When a tree recently fell on our car, we had to get a new car in a hurry. Like many people, we struggled between leasing or buying. Both methods have advantages and disadvantages, so it's important to understand your needs and payment habits before signing on the dotted line.
With a loan, you borrow money to purchase the car then own it once the loan is paid off. With a lease, however, you agree to pay a leasing agency (a lender often identified through the car dealer or manufacturer) to use the car during the lease period – but you're never the owner unless you decide to buy it after the lease ends.
Leasing advantages. Some people prefer to lease because monthly payments and upfront costs can be significantly less than with a loan; thus, they can either budget less for transportation or drive a more expensive car. Many who lease prefer driving a new car every few years, don't mind permanent monthly payments and like that the car is usually under full warranty throughout the lease.
Leasing does have potential downsides, however:
It's often difficult and expensive to get out of a lease, so if you think your income or employment status may change dramatically, tread carefully (for example, should you lose your job, retire, get sick, etc.)
Standard mileage allowances are typically 15,000 to 20,000 kilometres annually. If you average more than that per year during your lease, you'll likely pay a set fee for each excess kilometre. (Some leases allow upfront payment for excess mileage at a reduced rate.)
You're responsible to pay for any unreasonable wear and tear or damage, and possibly required to remove any customized features you've added before the lease is up.
If you lease a more expensive car, your insurance costs likely will be higher. And remember, bigger cars usually get worse gas mileage.
If you do decide to lease, always try to negotiate a lower initial sales price for the car, because your monthly lease payment is largely based on the difference between this price and what the leasing agency thinks it can sell the car for when the lease expires. Thus, the smaller the difference between those two costs, the better for you.
Compare leasing packages from multiple dealers and leasing agencies, and don't hesitate to arrange your own financing. A dealer may be willing to find you similar or better financing to get your business.
If you think you might want to buy the car when the lease ends, check how much comparable used cars cost online or in the Canadian Red Book (www.canadianredbook.com) to make sure you get a good deal. And don't be afraid to offer less – the lender may have a glut of cars to sell and be receptive to your offer.
So bottom line: Weigh the choice between leasing and owning carefully to make sure you pick the right option for your specific situation.
Carla Hindman directs Visa's financial education programs in Canada. To follow Carla Hindman on Twitter: [url=http://www.twitter.com/MoneySkillsCA]http://www.twitter.com/MoneySkillsCA[/url]
