You can start collecting your CPP and OAS benefits in your early 60s. But is it better to hold off for another few years? Here’s what to keep in mind before you tap into these pensions.
November 03, 2022
Should you buy or lease your car?
By Véronique Harvey
Buy or lease your next car? It all depends on your needs...and your finances too. Here are some key things to consider.
Should you lease or buy a car? It’s a very good question. There’s no clear-cut answer. You need to consider your needs and your budget before making such a major purchase. Here are some key considerations to help you decide.
2022: The new post-pandemic reality
The automobile industry was not spared the disruptions of the pandemic. By 2022, used cars had shot up in price (increasing by 34% since 2020). Why? Because it can take a very long time to get a new car. For some makes and models, the wait can be more than two years.
Repeated lockdowns in 2021 disrupted supply chains around the world. The microchip shortage also delayed new vehicle production. Microchips are essential components of new car engines and electronics systems.
Experts are predicting a return to normal by 2024. If you are hoping to buy a new vehicle, you might need to be patient.
What are my needs?
To make an informed decision about leasing or buying a car, you need to consider:
- your needs, and
- your lifestyle.
How much do you drive
Do you put a lot of mileage on your vehicle? There’s a penalty if you exceed the limit set out in your lease agreement. The extra charge can vary from $0.04 to $0.12 per extra kilometre.
Standard limits typically vary from 12,000 to 24,000 km per year. However, some dealerships allow you to “purchase” additional kilometres at a discount. That’s an option worth considering if you think you may go over the limit.
But do the math first. The extra charge may push your monthly lease payments higher than monthly payments for financing a purchase.
How far from work you live
Telework is becoming more common and accepted. Many employees have chosen to move out of town. But moving to the suburbs or the countryside often means a lot of driving. And remember that the further away you are, the faster your kilometres will add up. Again, it’s a good idea to do the math before you decide whether to buy or lease.
- Read more: 4 good reasons to give up your car
Repairs
Roger Lafrance is the director of ACEF for Montérégie-Est, a non-profit that helps people budget and manage debt. He suggests you consider the cost of repairs beyond normal wear and tear. Think of:
- scratched paint
- damaged seats or door panels
- dents in the body
- cracked windshield
These will cost you a tidy sum at the dealership when your lease is up. Otherwise, you’ll have to pay for the repairs yourself before you return the vehicle.
Some dealerships offer extended warranties against damage and wear and tear. The cost for the warranty is added to your total bill. Remember to include this cost when you calculate your monthly payment. Again, your monthly lease payments could end up costing more than financing a purchase…
Changing vehicles soon
Leasing is a great option if you know you’ll be changing vehicles in the near future. For example, if a baby is on the way. Vehicles lose most of their market value in the first few years after purchase. Depreciation is typically 60% after five years, and 30% in the first year alone. If you sell your vehicle right away, you absorb this steep depreciation. The longer you keep your vehicle, the less depreciation will matter.
What is your budget?
Monthly payments to lease a vehicle are normally lower than to buy one. That’s a consideration for people on a budget.
Keep track of your monthly expenses
Financing that works for you
Keep in mind that “when you lease, you’re only paying to use the vehicle,” Lafrance points out. It doesn’t belong to you. If you don’t return the vehicle when the lease ends, you have to buy it at its current value. And you may have to take out a loan.
That’s why some analysts say that buying a car is cheaper. The reason is simple: you pay interest over a shorter period. “It’s more expensive up front. But after six or seven years, depending on the term of the loan, the vehicle belongs to you. If you keep your vehicle for ten years, you won’t pay anything during the final years of ownership. Except for maintenance and repairs,” Roger Lafrance explains.
Ideally, you would save up the monthly payments you used to make every month. “That would give you funds for vehicle repairs, or even a down payment on your next vehicle,” he says.
Attractive buy-back option
Other experts claim that leasing and then buying the vehicle is a good way to finance a car.
Éric Brassard is a financial planner and the author of Finance au volant. In his view, it’s better to pay a lower interest rate when the balance you owe is at its highest. Even an interest rate difference of 1% between leasing and buying is enough to make this an attractive option. If you’re able, you could take the money you’re saving on the monthly payment and invest it in an RRSP. Or use it to pay down high-interest debt.
Reach your financial goals
What about electric vehicles?
Electric vehicles are generally more expensive than traditional gas-powered vehicles. Many people choose to lease because they can’t afford to finance a vehicle that costs $50,000, if not more.
Lafrance says that some experts recommend leasing an electric vehicle because the technology keeps evolving.
What is the impact on your insurance?
The premium you pay for your car insurance is the same whether you decide to lease or buy a vehicle. The premium is actually based on:
- vehicle make
- vehicle model
- your driving experience
- your previous claims
- your driving record
If you make a claim, it’s handled differently for a leased vehicle. When you lease a vehicle, the leasing company owns the vehicle, not you. The insurance company will deal with the lender and not with you.
Whether you lease or buy, the leasing company (or finance company) may require specific coverages be included in your car insurance policy. Here are the main ones:
Accident benefits
Coverage for injuries resulting from an accident is mandatory in all provinces and territories except Newfoundland and Labrador.
Third-party liability insurance
This is financial protection, both for you and others, if you’re at fault in an accident. It’s mandatory in Canada, but the minimum varies by province:
- Nova Scotia: $500,000
- British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Newfoundland and Labrador, New Brunswick, P.E.I.: $200,000
- Quebec: $50,000
Collision and comprehensive coverage
This covers damage to your vehicle and is often required by leasing companies.
Deciding to lease? It’s important to ask if gap insurance is included in your policy. If it’s not, what if the leased vehicle is stolen or written off as a total loss after an accident? What if the insurance company doesn’t pay you the vehicle’s full value? Gap coverage protects the person leasing the vehicle in these situations. You simply hand over the keys to the vehicle and the cheque from the insurance company. The lender assumes the loss.
The Government of Canada has an online Vehicle Lease or Loan Calculator. The tool allows you to compare the cost to lease or loan a vehicle over time. Do the comparison to see which option is better for you!
Read more:
This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.
