Leasing a car is a unique financial arrangement and while it has its perks, experts say it suits a fairly slim group of people.
The biggest draw for leasing is lower payments, and on a shiny new car no less. This is usually what hooks drivers on a tight budget.
“When it comes to leasing, new vehicles is definitely a big part of it,” said Brandon Wiebe, a fee-only financial planner with Money Helps, based in Saskatoon.
“You’re getting into a vehicle that looks brand new, shouldn’t require immediate maintenance, has updated features, whether that’s safety or audio. And then another benefit that people see is the lease payments will tend to look lower than your purchasing new vehicle payments, so it’s less restrictive on their cash flow, right?”
A car lease is essentially a long-term rental: you’re paying the dealership for use of a car over an agreed-upon period of time, usually a few years. Though you aren’t an owner of the vehicle, monthly lease payments are typically lower on a new car than if you were paying off a loan.
That one detail — the lower payment — convinced Stephanie Wallcraft to sign a lease in her 20s.
It was a mistake, said Wallcraft, a freelance automotive journalist, co-host of Modern Motoring, and former president of the Automobile Journalists Association of Canada.
“The reason I call it a mistake is that after a while, I started having problems with the car and I wanted to get rid of it,” Wallcraft said. “And it was very difficult, because getting out of a lease is far more complicated than getting out of financing.”
Young people are still setting up their lives — they might have to move for a job, they might start a family, there may be job change or loss. Although that lower payment may look smart for their budget at the time, Wallcraft says it’s still not worth it for most.
“People in their 20s, trying to get started, I would never advise leasing a car,” she said.
Essentially, leasing means your money is going to the dealership and not your own equity in a car, Wallcraft explained. You are paying for the depreciation of a new car, which loses value sharply after driving off the lot — usually around 20 per cent. You are paying the dealership and at the end of the term, you still don’t have a car.
There can be unpleasant surprises at the end of a leasing term, Wallcraft added. The vehicle will be examined carefully for any damage, and if you exceeded the mileage outlined in the contract, you’ll be hit with fees.
“It can be a pretty surprising amount at the end of the whole thing,” Wallcraft said, “and there’s no way to get out of it.”
When you finance a car to own it, however, you start with negative equity — you owe more on the car than it’s worth to sell — but after a certain amount of time, that equity turns in your favour.
“It takes a few years, depending on the length of the financing term,” Wallcraft said. “It takes some time where you’ve paid off enough of the car that you can then sell it for what it’s worth.”
For car lovers who want a fresh ride every three or four years, financing to own still has merits over leasing, Wiebe said.
“Even with purchasing vehicles every three years, you can still come out ahead by purchasing and reselling, because at least you are building some equity by creating ownership of the car that you’re paying for,” he said.
“But for most young people, buying and owning for a longer period is going to really free you up to be able to put money elsewhere, especially towards longer-term savings.”
As for leasing an electric vehicle, Wallcraft called the financial pros/cons analysis “less predictable” in this relatively new market. Residual values of EVs have yet to be fully understood, she said — the value the car holds over time, which lease payments are based on.
But lease contracts are very hard to break, Wallcraft noted. So if you don’t like the EV lifestyle and all it entails, you’re stuck or punished.
“I can’t imagine how difficult it would be to try to offload an EV lease and try to find somebody who wants to take that over when there’s really only 10 per cent of the market that’s showing a strong interest in EVs today,” Wallcraft said.
“That will change over time, but that would be extremely difficult. Better to finance at a rate you can afford, and then, even if you haven’t fully paid it down, at least the car is yours to make the decision about what to do with it.”
So who is leasing for? Wealthy customers, mostly. There’s less drama with a new vehicle under warranty, Wiebe pointed out.
“Let’s say you’re getting into a high-paying profession that demands a lot of your time,” he said. “You’re not having to deal with buying and selling a vehicle. You sign up, have that simple payment, everything’s under warranty, and you kind of take back both the time and having to think about that area of your life.”
Wallcraft said leasing is also good for corporations that prefer not to have ownership of a car on their record, said Wallcraft.
“It’s also a good situation for highly affluent customers who want to drive the latest and greatest,” she said.
“They know they want to have something brand new every two, three or four years. And they’re happy to essentially treat it like a subscription.”
