Client Piece — Leasing vs. Financing in Canada: The difference!

So you want to get a new vehicle, but you’re a little unsure about the route that you need to take in order to get there:

Published in

Salestraininc: Sales and Marketing Domination

10 min readFeb 25, 2017

Many of my clients swear they will never do anything but one day own their vehicles outright, others, are more than o.k. with never owning a vehicle but really want something new and reliable for every year they’re on the road, so they go with the Lease option — the question really becomes, what’s the best road you can possibly take?

What is Leasing?

Essentially, I want you to think in terms of a rental agreement between two parties! You are renting a vehicle from the dealership for a certain amount of time, the amount of time that you “rent” it for is completely up to you!

It comes with all of the features a typical rental agreement comes with, primarily the agreement consists of a few conditions; Taking care of the vehicle, maintaining it inside and out, there is a KM allowance associated with the vehicle as you are essentially renting a “portion” of the vehicle for the time you use it, it allows you to get newer options on vehicles faster, but you never truly “own” the vehicle. You’re still renting it!

What is Financing?

Financing on the other hand is a little bit different, you essentially own the vehicle. YOU are the landlord of the vehicle, you can do with it as you will! However, a bank or another lender carries you loan! The dealership gets paid on the value MSRP (Manufacturer Suggested Retail Price) from the bank, and you carry the loan! Stop making your payments, and the bank takes the asset back into its collection.

However, you truly own the vehicle, the payments are going to be much higher, but by the end of it, you’re going to be without a car payment, and if you want to extend the kilometres a little further before doing an oil change, there isn’t a problem with that either!

There are some other pro’s and cons associated with both options however:

The Monthly Investment:

As was said earlier, there is a significant difference in the overall investment terms of both options and we have to look at them both very closely!

One of the great things about Leasing a vehicle is that if you don’t have a lot of liquid cash on a monthly basis, it will allow you to keep your payments at a fraction of the cost.

Just the other day I was helping a client out with a New Vehicle purchase, we looked at both of the options and reality sunk in! Owning the vehicle outright simply was not an option!

My client could get the exact same vehicle they wanted and they only had to pay half of the value on the lease as they did with the financing option! However, by the end of the lease term, he would have to give the vehicle back! He was a little disheartened that he wouldn’t have owned the vehicle by the end of it, but was VERY happy that he was driving off with the vehicle he wanted!

So if you’re looking to save yourself a few dollars every month, so you can enjoy a lifestyle better accommodating to you, being able to afford another night or two out with the family, or being able to go on that dream trip this year is what you really want! Then Lease! But let’s do the math on a 5 and 10 year projection so you get the short and long term picture!

5 Year Projection:

Vehicle list price MSRP: $28,000

Lease @ 5 years:

Lease details: 60 months, 24,000 km annual allowance, $0 down offered at 1.5 per-cent financing and some incentives.

Lease payment: about $327 a month for 5 years, assuming continual roll over to new car at term expiry.

Total financing cost over 60 months: $19,620

Finance @ 5 years:

Loan financing details: 60 months, $0 down, offered at 0-per-cent financing, miscellaneous incentives.

Loan payment: about $495 a month for five years.

Total financing cost: $29,700

Timing belt, water pump, tensioner in fifth year: $750

Replace brake rotors and pads every three years: $1,000

Miscellaneous parts and labor over 5 years: $2500

Total financing, maintenance and repairs: $33,950

The Difference:

Potential savings in this example: $13,130 plus the value of owned car at 5 years in favor of the lease!

However, this isn’t the entire financial picture, you have to look at the extended long term of the vehicle as well and take all of this into account. It’s especially important, where over the same 60 month period, you’re going to have the financed vehicle paid off, however, you will still have a lease payment if you re-select into something else!

10 Year Projection:

Vehicle list price MSRP: $28,000

Lease @ 10 years:

Lease details: 120 months, 24,000 km annual allowance, $0 down offered at 1.5 per-cent financing and some incentives.

Lease payment: about $327 a month for 10 years, assuming continual roll over to new car at term expiry.

Total financing cost over 120 months: $39,240

Finance @ 5 years:

Loan financing details: 60 months, $0 down, offered at 0-per-cent financing, miscellaneous incentives.

Loan payment: about $495 a month for five years until paid off.

Total financing cost: $29,700 (for 5 years, remaining 5 years are zero)

Timing belt, water pump, tensioner in fifth & tenth year: $1500

Replace brake rotors and pads every three years: $1,000 x 3= $3,000

Miscellaneous parts and labour over 10 years: $5,000

Total financing, maintenance and repairs: $39,200

The Difference:

Potential savings in this example: $40 Savings difference in favor of the Financing option! It would appear over the long term projections, a Financing option is better!

Warranty, Care, & Maintenance:

Now, the beautiful thing about Leasing is that oftentimes, assuming you stay within your Kilometre allowance, your vehicle will always be covered under warranty! Which means that anything that is unfit to the manufacturer, is going to be taken of directly by myself and our dealership for repair!

For many, this offers the peace of mind that they are looking for should the vehicle ever break down and they need it taken care of!

This is important when you’re considering a lease that you also have to invest in regular maintenance with the vehicle itself! It’s important to realize that some dealerships are going to want your record of maintenance over the term of lease to ensure that they are getting a high quality, well maintained product back!

