Should You Lease or Finance a Used Car in Canada?

Lease or finance—which is the best option for a used car? This is the question everyone faces when it’s time to shop for a used car. You’ll get a completely different opinion on which option is best depending on whom you talk to. Although leasing a car usually costs less than financing a used car, there are additional factors to consider.

Expert Tips to Increase Your Used Car Trade-In Value

Selling Your Used Car in Ontario: How To Do It Right

Should You Lease or Finance a Used Car in Canada?

For a hassle-free experience, consider YST Auto Sales, your trusted used car dealer. Selling or trading in a used car in Ontario with YST Auto Sales is quick and easy. Simply visit our Sell Your Car page and enter your car’s details to get an instant cash offer within minutes.

Unlike selling privately through online marketplaces, YST Auto Sales eliminates listing fees and time-wasting negotiations and skips the hassle of meeting buyers. You will receive a transparent cash offer upfront. YST Auto Sales offers pick-up right at your door or a convenient drop-off location.

If you’re looking to upgrade, use your old car as a trade-in for a new one from our extensive selection. YST Auto Sales will even handle the simultaneous pick-up and drop-off for both vehicles. This also saves your valuable time and saves more on your new car—a win-win!

Should You Lease or Finance a Used Car in Canada?

Should You Leasing or Financing a Used Car in Canada?

What is a Car Lease?

A car lease is a financial agreement that allows an individual or a business to use a vehicle for a specific period in exchange for regular payments. Unlike traditional car financing, where the ultimate goal is eventually owning the car, a lease is more like a long-term rental.

In a car lease, the lessee (the person or entity leasing the car) makes payments to the lessor (the entity providing the vehicle, often a dealership or leasing company) for the right to use the vehicle.

A typical car lease includes:

Lease Term: Leases typically last for a fixed term of two to five years, during which the lessee is responsible for making monthly payments.

Insurance Requirements: Leased vehicles generally need specific car insurance coverage beyond basic limits.

Mileage Limits: Lessees are often limited in the kilometers they can drive yearly. If they exceed these limits, they may have to pay extra charges at the end of the lease term.

Monthly Payments: Lessees pay monthly fees to cover the vehicle’s depreciation, financing, and other costs as per the lease agreement.

Residual Value: The residual value refers to the anticipated value of the vehicle when the lease term ends. This value is established at the start of the lease agreement and plays an essential role in calculating the monthly payments.

Upfront Costs: Lessees may need to make an initial payment, which includes a down payment, a security deposit, and other fees. However, leasing a car often requires a smaller upfront payment than financing a used car.

Wear and Tear: You are responsible for maintaining the leased vehicle. Excessive wear and tear may result in additional fees upon return. Normal wear and tear is expected; anything beyond that may cost you extra.

Early Termination Fees: Terminating a lease early incurs substantial fees, so fulfilling the entire lease period is vital unless there’s a valid reason.

What are the Different Types of Car Leases?

Another component of leasing a vehicle in Ontario is the type to move forward with. The most common option is a closed-end lease, which allows consumers to return the vehicle at the end of the term. Here’s a look at other options:

Lease to Own vs. Financing: When leasing to own, you will own the vehicle like when you finance. The main difference is that the vehicle owner (dealership) will hold onto the title of the vehicle when you lease to own it until it’s paid off. When you finance, the title is transferred over right away.

Finance Lease vs. Operating Lease: In a finance lease, ownership is transferred to the lessee at the end of the lease term. In an operating lease, ownership is retained by the lessor during the term.

How Does a Car Lease Work?

A car lease typically lasts two to five years. You are paying to use the vehicle and the vehicle value you use during the lease with a lease. Leases can come in many types: standard leases, lease to own, and lease takeovers.

At the end of the lease term, the lessee has several options:

Return the Vehicle: The lessee can return the car and, if they stayed within the mileage limits and the vehicle is in good condition, walk away without additional charges.

