Buying Your First Vehicle

What's the difference between leasing vs. purchase financing? I hear this question asked a lot, especially for those getting their first new car from a dealership. So what is the difference... really?

Purchase Financing is taking out a loan for the purpose of buying a vehicle. You will be paying for the full price of the car plus interest. In this type of financing, the car is legally owned by you at the time of purchase (ownership doesn't mean much in a depreciating asset). At the end of the amortization period (i.e. when you pay off your loan), you can keep the car. The monthly payments are higher because you're borrowing more to pay the full price of the vehicle. Typically amortization periods (the length of time it takes to pay off the loan) is 7 years or less.

Lease Financing is an option usually only available for new cars where you pay for the use of a vehicle for a period of time (called the lease period). The amount paid is calculated by the depreciation on the car for that period of time plus interest (lease rate). Lease rates are lower and the monthly payments are lower. The typical lease period is 4 years or less. The car still belongs to the dealership for the whole time. At the end of the lease period, you have to return the car back to the dealership. You do have the option to buy the car at the end by paying what's left on the value of the car (i.e. initial purchase price - the depreciated amount). This is called the residual value.

Rule of thumb is if you're planning to change your vehicle often (every 2 - 4 years) and your vehicle is typically a luxury vehicle (over CAD$40k), leasing is likely cheaper for you. If you plan to drive your car into the ground, purchasing is better for you. Having said all that, if you really want the best deal on a vehicle, buy it used. Something within the 2 - 4 year-old range is my personal preference.