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What Is The Difference Between Leasing And Financing?

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When you decide to buy a car, you typically have three options to fund your purchase; all cash, leasing, or financing.

An all cash purchase is fairly straightforward but a luxury few of us can afford. You simply pay the full amount for the car at the dealership and drive away with a car that is entirely yours.

However, for most people, leasing and car financing in Toronto will be the two options they have to work with when purchasing a new car.

But what exactly is the difference between leasing a car and financing one?

There are several key differences and which one is best for you will depend on your financial situation and your end goals when it comes to car ownership. Read on to find out more about the differences between leasing and financing.

Car financing in toronto from dealership

Ownership

The single largest difference between leasing and financing comes down to your legal ownership of the car at the end of your financial agreement.

Financing acts essentially like a mortgage for a home. Like with a bank and your new home, the car financing credit provider is lending you the money to purchase the car from the dealership, and holds onto the rights to the car until the loan is paid off.

Each loan payment you make buys you a little bit more equity in the vehicle until your final payment, after which the car is now legally 100 percent yours to keep.

This is an attractive option for people who like the idea of owning their car outright and are averse to giving money to someone else and not getting something permanent in return. Car financing is a popular option for mid to higher end car models, as they break up the high initial capital expense into smaller, easier to manage payments over an extended period of time.
Financing a car is ideal for people who tend to stick with their cars for a long time and aren’t fussed about getting the latest bells and whistles that come in the current year model. As you own the car at the end of the financing agreement, if you wanted to upgrade you would have to sell or trade in your car for a much lower price than what you have already paid for it. This would put you at a distinct financial disadvantage if the car you also want to buy will financed as well.

In contrast, a car lease can be thought of more as a rental payment. When you rent a home, you are paying the property owner to live in that space, but you are not developing any kind of ownership over the property over the length of your lease. When the lease is up, you either renew it or you move out, you do not put your name on the deed.

A car lease works in much the same way as a rental agreement for a home. You pay the dealership a certain amount of money every month to rent the car off them, and at the end of your lease agreement, you must return the car to the dealership or renew the lease.

Unlike with a typical home rental, there is often an option to purchase the car at the end of the lease, with your previous payment counting towards the cost of the car. However, the final sale price is often inflated compared to if you had financed it from the beginning and so this tends to be a less attractive option for many people.

Whichever Toronto car financing you go with, it’s worth thinking about what you can afford and whether you plan on upgrading in the near future.

Woman deciding between car leasing and car financing toronto

Cost

Another key difference between car leasing and car financing in Toronto is the cost of the monthly payments.

Finance payments tend to be higher overall compared to lease payments. Finance agreements are loans, and all loans involve some form of interest payment. This is a percentage on top of the principal amount borrowed that acts as the profit for the lender. Naturally, having to pay interest on top of the borrowed amount will increase your monthly payments.

Additionally, as a financing agreement involves actually owning the car at the end of it, the entire value of the car will need to be paid off. This will mean the monthly repayments will likely be higher than a lease agreement to ensure the deal is worthwhile for the lender.

At the end of the financing agreement, you will then own the car, but you will also be responsible for upkeep, registration, and warranties. These can all add up quickly if you hold on to your car for a long time, as older cars often require more upkeep over the years. Overall, financing is the more expensive option in the short term, but if you take good care of your vehicles and buy a reliable car, it should work out cheaper than leasing over the long term.

On the other end of the spectrum, lease payments are typically lower than finance payments, as you are not paying any interest and you are not building any ownership of the car. In essence, you are paying for the depreciation of the car while you are driving it so that the dealership is covering its costs for having lent you the car.

As you are not paying for the entire value of the car over the course of the lease agreement, just the amount it depreciates, this typically means your payments will be lower. Additionally, as lease agreements typically run for about the same time as car warranty periods, you will usually never have to worry about expensive repairs coming out of pocket, as your car will usually always be under warranty.

At the end of the lease, while the car is not yours, you are also not responsible for any upkeep of the car and are free to upgrade to a new car on a new lease if you wish. If you are the kind of person that enjoys having the latest modcons or simply like that new car smell and don’t see the practicality in owning your own car in the near future, leasing is likely a better option for you.

Mileage restrictions

Another difference between financing and leasing your car will be mileage restrictions.

When you finance a car, the car is in effect yours and there won’t be any mileage restrictions on the car. This is because you will be taking ownership of the car at the end of your financing agreement and you will be responsible for its depreciated value and upkeep.

Conversely, when you lease a car, the dealership will still own the car at the end of the lease, except now instead of being brand new it will be a used car. Cars depreciate rapidly, and the amount of mileage on a car will contribute significantly to its resale value. The more kilometers on the odometer, the less the car is worth, and so dealerships want to protect their investments.

Thus, for many lease agreements, there are set mileage limits on how many kilometers you can drive per year on the car. The exactly threshold can be negotiated when signing up for a lease, and getting more mileage will usually increase your monthly payments marginally. If you go over your mileage allotment, you can expect to pay a fee to cover the added depreciation cost.
If you drive a lot for work or leisure, it is worthwhile asking your dealership about their different mileage options and negotiating on what you can include in your lease. It is always a better financial option to have too many miles included in your terms than to go over every year and have to pay fees on top of not actually owning your car.

Whichever option you choose for your car financing in Toronto will depend on how much you can afford to pay each month and whether you tend to upgrade your car every few years or stick it out over many years.

If you tend to drive a lot out of town or to client meetings, you may want to consider financing your car, or asking for more mileage to be included in your lease agreement. If you prefer flexibility and lower monthly payments above all else, leasing is definitely the best option for you as it will be cheaper every month and you will have the option to either give the car back no strings attached, or upgrade to a new model and begin a new lease.

If you are looking for competitively priced car loans, even if you have bad credit, contact Autoloansolutions.ca. We are an Ontario based car financing company that accepts any credit score or history. We negotiate on behalf of our clients with Canada’s largest banks and we don’t rest until your application is approved. Contact us today to find out what we can do for you.

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