How does leasing a car work?

Leasing a car in Canada has become a popular choice for many motorists, especially as the average cost of a new vehicle is rising to $67,817 in 2024, according to Driving.ca. If you prefer lower monthly payments, driving a new vehicle or want to avoid the long-term commitment of car ownership, driving a leased vehicle may be the choice for you. That said, leasing a car isn't for everyone, and with high interest rates, many Canadians are wondering whether a car lease is worth it.

In this guide, we'll break down everything you need to know about leasing a vehicle. Whether you're comparing lease vs. buy options, trying to understand your monthly lease payments, or considering an electric vehicle lease, you'll find helpful examples, different financial calculations, and more to help you make an informed decision before moving forward.

Article summary:

• Leasing usually means lower monthly payments than financing, but higher long-term cost if you keep leasing.

• Your payment depends on capitalized cost (price), residual value, money factor (interest), term, taxes/fees.

• At lease-end, you can return, buy out, or lease new.

• Business users may deduct lease costs up to CRA limits with proper records.

• Lessors typically require full coverage + higher liability limits than provincial minimums; GAP is strongly recommended/required.

• EV leases can qualify for federal/provincial incentives; long terms (≥48 mo) may unlock the maximum federal iZEV rebate.

Car lease vs. buy: Pros and cons

Leasing a car and buying a vehicle through a car loan, or outright, have pros and cons that cater to different lifestyles and long-term goals. Let's take a closer look at some of the advantages and potential downsides in more detail below:

Cost comparisons over time

Leasing generally means lower monthly payments than financing a new vehicle through an auto loan, with the average lease agreement being 48 months in Canada. This is mainly due to you paying for the vehicle's depreciation, not its value. For example, according to Experian, the average loan amount for a new car in Canada reached $40,927 in the second quarter of 2024. Financing this amount over the next 5 to 7 years, especially with high interest rates, can be financially stressful. In contrast, lease payments are based on:

• The car's capitalized cost, also known as the purchase price.

• The residual value, which is the estimated value of the vehicle at the end of your lease term.

• The money factor, also known as the interest rate of leased vehicles.

Note that while leasing a car may lead to more affordable monthly payments, owning a vehicle outright will benefit you long-term, especially once your car loan payments are all paid.

Flexibility and ownership

Leasing a car offers you flexibility, making it a great option for those who want to drive a brand-new vehicle every few years. But you’ll never build equity in the vehicle, and you're limited by annual mileage limits and potential penalties for wear and tear. Here’s what to know about leased vehicles:

Buying is better than a leased car if:

• You commute long distances throughout the week.

• Want to customize your vehicle to your needs and driving habits.

• Aren't worried about dents and scratches.

• Want to own your vehicle outright after it’s paid off.

Driving a leased vehicle makes more sense when:

• Want a new car every two to four years.

• Drive under 20,000 kilometres annually.

• Don’t mind making car payments long term

• Can write off your monthly payments as a business expense.

How car lease payments are calculated

While we briefly touched on this above, knowing exactly how your lease payments are calculated will give you a better idea about making monthly payments through a lease agreement or auto loan:

Residual value

The residual value is the vehicle’s estimated worth at the end of the lease. The higher the residual, the lower your monthly payments. According to Lease End, vehicles like the Honda CR-V and Toyota RAV4 are routinely ranked among the best leases, given their excellent resale value as well as slow depreciation rates.

Capitalized cost

Capitalized cost is the purchase price of the vehicle, minus any down payments or trade-in values. You may be able to negotiate this price to lower your monthly payments.

Money factor

Money factor is another term for interest rate. To find the money factor, multiply 2,400 by to get the annual percentage rate for your lease agreement. For example, if your lease contract has a money factor of 0.0020, multiply this by 2.4000 to get a 2.4% APR. Note that Capital One Auto Navigator states that a money factor of 0.0025 and below, which equals a 6% APR, is considered a good rate when leasing a car.

Taxes and fees

Leases also include:

• Sales tax, varies by province.

• Lease acquisition fees (administrative charges, ranging from $395 to $995).

• Disposition fees, which you are charged if you return the leased vehicle instead of buying it.

