Car Loan vs. Lease: Which is Better for You?
When deciding how to finance your next vehicle, Canadians often face two popular options: financing through a car loan or leasing. While both have advantages and disadvantages, the financial implications of each option can significantly impact your long-term goals. This article focuses on the details, nuances, and considerations for choosing between a car loan and a lease to help you make an informed decision.
If you're considering buying a car outright with cash and want to know how it compares to these options, check out our in-depth guide: Why You Should Never Lease a Car: Buy Outright Instead.
What is a Car Loan?
A car loan allows you to borrow money to purchase a vehicle. You’ll make monthly payments, which cover the loan principal (the cost of the car) and interest. Once the loan is fully paid, you own the car outright.
Key Features of a Car Loan:
Ownership: You own the car after the loan is paid off, giving you full control over its use and resale.
Monthly Payments: These tend to be higher than lease payments since you’re financing the entire cost of the car.
Resale Value: At the end of the loan, the car is an asset you can sell or trade in, though its value depreciates over time.
Flexibility: There are no restrictions on how much you can drive or how you can customize the car.
Example:
Financing a $30,000 car with a 5-year loan at 5% interest results in payments of approximately $566/month, with a total cost of $33,960 over the loan term. After five years, the car may still retain $10,000 in resale value.
What is Leasing a Car?
Leasing is essentially a long-term rental agreement. You pay for the vehicle’s depreciation over a fixed term (typically 2–4 years) rather than its full price. At the end of the lease, you can return the car, buy it outright, or lease another vehicle.
Key Features of Leasing:
Lower Monthly Payments: Lease payments are generally lower than car loan payments because you’re only paying for the depreciation during the lease term.
Mileage Restrictions: Most leases cap annual mileage (e.g., 20,000 km), and exceeding this limit incurs penalties.
No Ownership: The car belongs to the leasing company unless you choose to buy it at the end of the lease.
Upgrade Flexibility: Leasing allows you to drive a new car every few years, which may appeal to those who prioritize the latest features.
Example:
Leasing the same $30,000 car for 3 years with payments of $400/month will cost $14,400 over the lease term. At the end of the lease, you return the car with no equity or resale value.
Car Loan vs. Lease: Key Differences:
| Feature | Car Loan | Lease |
|---|---|---|
| Ownership | Full ownership after repayment | No ownership |
| Monthly Payments | Higher since you finance the full car value | Lower since you pay for depreciation |
| Mileage Restrictions | None | Capped annually, penalties for overages |
| Upfront Costs | May include a larger down payment | Lower upfront costs |
| Resale Value | Car can be sold or traded in | No resale value, car must be returned |
| Long-Term Costs | Lower if you keep the car long-term | Higher due to recurring leases |
Pros and Cons of Car Loans
Pros:
Full ownership after repayment.
No mileage limits or lease-end fees.
Long-term savings if you keep the car for many years.
Freedom to customize the car as you wish.
Cons:
Higher monthly payments compared to leasing.
Depreciation reduces the car’s value over time.
Ongoing maintenance and repair costs after the loan is paid.
Pros and Cons of Leasing
Pros:
Lower monthly payments and upfront costs.
Access to a new car every few years.
Often includes warranty coverage for the duration of the lease.
Cons:
No ownership or equity in the car.
Mileage restrictions with penalties for overages.
Customization is limited or prohibited.
Recurring leases can be more expensive over time.
Final Thoughts
Choosing between a car loan and a lease depends on your financial priorities, lifestyle, and long-term goals. If you value ownership and long-term cost savings, a car loan may be the better option. On the other hand, leasing might work if you prioritize lower monthly payments and frequent vehicle upgrades.
However, if your ultimate goal is financial independence and building wealth, neither option may be ideal compared to buying outright with cash. To learn more about the financial benefits of purchasing a car without financing, check out our article: Why You Should Never Lease a Car: Buy Outright Instead.