Leasing vs. Financing Car: All You Need to Know

WOWA Simply Know Your Options

Factor	Car Leasing	Car Financing
Monthly Payments	Lower	Higher
Down Payment	None or Low	Higher
Ownership	No Ownership. The car is returned at the lease end.	The vehicle is owned after the loan is paid.
Long-Term Cost	More expensive over the long term.	Cheaper over the long term.
Flexibility	Includes penalties for breaking the lease early.	Ability to sell or refinance.

When getting a new car, the two main options Canadians get are leasing and financing. The third option is buying outright; however, only some people can afford that alternative. While both leasing and financing require you to make monthly payments, the ownership makes the two different.

While you own a financed vehicle, leasing is like renting a car for an extended time period. Monthly lease payments are usually much lower than monthly finance payments, as you only pay for the vehicle's depreciation during the lease term. Finance works similarly to mortgages, and you may find different car loan rates offered by different car dealerships and lenders, just like in the case of mortgage rates. Both have pros and cons, and understanding both options can help you decide your better choice. Read below to learn more about lease vs. finance car options.

Car dealerships in Canada offer the option of leasing a vehicle of your choice. When you lease a car, you pay to use the car for a predetermined length of time, called the lease term. The common lease terms in Canada are 24 and 36 months. You must return the car to the dealership at the end of this term. Car dealerships offer the option to buy out the vehicle at the end of the lease term if you don’t want to return it.

Monthly lease payments are much lower than monthly car loan payments, as you pay only for the car's depreciation during the lease. The car's value at the end of the lease term is called residual value, which is the basis of the monthly payment calculation. The most significant drawback of leasing is that you don’t own the vehicle; thus, you don’t build any equity in it. Listed below are all the pros and cons of leasing a car.

Pros and Cons of Leasing a Car

While car leasing may seem attractive due to lower monthly costs, it is more expensive in the long run. When you finance a vehicle, the monthly payments may be higher, but you end up owning the car at the end of the finance term, and you can continue to use the vehicle for years to come. However, a car lease may be a favorable choice for those who like to change cars every few years and do not wish to own them.

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Financing a car simply means getting a loan for the car, which works similarly to home mortgages. Usually, you can get financing directly from the dealership, but other financing institutions also offer car financing. The vehicle is usually used as collateral for the loan.

Financing may be ideal for those who wish to own a car and intend to drive it for a long time. When you finance a vehicle, you can drive the car indefinitely, even after the loan term ends. You can also choose to sell or trade in the car anytime. Listed below are the pros and cons of financing a car.

Pros and Cons of Financing a Car

While it may seem more expensive to finance a car, given the higher monthly payments, the payments are for a limited time, after which you own the car without making any monthly payments. Financing a car offers greater flexibility in the long run and is often the better option for those who do not wish to change cars every few years and would rather be free from monthly payments after the loan is paid off.

If you have a bad credit score, your options may be limited. It may be difficult to lease a car when you have a bad credit score, as you cannot use the car as collateral in the contract. You may have to offer a higher down payment or get a cosigner to sign the lease to get a dealership to approve your lease. One option may be to take over someone else’s lease if you know someone looking to transfer their lease. Individuals with credit scores in the 600s may be able to lease a car; however, it is recommended to maintain a credit score of over 700 if you want to lease a car.

On the other hand, you may be able to get financing for a car with a bad credit score, but you may be charged a higher interest rate. It may be easier to secure financing for a car, as the car can be used as collateral for the contract. If you have a bad credit score, going through the financing route may be simpler, even if it is more expensive.

Both leasing and financing a car can help rebuild your credit score. To ensure the same, you should always make your payments on time and avoid missing payments.

If you are using a car for your business, you can deduct some of the costs of the car from your income for tax purposes. You can expense a vehicle in the case of both financing and leasing. Many business owners question whether leasing or financing is better for them from a tax perspective.

When you lease a car, you can deduct up to $900 before HST (or GST and PST), meaning if your lease costs $1,000 monthly before HST (or GST and PST), $100 of it would not be deductible. Furthermore, if you use the car for both business and personal use, you can deduct only for business purpose use. For example, if 60% of your car’s use is for business, you can deduct only 60% of $900, equaling $540 before HST (or GST and PST). The percentage is calculated based on the kilometers driven for business and the total kilometers driven. If your leasing cost is more than $900 per month, the eligible leasing cost for passenger vehicles can be calculated using the chart provided by CRA.

The tax deduction for financed vehicles works a bit differently. Business owners can claim depreciation on any asset that has been purchased for business use. The deductible capital cost allowance (CCA) is calculated based on the asset class. Most Vehicles fall under class 10 or 10.1, defined by CRA, unless they are zero-emission vehicles (ZEV), in which case they fall under class 54 or 55. Vehicles purchased after December 31, 2021, fall under class 10.1, and their maximum capital cost is capped at $34,000 excluding HST (or GST and PST). The maximum CCA rate for both categories is 30%, and CCA allowed in the year the vehicle is purchased is 50% of the amount. The deductible CCA amount decreases with every passing year and is calculated on a declining balance basis. Since you have a loan on a financed vehicle, you may also deduct interest on that loan up to a maximum of $300 every month.

In the above example, the deductible lease expense is slightly higher than the total deductible loan expense. However, each situation is unique, and the calculations may differ based on the car’s value, interest rate, loan/lease term, and other factors. You should also consider that leasing may have slightly higher tax benefits in the shorter term, but buying may be better if you plan to keep the car for a long time.