Purchase the Vehicle: Some leases offer the option to buy the vehicle at the end of the lease term. The purchase price is often predetermined and includes the residual value.

Lease a New Vehicle: Some individuals choose to return their leased vehicle and lease a new one, continuing the cycle of having a new car every few years.

Leasing a vehicle can appeal to those who prefer to drive a new car every few years and want lower monthly payments than buying. However, it’s essential for potential lessees to thoroughly comprehend the terms and conditions of the lease agreement before committing.

Pros and Cons of Leasing a Car

Benefits of Leasing:

You want to drive a new vehicle: Lower monthly payments allow drivers to drive a model that they may not be able to drive if they had to buy or finance it, and you will enjoy a car during its most trouble-free years.

A new car every couple of years: If you like driving with the latest features and technology, leasing is a great way to get a new one every two to four years without worrying about fluctuating value when you want to resell.

You’ll be covered under warranty: You’ll likely always be leasing a new model and will be covered under the manufacturer’s warranty.

Lower monthly payments: Many people need to watch their bottom line and keep monthly expenses as low as possible. Leasing allows people to drive a new automobile for less than financing a used car.

You don’t drive a lot: If you don’t drive a lot, you don’t have to worry about kilometer limits or depreciation.

Disadvantages of Leasing:

Owning the Vehicle: When you finance a vehicle, you fully own it at the end of the agreement. When you lease, you only have the right to drive it, but you can buy it at the end for the value stated in the contract.

Mileage Limits: There is always a set amount of kilometers you can drive with a lease. If you go over, you’ll have to pay a per-km fee.

Wear and Tear: If your vehicle shows signs of excessive wear and tear, you’ll have to pay extra fees.

Mods: You can make as many car modifications or customizations as you own it, but any after-market additions will need to be removed when it is returned.

Ending the Agreement: When you finance, you can sell or trade it in whenever you want or need to, but you will still need to pay off the outstanding loan amount. In most cases, you will be charged a fee for breaking the lease before the end of the term. The termination fees will be due all at once.

Returning the Vehicle: At the end of a lease, you’ll have to pay end-of-lease costs, but if you finance, once the payments are done the vehicle is all yours.

What is Car Financing?

When you finance a vehicle, you borrow money from a financial lender. When you finance an auto loan, you have entered into an agreement to make monthly payments. You will pay more per month compared to leasing. Once the loan is paid, you will own the vehicle. Auto dealers have relationships with several lenders. You can choose one of their lending partners or get financing independently.

What’s the Difference Between Leasing and Financing a Vehicle?

Vehicle ownership is the one key distinction between leasing and financing. You will own the car at the end of a loan agreement. Under a lease, you will not be the automobile owner. Every payment you make with financing is directed toward debt pay-off. The car boasts 100% equity once the loan is paid off.

According to Statistics Canada, the average interest rate for car loans in Canada is 8.19% in 2024. However, the actual interest rate you will be charged depends on several factors, such as whether you’re purchasing a new or used car, your credit score, the purchase price of the car, and whether the loan is based on a fixed or variable interest rate.

Typically, car buyers can expect to pay anywhere between 6.7% and 9% interest on their car loan.

On the other hand, if you’re considering a car lease, the interest rate you’ll be charged will depend on your credit score and income. Generally, car lease interest rates range from 3% to 15%.

It is Better to Lease or Financing a Used Car in Canada?

Before deciding about leasing or finance, you need to understand your driving needs and habits and, more importantly, which is most financially supportive. Ask yourself:

How much of a monthly payment can I afford?
What is more important—the monthly payment or the total cost of the vehicle?
How will I pay for the car—cash on hand? Financing? Line of credit?
Do I plan to make a down payment?
How many kilometers do I drive?
Do I want/need a new automobile every few years?
Do I want something to trade in on my next vehicle?
How long would you like to keep your automobile?
How many kilometers do you drive annually?
Do you take care of your automobile or stick to a maintenance schedule?
Do you want to add any vehicle modifications?
Is it important for you to have equity in it?

