How do car leases work in Canada?

Wondering how car leases work in Canada? BrokerLink can help. In this article, we discuss the basics of car leasing, such as how it works, the pros and cons of leasing a vehicle, and how a car lease can impact car insurance. By the end, we hope you will have a firm grasp of what car leasing is and whether it makes sense for you.

Car lease definition

A car lease allows a driver to drive a vehicle for a set period of time at an agreed-upon monthly rate. This monthly rate is usually made up of interest, taxes, rental charges, and depreciation costs. A common misconception is that car leases require car loans, but they do not. They also do not require a large payment upfront, which makes them accessible to a broader range of drivers. That said, unlike other types of financing plans, the monthly lease payments you make as the lessee do not go toward vehicle ownership. Instead, they go toward your use of the car, similar to how a tenant’s monthly rent payments go toward their use of the home, rather than the ownership of the home. The lengths of car leases vary, but are often between two and four years. Once the lease expires, the driver will typically return the vehicle to the lease company or purchase it at market value.

How does car leasing work? Car leases vs. car loans

As mentioned above car leasing and car loans are not the same. In fact, the only thing they have in common is that as with a car loan, you are required to make a down payment upfront for a car lease. In addition, you are required to make monthly payments at an agreed-upon rate for the duration of the term. But beyond that, car leasing works quite differently than car loans. One of the most distinguishable features is that at the end of a car lease agreement, the lessee has several options. They are as follows:

• The lessee can return the vehicle to the dealership
• The lessee can buy out the vehicle for the residual value
• The lessee can sign a lease contract with the same leasing company or a new leasing company and lease a new vehicle
• The lessee can trade in the previously leased vehicle for another vehicle from the leasing company

Another key difference between car leasing and car loans is that the monthly lease payments for a leased vehicle are typically far less than for a car loan. These lower monthly payments are due to the fact that you are only paying to use the car, not buy the car. Financing the purchase of a car through a car loan usually amounts to much higher monthly payments.

Finally, leasing a car, as with taking out a car loan, means signing a contract. In the case of car leases, you are signing a lease contract that stipulates the duration of the term and the monthly payment amount. However, in addition to these details, a lease contract typically also has several restrictions you won’t find on a car loan agreement. Such restrictions include the number of kilometres that can be driven annually and the process for any necessary mechanical or visual repairs.

Car leasing options

Canadian drivers who are interested in leasing a car in Canada have several options. The option you select should depend on your personal preferences, ownership goals, lifestyle, and budget. Brief descriptions of four of the most common car leasing options are below:

Standard lease agreement

Standard car leases involve drivers signing lease agreements to drive brand-new vehicles. To enter into a standard lease agreement, you will be required to make a small upfront down payment and pass a credit check. Once you are approved, you will sign the lease agreement and make monthly lease payments for the remainder of your vehicle lease term. Upon the expiry of a standard lease agreement, you are required to return the vehicle to the dealership. However, you can negotiate to extend the lease if you wish or you may have the option of trading in the vehicle for a newer one.

Leasing to own

Leasing to own is another type of car leasing that is popular among Canadian drivers. Unlike a standard lease agreement, leasing to own gives a driver the opportunity to purchase the car once the contract term expires. As with a standard lease contract, the driver is required to make regular payments on the vehicle. However, these payments may be weekly or bi-weekly rather than monthly. Further, rather than your payments solely going toward your use of the vehicle, they will also go toward ownership of the car. In other words, you will accumulate equity with every payment, much like how you accumulate home equity as you make your monthly mortgage payments. Lease to own contracts may be offered by all sizes of car dealerships and leasing companies, but you will typically find them offered at smaller dealerships. They can be a reliable option for drivers with poor credit, as the dealership may not do a credit check for lease to own contracts. Instead, all you may have to provide is identification, proof of income, and proof of car insurance. Note that the vehicles eligible for lease to own agreements may be older than those available for standard leases.

Lease takeover

A lease takeover is the next car lease option available to Canadians. Lease takeovers are when one driver takes over the car lease of another driver before the end of the term. This can be a fantastic option for anyone on a tight budget, as lease takeovers tend to be cheaper, featuring much lower upfront costs. On the flip side, lease takeovers can be risky, especially if you haven’t carefully reviewed the lease terms and inspected the vehicle in advance. The last thing you want is to discover upon the expiry of the lease that the previous lessee went way over the annual mileage limit or didn’t adhere to the leasing company’s repair process.

Leasing a used car

One final car lease option available in Canada is that of leasing a used car. As mentioned, most standard lease agreements pertain to new cars. However, there might come a time when you want to lease a used car. This is possible and is often the case with both lease to own agreements and lease takeovers. Before you sign up to lease a used car, speak with an automotive professional and hire someone to inspect the vehicle for you. In addition, give careful consideration to some of the risks that come with used car leases, such as the potential for higher maintenance costs or a decrease in the vehicle’s reliability and safety as it ages.

