What is a car lease?

If you want to learn about car leases in Canada, you’re in the right place. Leasing a car is a great option for many people, giving them access to a vehicle without having to buy a new car. Continue reading to learn more about how car leases work in Canada, the differences between leasing and financing, and the pros and cons that come with leasing a car.

What is a car lease?

First, let’s explain what a car lease is. Think of a car lease like a rental agreement. When you lease a vehicle in Canada, you get the privilege of driving a certain car for a specific period of time in exchange for paying a monthly fee.

Unlike when you buy a used vehicle or a new one, there are several restrictions that come with a lease agreement. These vary but may include a kilometre limit, early termination fees, excessive wear and tear fees, and the requirement that borrowers purchase certain types of car insurance.

How car leases work in Canada

When you sign a car lease in Canada, the lease typically lasts between two and five years. During this time, the lessee pays to use the vehicle. Once the lease comes to an end, the vehicle must be returned to the dealership. You may also have the option of purchasing the car if you wish to do so. There are also several types of car leases to be aware of, including standard leases, lease to own, and lease takeovers.

Leasing vs. financing a car

Just as some drivers debate between buying or leasing a vehicle, others debate between leasing or financing a car. Leasing and financing a vehicle are not the same. When you lease a car, you do not own the car at the end of the lease term. Instead, you must return the vehicle to the leasing company or purchase it outright.

In contrast, when you finance a vehicle, you will own the vehicle at the end of the agreement. Although you make periodic payments whether you are leasing or financing a car, the payments you make toward a financed car go toward paying off the loan. Once your loan is paid in full, you gain 100% equity in the vehicle. Due to the fact that you gain ownership of the vehicle after the term, financing payments tend to be significantly more expensive than lease payments.

In fact, monthly financing payments may be 30% higher than monthly lease payments at the start. However, as the term goes on, things may begin to even out. Therefore, in the long run, financing can be less expensive than leasing. You can use an auto loan calculator to determine how much you can expect to pay.

What to consider before deciding between leasing and financing

There are several considerations to make before deciding whether to lease or finance a car in Canada. To help you make this decision, you can start by asking yourself the following questions:

• How much can I afford to spend on a monthly car payment?
• How will I find the car payments, e.g. a line of credit, a car loan, financing, etc.?
• Can I afford to make a down payment, and if so, how much?
• How many kilometres do I typically drive each year?
• Do I want to be able to drive a new car every couple of years?
• How many years do I want my lease or financing agreement to last?
• Do I want to be able to trade in a car for my next vehicle?
• Do I want to have equity in the car I drive?
• Do I intend to wish to modify the vehicle in any way?
• Do I take my car in for regular maintenance?

Although it might take some time to answer these questions, carefully consider each to help you make the right decision for your driving habits and wallet.

Types of car leases in Canada

There are several types of car leases in Canada, and should you decide to lease a vehicle, it’s important to be aware of each of them and how they differ from one another. We break down a few of the most common types of car leases in Canada below:

Closed-end car leases

Closed-end car leases, also known as standard lease agreements, are by far the most popular type of lease agreement in Canada. They involve the borrower returning the car to the leasing company at the end of the term. With a standard lease agreement, the lessee will be required to make a small down payment, as well as monthly payments for the duration of the lease term.

When the lease expires, the car will need to be returned to the leasing company. The lessee might also have the option of trading the car in for a newer model, at which time the terms of the lease agreement would be renegotiated.

Please note that to obtain a standard lease agreement in Canada, you will need to be approved by the leasing company, which usually involves an evaluation of your financial and credit profile.

Lease to own car leases

Leases to own car leases operate similarly to financing agreements in that the borrower has the option of gaining ownership of the vehicle at the end of the term. As with a standard leasing agreement, lease to own agreements still require the lessee to make periodic payments to the leasing company in exchange for driving the car. These may be made on a weekly or bi-weekly schedule.

However, unlike with a standard lease agreement, the periodic payments you make in a lease to own agreement allow you to build equity.