Example lease agreement

Let’s say you’re leasing a $40,000 vehicle:

• Residual value: $22,000 (55%)

• Lease term: 48 months

• Interest rate: 6.5% APR

• Capitalized cost: $39,000 after negotiation

Your monthly payment would cover the $17,000 depreciation, interest, and taxes. Your monthly lease payments would then be $355.82 before tax.

Your lease contract with your leasing company ends. What now?

When your lease expires, you have three options of what you can do next. Let's take a closer look:

Lease buyout

This means purchasing the car for its residual value, which, remember, is the price set at the start of your lease contract. You may choose to buy out your leased vehicle if:

• You've grown attached to the car after 3 to 4 years, and want to continue driving it.

• Market values have changed. If used vehicle prices have gone up like they have since COVID-19 due to supply chain shortages and inflation, your buyout price might be lower than the car’s current market value, making it a smart financial move to purchase it.

Lease return

You return the car to the lease company. They’ll perform a wear-and-tear inspection and assess any excess mileage. If the vehicle is in good shape and under mileage, there’s little or no cost beyond the disposition charge.

However, if you're over your mileage limits, most lease agreements will charge excess mileage fees. Additionally, you may be charged fees for excessive wear and tear.

Lease a new vehicle

Leasing a brand-new car once your lease term is up is another popular choice for many Canadians. It allows you to drive a new car and potentially qualify for leasing incentives from the leasing company, especially if you are a repeat customer.

Leasing for businesses & self-employed Canadians

As we mentioned, leasing a car is a great choice for many Canadians, but it's not for everyone. That said, leasing a car can be a strategic move for many business owners and self-employed professionals in Canada. Here's how:

Tax advantages

According to the Canada Revenue Agency, as of 2024, your monthly payments for your leased car can be deducted from your income taxes for the year up to a maximum of $900 per month plus HST and GST. This can make leasing a car more affordable for you. However, note the following when leasing a vehicle for business:

Restrictions to be aware of when leasing a vehicle for business-purposes

In order to qualify for the CRA tax deduction, your leased vehicle must be used for business purposes more than 50% of the time. You also need to keep a logbook of business vs. personal use. >When Leasing a Vehicle for Your Business Makes Sense:

Leasing a vehicle for business is ideal for

• Real estate agents.

• Freelancers with frequent travel.

• Contractors and consultants.

Insurance implications when leasing a car

Choosing to lease a car comes with special insurance implications you need to be aware of:

Gap insurance

Gap insurance is essential when leasing a car. For example, if you are in a car accident and your leased vehicle is totalled or it's stolen, your insurance company will only cover the vehicle’s actual cash value (ACV), not the full lease balance. The gap between those two amounts is your responsibility to pay out-of-pocket if you do not have the coverage.

Note that some leasing companies require gap coverage, while others have this insurance built into your car lease.

Comprehensive coverage & collision coverage

Full coverage is mandatory on all leased cars:

• Comprehensive insurance protects your vehicle from theft, vandalism, fire, falling objects, and weather damage.

• Collision insurance will cover repair costs if your car is damaged in a car accident.

Provincial regulations

While all leased vehicles require car insurance, requirements will vary between provinces:

Ontario

• Before finalizing your car lease, your leasing company will require that you show proof of insurance before you're able to drive off the lot and register your car.

• Within this insurance plan, you must have a minimum of $200,000 in liability car insurance, although many leasing companies require $1 million liability coverage.

• Beyond this, standard OAP 1 coverage applies and includes accident benefits coverage and uninsured motorist insurance. Some lessors may also require an auto additional insured endorsement.

Quebec

• Quebec mandates a minimum $50,000 liability for property damage under the SAAQ system. However, if your leasing company requires higher coverage limits, you will be required to purchase them.

Electric and hybrid vehicle leasing in 2024

As of the fourth quarter of 2024, 20% of all new car leases in Canada were for electric vehicles, which is a huge increase from 2.1% in 2020. Leasing is a great option if you want to experience new car technology without committing to long-term ownership.

Rebates and incentives

Many provincial and federal EV rebates still apply to car leases, including:

• The iZEV program, which offers up to $5,000 off EV leases of at least 48 months. For shorter lease terms, the incentive is lower.

• In Quebec, you can receive up to $600 from the provincial government if you install a charging station at home, even if your EV is through a car lease!