The pros and cons of car leasing

Now that you know more about how car leasing works and the various car lease options available to drivers in Canada, let’s get into the nitty gritty of car leasing. What are the advantages and what are the disadvantages of leasing a car? We outline the pros and cons below:

Car leasing pros

The clear-cut advantages of leasing a car in Canada are as follows:

• Opportunity to try new cars: Depending on the type of car lease you select, leasing could give you an opportunity to try lots of new cars every couple of years. This means you will always get to experience the latest in car technology without having to worry about the manufacturer's warranty. If you love test driving new cars and are never happy with the same car for long, leasing might make the most sense for you. If you know you will always have a financed vehicle, why not always drive a new car?
• Lower monthly payments: Buying a brand-new car can be expensive, whether you’re paying for it upfront or through financing. Therefore, one of the main pros of leasing is that it requires a much smaller down payment coupled with lower monthly payments. Typically, monthly lease payments are far cheaper than monthly loan payments.
• Free vehicle maintenance: Another perk that may come with leasing a car is the potential for free vehicle maintenance. Since automakers want to keep their vehicles in good condition, they may offer free maintenance, such as oil changes or tire rotations, for the duration of the lease at a nearby dealership or auto body shop. Be sure to check the terms of your lease agreement or ask your leasing company about this.
• Ability to test out a vehicle before buying: We all love taking a potential new car for a test drive. But what can one, 10-minute test drive really tell us? Leasing a vehicle is like a long-term test drive, allowing drivers to test out a vehicle for two years or more before buying it. If you are interested in buying the vehicle you want to lease but want to be sure first, we suggest signing a lease to own agreement. Then if you happen to find the vehicle does not meet your needs, you are free to try something else.

Car leasing cons

There are several disadvantages of car leases as well. Read the list below before jumping in and regretting it down the road:

• You are essentially renting rather than owning the vehicle: Unless you sign a lease to own agreement and then choose to buy the vehicle out at the end of the term, you are essentially paying money to use the car. This means that you will have no equity built up at the end of your standard car lease agreement.
• Potential for depreciation: Leasing typically involves a new car, and while the opportunity to drive a brand-new vehicle is enticing, there is a downside: depreciation. New cars depreciate quickly. Research indicates that a brand-new car can lose up to 20% of its value in the first year alone, followed by another 15-25% in the next four years. What does this mean? That the majority of the car’s depreciation happens during your term lease.
• You cannot make any vehicle modifications: Lease agreements typically have strict terms, which means you likely will not be allowed to make any modifications to your car. If you’re someone that enjoys customizing their car, such as by installing new tires or adding a window tint, the constraints of car leasing may not be for you. Keep in mind that whether you lease a vehicle or not, car modifications can impact your auto insurance rate. Be sure to inform your insurance broker about any plans to modify your vehicle. They can check whether the modification you want to make is approved by your insurer or not. If your modifications are not approved by your insurer it can lead to the denial of a claim payout.
• Additional fees: There are a number of fees that you may be subject to as a lessee. These may include a lease termination fee, if you decide you no longer want to lease your vehicle before the term has expired, a lease disposition fee, which may be charged at the time you return the vehicle at the end of the term, and wear-and-tear fees, if the vehicle is not in good condition upon its return. Some of these fees can be hefty, which can make leasing far less cost-effective.
• Mileage restrictions: Most car lease agreements have mileage or kilometre limitations. These vary but are often between 20,000 and 24,000 kilometres each year. This means that if you have a three-year car lease contract, you will only be able to drive the vehicle a total of 60,000 to 72,000 kilomteres during this time span. Exceeding your mileage limit can be expensive, with kilometre overage fees ranging from $0.07 to $0.15 per kilometre.

A step-by-step guide to leasing a car

Ready to lease a car in Canada? Follow the steps below and you’ll be on your way in no time:

1. Check your credit score

Step one is to check your credit score, which can be done for free online. Checking your credit score is important as with most car lease agreements, the leasing company will conduct a credit check. To be approved for a car lease, you want your credit score to be as high as possible, ideally no less than 660. Take steps to raise it in the months or years prior to your car lease, such as by paying off as much debt as possible to save yourself money on your car lease or loan, you may also be able to unlock a better interest rate if your credit score is higher.

2. Determine your budget

The next step is to determine your budget. Since car leasing involves monthly lease payments, you should take the time to assess your finances and identify the maximum amount of money you are comfortable paying toward your leased vehicle each month. You should also budget for the down payment, along with the cost of car insurance, gas, maintenance, and more.

3. Find a car and dealership that meets your needs

First, do some research into vehicles that you might be interested in leasing. From there, narrow down your list and reach out to car dealerships in your area. Inquire about the leasing options they have available for the specific cars you are interested in. Then, schedule a test drive, and don’t hesitate to negotiate when it comes to the terms of your prospective lease agreement.

4. Review the terms of your car lease agreement

Before signing any contract, it’s imperative that you review the terms carefully. If you aren’t confident in your ability to do this, have a professional look it over for you. Pay particular attention to the following pieces of information: your monthly lease payment amount, any required down payments, the length of the term, the maintenance you are responsible for, and any other fees that may apply, such as a lease termination fee or a wear and tear fee.

5. Sign the lease contract and start making monthly lease payments

Once you’re happy with the terms of the lease contract, all that’s left to do is sign on the dotted line. This can be done digitally or in person at the car dealership or leasing company depending on their preferences. Once signed, you will need to pay the down payment, if applicable. After that, it is up to you to pay your lease payments each month at the agreed-upon rate.

Contact BrokerLink for more information on car leasing in Canada

Car leasing is a fantastic option for many Canadian drivers. But if you’re still on the fence about whether to lease or buy a car, we recommend contacting BrokerLink. BrokerLink has an entire team of automotive experts who can help you make important decisions, such as whether purchasing a vehicle or leasing one is right for you. Of course, we can also help you find a great car insurance policy for your owned or leased vehicle and even make you aware of the most common car insurance myths. No matter your auto insurance needs, BrokerLink is here. Get in touch today to learn more about our superior auto insurance services.

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FAQs on car leases in Canada

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