Some conditions with the Lease as well might be that you can only invest your maintenance with the dealership themselves! Which means that when you need an oil change, there aren’t going to be any more $24.99 oil changes, you might be investing a little more out of pocket to maintain the integrity of your lease contract! There are a lot of stipulations associated with a Lease, so it’s important that you ask a lot of questions, and read over your contract with a fine tooth comb in order to make sure that you don’t do something that violates the term of the Lease!

With owning a vehicle however, if you want to never change the oil or maintain the vehicle itself, and drive the thing until the motor seizes, you’re more than welcome to!

You’re responsible for the ownership of the vehicle itself, and the loan is the responsibility between you and the bank!

Now, I understand that many of you are not going to drive it until the engine seizes, but if you want to find more cost effective solutions to maintenance than what a dealership has to offer, than you are more than welcome to do that as well!

The conditions attached to Financing a vehicle in terms of overall maintenance are absolutely minimal! However, the downside to this is Warranty, if you’re going to own a vehicle for longer than the term of the warranty, it is no longer subjected to going to be covered for any manufactures defects that you would otherwise have covered under a lease.

That means that if you’re saving a few hundred dollars by finding more cost effective options on your maintenance, over a 10 year term, having to replace a transmission is going to blow those savings out of the water and make it a completely mute point altogether!

Had you leased a couple of different vehicles over a 10 year term, something like that would have been covered and at the expense of the dealer!

KM Allowance:

Now, the wonderful thing with Financing is that you do not have to worry about a KM allowance! You can drive to your hearts content and never have to worry about whether or not you’re going over your allowance that year and what it is going to cost you!

For individuals who are driving back and forth from city to city or really like going on long road trips or have one planned in the future then financing is a great option to work with!

It allows you the freedom to roam, and should you want to pack the family up and move them across the country one year, you’re not going to have to be accountable to the dealership for the KM that you’ve incurred!

However, if you’re the kind of person that plans on staying in the same city all of that time and you take the occasional trip outside of the city, and really only use your vehicle to drive back and forth from work or use it for running errands, a lease isn’t a bad option to work with!

A typical lease agreement can run term of about 24,000 KM/ Year! This is great news if you’re only travelling 20KM per day x 365 days = 7,300 KM + 4000 extra KM for travel outside of where you live! That’s 11,300KM in a given year!

It’s important to be realistic with your driving habits as dealers can offer KM allowances of as low as 9000 KM per given year!

The payments on something like that could mean THOUSANDS of dollars of difference for you over your term, but it’s important to be honest! So if you’ve got a long road trip across the country of about 3000 KM coming up right around the corner, than you definitely should consider something with a higher KM allowance!

It’s all about honesty with yourself, running your KM over the term of the vehicle could cost you more than the vehicle is even worth had you just financed it in the first place!

Convenience and peace of mind on the trade:

The last thing to really consider when Leasing vs. Financing a vehicle is peace of mind when it comes time for a trade.

Assuming that you take a Lease on a three year term when the term is up, and you’ve maintained the vehicle to the dealers expectations, you have to option to walk into the dealership give the vehicle back, and get something BRAND NEW once again!

This means that you’re always going to have a new vehicle no matter what you do, however, because your essentially “renting” the vehicle, it also means that you’re going to have a vehicle payment forever.

I had heard from one of my clients that “Thought a lease was great! They treated it like it was a utility payment every month, it fit the budget perfectly, and that they were simply happy to do it forever so long as they had the latest vehicle and didn’t have to worry about anything!”

If convenience is something you have on your mind and you don’t mind making a monthly payment while still having the latest iron in your driveway, than a lease is definitely a way to go!

With financing however, you’re going to be able to rid yourself of the car payment, however when it comes time for a trade, you have to go through a negotiation process of trade value and potentially receive a trade value that is worth FAR LESS than what the vehicle is actually worth!

Every dealership has to make money somewhere, and you’re going to be subject to the mercy of the ethical practices of the dealer you’re working with!

Dealerships are a lot like bad mother-in-laws, they have opinions about what you’re worth to them!

You see, a dealership that has bad practices and doesn’t offer the customer true trade value is something you’re going to have to be cautious of when you’re trading in your vehicle!

You’re going to have to have your wits about you because many dealers are trained to maximize their profit margins for the Businesses sake. However, there is a line many ethical practitioners take when it comes to trade values of your vehicle, that line falls between “What’s best for the client while still maintaining profits” and when they’re just plain screwing you!

It can be quite the hassle!

Summary:

With a lease, you’re essentially “renting” the vehicle from the dealership! It comes with an agreement that you’re going to have to look after the property. With financing, you own the property outright, no care stipulations, drive it till it dies should you so choose!
Look at your financial situation, a lease can be a much cheaper affair for you in the short term, however, in the long term financing it could be the better of the two options! It’s all in how you spend your money and what you’re looking to save every month!
If you want a hassle free experience where you never have to worry about warranty, then go with a lease! Just make sure you’re taking care of it! The only downside, you might have to use dealer approved maintenance centers, which could cost you! Financing you run the risk of running out of warranty, and all of those little savings you would have accumulated by going to a cheap lube center could be out the window with one transmission break down!
The Lease wins every single time when it comes to the trade! Being able to walk into a dealership at the end of your term and either drive off with something brand new for the same payments, or walk away from it entirely without losing your shirt is appealing! Financing, you’re truly at the mercy of ethical practices by the dealership! You could have the best or worst time of your financial life depending on the value a dealership offers you on the trade!