Even though choosing an automobile can be very emotional, you need to make a rational decision, especially regarding finances.

Is it More Affordable to Lease or Finance a Used Car?

The overall car cost of leasing versus financing can change based on the term. In the short term, with everything the same (term, price, interest rate, down payment), a monthly lease payment typically will be less than a monthly finance payment.

However, things begin to balance out as the term length gets longer. Monthly payments can be reasonable even for medium-term agreements. In the long term, financing a used car can be cheaper than leasing. Consider all financial factors, terms, and options to determine which option is the most affordable and meets your financial needs.

Does Leasing or Financing a Used Car Affect Insurance?

Your decision to lease or finance does not directly impact your car insurance quotes. However, you will need to meet the leasing company’s requirements when leasing. Since your leasing company still owns the vehicle, you will need to have specific coverage in place to protect the car. Leasing companies will require you to have comprehensive insurance and collision insurance.

You will also need to carry a certain amount of third-party liability and specific policy endorsements. Your decision to lease or finance can slightly impact your coverage needs.

When Does It Make Sense to Buy or Finance a Used Car?

Owning gives drivers much more flexibility with how they use their car and what they do to it. Financing a used car allows you to make modifications, drive it as you please, and use it as an asset.

When purchasing a vehicle using a loan, your lender is the one who owns the car until you finish paying off the loan. You can negotiate the loan term, the interest rate, and the monthly payment with your finance expert. If you have the resources, you can pay with cash, which gives you good negotiation power. However, most people take out a loan. You can secure a loan through the dealership you are working with, but you can also get a loan with your bank or a lending company or even use a personal line of credit.

When is it Best to Lease a Car?

Ownership costs can quickly add up, and drivers continually search for ways to reduce those costs. For some people, leasing is one significant way to reduce the monthly costs.

When you lease, you enter into an agreement with a leasing company that gives you the right to drive the vehicle you choose—leasing is like a long-term rental. Your payments don’t build equity as an automobile loan, and payments do.

You can still negotiate the terms of the deal, including the length of the lease, monthly payment, rate of interest, and kilometer limits. Consider negotiating a buyout price (residual value) at the end of the contract if you decide to buy it.

When should you choose leasing vs. financing a used car?

Leasing is generally better suited for new vehicles, as the leasing company can accurately predict the residual value. For a used car, the residual value is harder to estimate, making leasing less advantageous. Financing a used car is typically the better option.

Main Factors About Leasing vs. Financing a Used Car

Personalization is Vital: Choosing between leasing and financing a used car in Canada depends on your preferences, driving habits, and financial situation. Consider your budget, long-term goals, and vehicle usage.

Ownership vs. Flexibility Dynamic: Leasing and financing differ in terms of ownership. Financing leads to complete ownership, while leasing provides the flexibility to drive a new car every few years without a long-term commitment.

Financial Considerations Beyond Monthly Payments: Consider the overall financial picture before leasing and financing a vehicle. Factors like term length, interest rates, down payment, and total cost over time play a crucial role.

Leasing a vehicle may not be a good idea for you if:

You drive a lot: When you own your car, you don’t need to worry about the number of kilometers. There are mileage limits and financial penalties if you exceed them with a lease.

You plan to keep the vehicle for a long time: Once you pay off your car loan – which is often a 48 to 60-month term, you own the car. It’s an asset you can use toward trade-in value on another new automobile or continue to drive payment-free.

You want to customize your car: Some people like to add extra features such as specialty tires or safety features. If you lease a vehicle, you must remove any modifications or customizations you have made when the contract is up.

When it comes to financing a used car, choose an option that fits with your unique circumstances. If leasing restrictions are off-putting, consider financing a used car that is less expensive or getting a longer loan term.

For a hassle-free experience, consider YST Auto Sales, your trusted used car dealer. Selling or trading in your car in Ontario with YST Auto Sales is quick and easy. Simply visit our Sell Your Car page and enter your car’s details to get an instant cash offer within minutes.