Leasing a vehicle

Step 1: Deciding to lease or buy

Leasing vs. buying

Leasing is based on the concept that you pay for the vehicle's depreciation during the time you drive it. When you lease, you are essentially renting the vehicle for a number of years. You have the option of making a down payment to reduce the size of your monthly payments, and pay a money factor, which is similar to interest on a loan.

The money factor is calculated by expressing the interest rate as a decimal, i.e. 10 per cent = .1, then dividing that number by 24. You can also get the amount by multiplying the money factor by 2,400 to convert it to an approximate annual interest rate.

Leasing may be for you if you like to drive a new car every few years, want to keep your payments lower, and don't mind the restrictions included in most lease arrangements.

Buying a car may be more expensive initially, but you'll end up with equity in your vehicle, i.e. an asset you can sell. From a dollars and cents standpoint, you are usually better off buying rather than leasing.

Pros and Cons of Leasing

Advantages:

• Lower down payment if desired
• Lower monthly payments
• New vehicle every few years
• Eliminates trading in and selling the vehicle

Disadvantages:

• Confusing process
• Restrictions/conditions/penalties placed on use
• Potential to cost more than conventional financing
• No equity at end of term

Loans vs. leasing

When you compare lease payments with loan payments, that monthly figure shouldn't be your only consideration. Remember that at the end of a 36-month lease, you either give back the vehicle, or buy it out. The residual value owing on the vehicle is often quite high. You may have to finance the remaining amount over another three or four years, at which time, the vehicle maybe be six or seven years old when it's paid off.

Use the federal government's website to help you decide whether you should finance or lease with their calculator. The site also offers leasing tips, as well as definitions.

How long should your lease be?

Lease agreements range anywhere from two to five years. A three-year lease may be the best option for a number of reasons:

• Many manufacturers offer three-year warranties, which means with a three-year lease, your vehicle will always be under warranty.
• A four or five year lease means you may have to pay for repairs and consider an extended warranty for added protection if the vehicle is only covered by a three-year warranty.

Payments can be lowered even more with an extended lease, but by extending a lease, you'll end up paying more in the long run for something you'll never own.

Step 2: Check the ads ? carefully

Lease ads may look great. You might assume you can drive away in a brand new vehicle for $200 per month. Take a close look at the ad and read the fine print. What may appear to be the deal of a lifetime may not include GST. You may have to come up with a large down payment to secure an acceptable monthly payment. The lease term may also be much longer than what you are looking for.

What to look for

• Incentives and rebates: Some auto manufacturers offer incentives to spur the sale of slow-selling vehicles. Car ads are an important way to learn about this financing method. It's a good idea to apply a rebate or incentive to the down payment, which will lower your monthly payments.
• Additional taxes: GST is rarely included in the figures quoted in advertisements.
• Length of the contract: Some monthly payments look good until you see the term of the loan; $399 a month might be manageable for 36 months, but stretched over 48 or 60 months it becomes less of a bargain.
• Available models: Some models qualify for big savings. Others don't. Read the fine print.
• Interest rates: Dealers may offer low interest rates available through the manufacturer. These rates can be better than bank loans and save you money over the term of the loan. Don't forget to check traditional institutions such as banks and trust companies.

Shop around and compare

Different leasing companies offer different deals. Don't use monthly payments as the only comparison.

• Examine all conditions and requirements carefully.
• Determine the annual mileage limits, penalties for early termination, the definition of normal wear and tear, and any other conditions imposed on the use of a leased vehicle.
• Avoid open-end leases in which you must guarantee the residual value of the leased vehicle at the end of the term. Closed-end leases that allow you to walk away from the vehicle are preferable.