Thinking of leasing a new car? Here's what you need to know

Lower monthly payments

Generally, lease payments are lower than loan payments because a lease payment usually covers only the depreciation of the car from the purchase price to the residual value, or the expected value of the car at the end of the lease, along with a finance charge. Rather than paying sales tax up-front on the full value of the car, as one does with a loan, leasing costs reflect taxes on the monthly payment only.

Warranty coverage

Most leased cars are covered by warranties for the term of the lease for major defects and repair expenses.

You have 3 options at the end of most leases: you can return the car, buy it at the residual value or lease a new car.

No resale risk

The residual value is normally agreed upon at the outset, so you know exactly how much the car will cost to buy at the end of the contract. If you don't want to buy the car, you can simply return it to the dealer.

If an employee or company leases a car, the lease payment is deductible up to limits set by Canada Revenue Agency.

No equity

A leased car doesn't build up equity. At lease-end, you own nothing, unless you buy the car at its residual value. And, while the lease cannot be used as collateral, the monthly lease payments do count against your total debt-servicing ratio.

Other costs

There may be costs upon signing the contract, in addition to any down payment, such as a security deposit, first and last month's lease payments, freight and an administration fee.

Mileage limits

The lease contract specifies the number of kilometres that you can put on the car over the duration of the lease. The leasing company will charge for any excess mileage.

Wear and tear

You must follow a specified maintenance schedule and keep good records, and keep the interior and exterior like new. If the car is returned with excessive wear and tear, costs may be deducted from the security deposit.

Focus on price and residual value

Negotiate the lowest price before disclosing your intention to lease or buy. Then negotiate the highest residual value.

Lease cars that retain their value

Generally, cars that retain their value will have a higher residual value and a lower payment.

Choose an optimal lease term

If a car is needed for a specific period, it shouldn't be leased beyond that term, as there are penalties for cancelling early. Similarly, you should match the lease term to the warranty period where possible, so you're covered throughout the leasing term.

Avoid lease-end penalties

Not only will there be fees if you try to cancel the lease early, but there generally are limits on the number of kilometres driven. If you know you'll drive more than the allotted mileage, it may be cheaper to bargain for more kilometres at the start of the lease, rather than pay higher penalties at the end of the lease.