Please note that with a lease-to-own agreement, the leasing company or dealership retains the title to the vehicle until the borrower has paid the loan off in full. Lease to own agreements may be more common at smaller car dealerships compared to large ones and for customers with bad credit. This is because the dealership is unlikely to do a credit check before issuing a lease-to-own agreement.

Rather, all a customer needs to provide is photo identification, proof of income, proof of residency or citizenship in Canada, and sometimes proof of car insurance. You can learn more about the different types of auto insurance and how leasing affects insurance by contacting BrokerLink. One final thing worth noting about lease to own agreements is that unlike with standard lease agreements, which often involve leasing brand-new vehicles, lease to own agreements usually involve older vehicles. Therefore, you won’t have a collection of shiny, new cars to select from.

Lease takeovers

One last type of car lease agreement in Canada is a lease takeover. A lease takeover occurs when a driver sells their leased car to another person, who then inherits their leasing contract. This is common when the lessee wishes to terminate their lease agreement early. Lease takeovers are usually a good deal for the person who inherits the lease, as the upfront costs and fees are lower.

Plus, some sellers offer a cash incentive to the person who agrees to take over their car lease. On the flip side, lease takeovers come with heightened risk. For example, you may not be fully aware of the vehicle’s condition or the mileage restrictions. If you don’t carefully inspect the terms of the lease, as well as the vehicle, you could be in trouble when the lease expires.

When you should consider leasing a car in Canada

There are several circumstances under which drivers should consider leasing their cars in Canada. The following are two categories of people who might be well suited to leasing vehicles:

You are on a tight budget

First and foremost, drivers on tight budgets should consider leasing vehicles. If you’re looking to reduce the costs that come with car ownership, leasing a car will significantly decrease your monthly costs.

You want to change your car every few years

Second, leasing is ideal for people who want flexibility. Since you do not own the car, you have the freedom to return the car at the end of the agreement and get a new one. Some drivers love swapping cars every few years, as it gives them a chance to test out driving a wide range of vehicles. If this sounds like you, leasing is a great option.

Plus, if you find a car you like, you will likely have the option of buying it at the end of the term. Further, in terms of flexibility, although lease agreements feature several restrictions, borrowers still have the ability to negotiate various terms.

For example, if you want to amend the length of the lease, the monthly payment amounts, the interest rate, or the kilometre limit, you can try to do so through negotiations. You can even negotiate a buyout price at the end of the contract if you are interested in purchasing the car.

You don’t want to be stuck paying long term

If you are looking for a short term solution to have a new vehicle, leasing can be an option. With terms between 2 and 5 years you can get a short term policy with your lease.

When you shouldn’t lease a car in Canada

Leasing a car isn’t for everyone. In fact, there are a few circumstances in which leasing a car may not make the most sense for you. They are as follows:

You drive frequently

If you spend an above-average amount of time on the road, then owning your car might be the wiser choice. This is due to the fact that most lease agreements come with strict mileage limits. If you go over these limits, you will have to pay a penalty. Thus, if you love long road trips or have a long daily commute to work, leasing may not be the best financial design for your situation.

You hope to drive the same car for a long time

If you hope to drive the same vehicle for a long time, then owning probably makes more sense than leasing. Although you can choose to buy the car at the end of the lease agreement, leasing it before buying it will likely cost you more money than buying or financing it from the get-go.

You want to modify or customize your vehicle

If you’re someone who loves modifying or customizing their cars, then leasing probably isn’t for you. When you lease a vehicle, you may be prohibited from modifying the car in any way. If you are allowed to make modifications, then chances are you will have to remove them and return the car to its original state before the end of the agreement.

The pros of leasing a car in Canada

There are many advantages to leasing a car in Canada. We outline a few of them below:

You get to test out a new car every few years

By leasing a car, you get to enjoy driving several new cars. If you’re someone who loves the experience of testing out a variety of cars, then leasing may be perfect for you. You will get to drive a new model every two to five years, depending on the length of your lease agreement.

