Leasing a car is a unique financial arrangement, and while it has its benefits, experts say it’s suitable for a fairly narrow group of people.
Posted at 11:17 a.m.
Nina Dragicevic
The Canadian Press
The biggest appeal of leasing is the fact that the payments are lower for a brand new car. This is usually what attracts drivers on a tight budget.
“When it comes to leasing, new vehicles make up a large portion,” says Brandon Wiebe, financial planner at Money Helps, based in Saskatoon.
“You’re getting a vehicle that looks brand new, shouldn’t require immediate maintenance, has updated features, whether it’s safety or audio. And then another benefit that people see is that lease payments will tend to look lower than buying a new vehicle, which is less restrictive on their budget,” he says.
Leasing a car is essentially a long-term rental: you pay the dealer for the use of a car over an agreed period of time, usually a few years. Even if you don’t own the vehicle, monthly lease payments are generally lower on a new car than if you were repaying a loan.
“A mistake”
It was this detail – the lower payment – that convinced Stephanie Wallcraft to sign a lease in her 20s.
It was a mistake, says Mme Wallcraft, independent automotive journalist, co-host of Modern Motoring and former president of the Automotive Journalists Association of Canada.
“The reason I call it a mistake is because after a while I started having problems with the car and I wanted to get rid of it,” she says. And it was very difficult, because getting out of a rental contract is much more complicated than getting out of financing. »
Young people are still preparing for their lives: they may have to move for a job, they may start a family, there may be a change or loss of job. Although this lower payment may make sense for their budget at the time, Mme Wallcraft believes it’s still not worth it for most.
“For people in their 20s who are trying to get started, I would never advise renting a car,” she says.
Basically, leasing means your money goes to the dealership and not your own equity in a car, says Mme Wallcraft. You pay for the depreciation of a new car, which loses value significantly after it leaves the garage, usually around 20%. You pay the dealer and at the end of the term you still don’t have a car.
There can be unpleasant surprises at the end of a rental contract, adds Mme Wallcraft. The vehicle will be examined carefully for damage, and if you have exceeded the mileage stated in the contract, you will be charged a fee.
“It can be quite a surprising amount at the end of the whole process […] and there is no way out of it,” explains Mme Wallcraft.
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 it, but after a while, that equity shifts in your favor.
“It takes a few years, depending on the length of the funding,” said Ms.me Wallcraft. It takes a while to have sufficiently paid off the car and be able to resell it for its value. »
For car enthusiasts who want a new vehicle every three or four years, financing for ownership still has advantages over leasing, Wiebe said.
“Even if you buy vehicles every three years, you can still benefit from buying and reselling, because at least you’re building some equity by owning the car you’re paying for,” he says. .
“But for most young people, buying and owning for a longer period of time is really going to free up your money to be able to put money elsewhere, especially for long-term savings,” he continues.
What about electric vehicles?
Regarding the rental of an electric vehicle (EV), Mme Wallcraft called the analysis of financial pros and cons “less predictable” in this relatively new market.
The residual values of EVs have not yet been fully understood, she says. Value being what the car retains over time, which is what lease payments are based on.
But rental contracts are very difficult to break, specifies Mme Wallcraft. So if you don’t like the electric vehicle model and all that entails, you’re stuck or penalized.
“I can’t imagine how difficult it would be to try to get rid of an electric vehicle lease and try to find someone who wants to take it back when there is actually no only 10% of the market that shows strong interest in electric vehicles today,” said Mme Wallcraft.
“It will change over time, but it would be extremely difficult. Better to finance at a rate you can afford, and then, even if you haven’t paid the amount off in full, at least the car is yours to decide what to do with it. »
For wealthy people
So, who is rental for? Mainly to wealthy customers. There are fewer problems with a new vehicle under warranty, underlines Mr. Wiebe.
“Let’s say you’re entering a well-paid profession that demands a lot of your time,” he says. You don’t have to worry about buying and selling a vehicle. You sign a contract, you make a simple payment, everything is under warranty and you somehow regain the time and the need to think about this aspect of your life. »
Leasing is also attractive for businesses that prefer not to have a car under their belt, according to Mme Wallcraft.
“It’s also a good option for very wealthy customers who want to drive the latest thing,” she explains. They know they want to have something new every two, three or four years. And they’re happy to essentially treat it like a subscription. »
