Financing a Car: Should You Buy or Lease?

Financing a Car: Should You Buy or Lease?

Before you search for your next ride, knowing how you’ll finance it is important. Understanding your financing options can help provide flexibility to your budget and could make your dream ride more affordable.

One of the first choices is whether you plan on buying or leasing, a decision that will ultimately come down to your personal situation. Here are some factors to consider to make the right choice for you.

Leasing

Leasing a car is like a long-term rental. In a typical leasing process, you sign the lease for a set amount of time, pay an upfront fee, then make monthly payments until that time is up. At the end of your lease, you’ll return your vehicle and choose if you’d like to lease another vehicle, buy the current vehicle, or move on without it.

Lower monthly costs

Leasing is one way to make your ideal vehicle fit your budget. Generally, lease payments are less expensive than loan payments. The monthly costs of your lease will primarily be determined by the initial sale price (negotiated with your dealer), the length of the lease, interest (or “rent charge”), and your expected mileage.

Expected mileage is the maximum amount of kilometres you agree to drive the car each year. The higher the yearly mileage, the more you’ll pay per month. If you exceed your expected mileage, you’ll pay for each extra kilometre at the end of the lease term.

Unsure of your budget? RBC’s My Auto Affordability Tool can help you determine what you can afford before going to a dealership.

Less commitment

A car lease typically lasts 2 to 5 years, while purchasing a new vehicle may be a decade-long commitment. Your vehicle should match your lifestyle, and if you expect some changes on the horizon, it’s good to have the flexibility of a short lease. A sedan is great for commuting to work, but if you want to start a family you might want more seating and storage space. When your lease is up, you can upgrade to a larger model with better safety and comfort features.

Reduces maintenance stress

The average warranty for a new car is around three years, which will likely cover most of your lease term. That means you won’t have to worry about the costs of repairs while leasing under warranty. Also, you’ll drive the car when it’s newer and less likely to break down. But it is important to note what your warranty does and does not cover, like damage caused by an accident.

Buying

Whether you’re financing with an auto loan or had enough saved to make a single purchase, buying your vehicle grants you full ownership.

Fewer restrictions

When you own your vehicle, there’s no need to worry about mileage limits, lease terms, or wear-and-tear insurance. You can drive your vehicle as far as you like and customize it however you like. If you’re planning on reselling in the future, you might want to be careful in an effort to improve your vehicle’s market value, but there’s no contractual obligation to do so.

Potential long-term savings

When you lease your vehicle, the monthly payments never stop — the longer you lease, the more you pay. On the other hand, after you’ve paid off your loan, the long-term savings of owning a car increases the longer you drive it. If you always lease, over time, you’ll pay more than buying outright.

Resale value

Owning your vehicle allows you to sell it when you’re ready to move on, which means you’ll make back some of what it cost to purchase it. You can research the market value of your vehicle by age, make and model to maximize the value you can get out of it. Websites like Kelley Blue Book Canada and Canadian Black Book can provide estimates to help you set a competitive and fair asking price.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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