle

• Depreciation: When leasing, depreciation is factored into the lease payments. You are essentially paying for the vehicle’s depreciation during the lease term, along with interest and fees.
• Residual Value: The residual value is the estimated value of the vehicle at the end of the lease term. A higher residual value can result in lower lease payments since the vehicle retains more of its value.

Buying vs. Leasing a Vehicle: Making the Decision

Deciding whether to buy or lease a vehicle ultimately depends on your personal circumstances, financial situation, and lifestyle preferences. Here are some steps to help you make the best decision:

Assess Your Financial Situation

Use tools such as our budget calculator, car loan calculator, or simple loan calculator to determine how much you can afford for a down payment and monthly loan payments or monthly payments toward a leased vehicle. If you’re interested in comparing a gas-vehicle versus an electric vehicle or plug-in hybrid, try our EV vs. Gas Cost Calculator and read our common EV myths and misconceptions.