Should You Lease or Buy Your Next Vehicle?
Whether it’s better to lease or buy a new vehicle is a common dilemma.
The answer depends on the specifics of your situation.
Many consumers can overburden themselves with car leases or loans they cannot afford. While most of us require a vehicle to get to and from many destinations throughout the week, we don’t need a high-end vehicle to serve this purpose.
Remember that overspending on a vehicle affects your debt ratios and may restrict or negate your financing ability when looking for a mortgage.
Leases and purchase loans are two different methods of automobile financing. One finances the use of a vehicle, while the other finances the purchase of a vehicle. Each has its benefits and drawbacks.
When deciding to lease or buy, you may want to look at your financial abilities regarding your debt ratios. If you’re unsure how leasing or purchasing a vehicle may affect these ratios, it’s best to speak to your mortgage broker before making your decision.
When purchasing a vehicle, you pay for the entire vehicle cost, regardless of how many kilometres you drive. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company based on your credit history. Later, you may decide to sell or trade the vehicle for its depreciated resale value.
When you lease, you pay for only a portion of a vehicle’s cost, which is the part that you “use up” while you occupy its use. The down payment is optional, paying sales tax only on your monthly payments, and paying a financial rate, called a money factor, similar to the interest on a loan. You may also be required to pay fees and a security deposit. You can either return the vehicle at lease-end or purchase it for its depreciated resale value.
For example, if you lease a $20,000 car with an estimated resale value of $13,000 after 24 months, you pay for the $7,000 difference (depreciated value), plus finance charges and fees.
You pay the entire $20,000 plus finance charges and fees when you buy. Therefore, leasing offers a lower monthly payment than buying.
Lease payments are composed of two parts: depreciation and finance charges. The depreciation part of each monthly payment compensates the leasing company for the portion of the vehicle’s value lost during your lease. The finance part is interest on the lease company’s money tied up in the car while you’re occupying the vehicle.
Loan payments also have two parts–a principal charge and a finance charge. The principal pays off the total vehicle purchase price, while the finance charge is loan interest. Since all vehicles depreciate, whether leased or purchased, part of each loan payment’s principal charge can be considered a depreciation charge. Just like with leasing, it’s money you never get back, even if you sell the vehicle in the future.
The remainder of each loan payment goes toward equity, or resale value, which is what remains of your car’s original value at the end of the loan after depreciation has taken its toll. Typically, the longer you own and drive a vehicle, the less equity you have. In the last couple of years, used vehicle sales have shown this to be outside the norm with above-average sale prices.
With leasing, you may want to put your monthly payment savings into more productive investments, such as your mortgage, an investment property or a vacation home, which will increase in value. Many experts encourage this practice as one benefit of leasing.
Deciding whether to buy or lease a new vehicle depends on your financial and home ownership goals.
Do you have questions about home ownership and the mortgage process? Let’s talk today! I can be reached by phone at 250-320-4110 or by email at tarasales@mortgagewest.ca
Tara Sales
The Right Advice at The Right Time