You get to drive brand-new cars

If you enter into a standard lease agreement, then you will also have the benefit of driving a brand-new car. Standard lease agreements usually allow lessees to drive new cars. This is in contrast to lease to own agreements, which usually only give lessees the option of driving an older model. If you wouldn’t otherwise be able to afford a new car, leasing can be a great option for you.

Your leased car will be under warranty

Another advantage of car leases in Canada is that since you are driving a brand-new car, it is likely still covered by the manufacturer’s warranty. This can save you a lot of money if something goes wrong. To confirm how much time is left on the car’s warranty, research the terms of the warranty or ask the car dealership for a copy.

Less expensive monthly payments

Cheaper monthly payments is yet another benefit of leasing a vehicle in Canada. As mentioned above, leasing is usually cheaper than financing and also less expensive than owning.

The cons of leasing a car in Canada

While there are many advantages that come with leasing a car in Canada, there are also a few disadvantages. Read through the cons that may come with car leases below:

You will not own the vehicle at the end of the term

In contrast to financing where you own the car at the end of the term, leasing a car does not give you ownership of the vehicle. Leasing only gives you the right to drive it, not the right to own it. If you sign a lease to own agreement, then you might have the option of buying it at the end of the contract, but you still won’t have any equity in the car as you would with a financing agreement.

You will be subject to a mileage limit

Nearly all lease agreements have mileage limits. This means that you can only drive a certain number of kilometres for the duration of the agreement. If you go over this limit, you will be subject to hefty fees. These fees are often per kilometre.

You may have to pay wear and tear fees at the end of the term

Depending on the terms of your leasing contract, you may have to pay an additional fee if your car shows signs of excessive wear and tear at the end of the term.

You can’t modify your car

Most lease agreements stipulate that the lessee is not allowed to modify or customize the car in any way, or if they do, they must remove it before the end of the term.

You cannot end the agreement without a financial penalty

Another con of a lease agreement is that if you decide you wish to end your lease, you will likely have to pay a steep financial penalty. These are known as termination fees and they can be extremely expensive. Be sure to review the terms of your lease agreement to find out exactly how much it would cost you to get out of your lease early.

You have to return the car at the end of the term

When your car lease expires, you are contractually obligated to return the vehicle. You may even have to pay end-of-lease costs. Alternatively, if you finance your car, you will take ownership of it at the end of the term, as the payments you make are equity.

Leasing a car and auto insurance

There are a few things you should know about how leasing a car impacts car insurance. Your decision to lease a car in Canada can impact your car insurance policy in a few ways. First, your leasing contract may stipulate that you have to buy certain types of car insurance coverage beyond the legal requirements. For instance, many dealerships require lessees to purchase gap insurance, collision insurance, and comprehensive insurance. These are all optional insurance coverages for most drivers, but those who have lease agreements may be contractually obligated to purchase them. The good news is that adding these types of coverage to your auto insurance policy will give you more protection. The trade off is that buying car insurance will likely cost you more money. In addition to buying extra protection, the leasing company may state that you need to purchase certain amounts of other types of coverage, like a specific limit of third party liability coverage that is more than the minimum requirement in your province. Overall, the insurance policy you buy for your leased car may be more expensive than if you purchased a car. However, your rates also depend on other factors unrelated to whether you lease or own your vehicle. These can include your age, credit score, gender, insurance history, home address, annual mileage, local laws, how you use your vehicle, and more.

Contact BrokerLink to learn more about car leases in Canada

If you are ready to take the plunge and lease a car, reach out to BrokerLink. We can answer all of your car lease-related questions, as well as explain the differences between leasing and financing and the pros and cons of both. As an insurance brokerage, we can also help you find the right insurance coverage for your leased vehicle. One of our licensed insurance advisors can provide insight into buying a car without insurance, renewing car insurance, and how to save money on auto coverage, such as by buying multiple auto insurance policies. Of course, we can also offer you a free car insurance quote. Reach out to us today to request your free quote now. BrokerLink can be reached over the phone, in person, or via email. You are also invited to take advantage of our online quote tool, through which you can receive an accurate and reliable auto insurance quote in as little as five minutes.

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