Charging and maintenance costs

While maintenance costs for electric vehicles are more affordable than gas and diesel models, installing a home charging station will cost you between $1,500 and more, depending on where you live and the current electrical infrastructure of your home. However, some dealerships, like Hyundai, offer charging credits and discounts on home chargers when you lease certain electric vehicles.

If you're unsure whether buying an electric vehicle is worth the investment, leasing one for a couple of years is a great way to see how they fit into your lifestyle before making a long-term commitment.

Can I end a lease early?

Yes, you can end your lease before the end of your lease period. However, most companies charge early termination fees. You’ll likely owe remaining payments, additional fees, and adjustments for depreciation. Some dealers offer you the option to transfer ownership of the leased vehicle to someone else.

Do I need a good credit score to lease a car?

To be approved for a car lease, you want your credit score to be as high as possible, ideally no less than 660. Take steps to raise it in the months or years prior to your car lease, such as by paying off as much debt as possible to save yourself money on your car lease. You can also unlock a better interest rate if your credit score is higher.

Is leasing a car better for the short term?

Yes, leasing a car is better short-term if you want to avoid long-term financial commitments and higher monthly payments, enjoy driving new car models, and have low annual mileage.

Who pays for routine maintenance and repairs on leased cars?

You do. Just like owning a vehicle outright, you are responsible for all oil changes, tires, brakes, fluid top-ups, and repairs. Some leases include basic maintenance packages, but they’re not always offered. Remember, any repairs the car requires during your lease term may result in fees from your dealership.

Can I modify or customize a leased car?

No, unfortunately, you can't perform any modifications to your leased vehicle. You must return the vehicle in its original condition, minus normal wear and tear, or you could be charged fees for the modifications or damages.

Can I get a one-year car lease?

Car leases in Canada typically last a minimum of two years, which means finding a one-year lease may be difficult. That’s not to say it is impossible, but one-year leases are certainly far rarer. Further, if you do find a leasing company that is willing to offer you a one-year car lease, odds are that the monthly payments will be more expensive.

Contact BrokerLink today

Leasing a vehicle is a great option if you're looking for flexibility and no long-term commitments. But it's not a one-size-fits-all solution.

Whether you’re leasing for personal or business use, BrokerLink can help you get the insurance coverage you need at an affordable price. With access to numerous policies from some of the top providers across Canada, our brokers can work within your budget to ensure you purchase insurance you can feel confident in.

Speak with a licensed broker today to protect your leased vehicle by contacting us over the phone or using our free online quote tool!

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FAQs on car leases in Canada

Can I get a one-year car lease?

Car leases in Canada typically last a minimum of two years, which means finding a one-year lease may be difficult. That’s not to say it is impossible, but one-year leases are certainly far rarer. Further, if you do find a leasing company that is willing to offer you a one-year car lease, odds are that the monthly lease payments will be higher. Thus, a better option might be to find a lease takeover that only has one year left on the lease. You could also consider leasing a used car, which might have cheaper monthly payments.

What types of cars are available to be leased?

Many types of cars are available to be leased in Canada. Most commonly, vehicles available for lease are new. However, this may include new pickup trucks, SUVs, sports cars, minivans, sedans, and more. Keep in mind that a new car isn’t necessarily one that was manufactured this year or the year prior. It may refer to a car that is a few years old but that has never been used before.

What is the difference between leasing a car and financing a car?

The main difference between leasing and financing relates to ownership. When you take out a car loan to finance your car, the loan payments you make are going toward your future ownership of the vehicle. Oppositely, with leasing, the payments you make are simply to use the vehicle, not to own it. The monthly lease payments you make do not build equity the way that monthly financing payments do.

What are the benefits of buying leased car insurance from an insurance broker?

The benefits of an insurance broker are endless. Car insurance brokers can help all kinds of drivers purchase quality coverage. Whether you lease your car or own it, and whether you drive a luxury sports car or a basic sedan, a broker can ensure you get a great policy at an affordable rate. Plus, an insurance broker can review the terms of your lease agreement and make sure you purchase a car insurance policy that meets them. For instance, sometimes lenders require borrowers to purchase additional coverage, such as comprehensive or collision coverage.

If you have any questions, contact one of our local branches.