Leasing vs Financing: Which Option Is Right for You?
When you're buying your first car in Canada, one of the biggest decisions you'll face is whether to lease or finance. Both options have their advantages and disadvantages, and the right choice depends on your personal situation, driving habits, and financial goals.
Understanding the Basics
Financing means you're taking out a loan to purchase the vehicle. You make monthly payments toward owning the car outright. Once you've paid off the loan, the car is 100% yours.
Leasing is more like renting. You pay for the right to use the vehicle for a set period (typically 2-4 years), but you don't own it. At the end of the lease, you return the car to the dealership.
Quick Tip
Think of financing as buying a house with a mortgage, while leasing is like renting an apartment. Each has its place depending on your lifestyle and goals.
Key Differences at a Glance
Monthly Payments
Lease payments are typically 20-40% lower than financing payments for the same vehicle. This is because you're only paying for the vehicle's depreciation during the lease term, not its full value.
Example: A $35,000 vehicle might cost you:
- Financing: $600-700/month over 5 years
- Leasing: $400-500/month over 3 years
Compare lease vs finance payments
Ownership
- Financing: You own the car once the loan is paid off
- Leasing: You never own the car unless you buy it at lease-end
Mileage Limits
This is a crucial difference for Canadian drivers:
- Financing: Drive as much as you want with no penalties
- Leasing: Limited to 16,000-24,000 km/year (typically 20,000 km in Canada)
Watch Out
Excess mileage fees can be expensive, ranging from $0.10 to $0.25 per kilometer over the limit. If you drive 30,000 km/year and have a 20,000 km limit, you could owe $1,000-2,500 per year in overage fees.
ON, BC, AB
Canadian lease agreements use kilometers, not miles. A typical 20,000 km/year allowance equals about 12,500 miles. Make sure you understand whether your agreement is in km or miles, especially if dealing with US-based lenders.
Canadian Tax Implications
Understanding how taxes work is critical for making the right financial decision.
Financing Tax Treatment
When you finance a vehicle, you pay the full provincial sales tax upfront at the time of purchase:
ON
In Ontario, you'll pay 13% HST on the full purchase price. For a $35,000 car, that's $4,550 in tax due at signing.
BC
In British Columbia, you'll pay 12% PST plus 5% GST (17% total) on the full purchase price. For a $35,000 car, that's $5,950 in tax due at signing.
AB
In Alberta, you'll pay 5% GST on the full purchase price. For a $35,000 car, that's $1,750 in tax due at signing.
QC, NS, NB, PE, NL
In provinces with HST (Quebec has QST + GST), you pay the combined rate on the full purchase price upfront.
Leasing Tax Treatment
With a lease, taxes are calculated differently:
- You pay provincial tax on each monthly payment, not the full vehicle value
- Some provinces also tax the down payment
- The total tax paid over the lease term is usually less than financing
Example (Ontario):
- Lease payment: $450/month
- Monthly tax: $450 × 13% = $58.50
- Total monthly payment: $508.50
Quick Tip
Leasing can reduce your upfront tax burden significantly. Instead of paying $4,550 in tax immediately (Ontario example), you spread it across your monthly payments.
Business Use Considerations
If you're self-employed or use your vehicle for business:
- Leasing: Monthly payments are typically 100% tax-deductible as a business expense
- Financing: You can claim Capital Cost Allowance (CCA) depreciation annually, but it's more complex
ON, AB, BC, QC
Consult a Canadian accountant about CRA rules for vehicle expense deductions. The rules vary based on whether the vehicle is owned personally or by your business.
Wear and Tear
Financing
- You own it, so normal wear and tear is your responsibility
- You can modify the vehicle however you want
- No penalties for dings, scratches, or interior wear
Leasing
- Subject to end-of-lease inspection
- Charged for excessive wear and tear
- Cannot modify the vehicle (no aftermarket parts, custom paint, etc.)
Watch Out
Typical wear-and-tear charges at lease-end: $200-500 for minor scratches, $500-1,500 for dents, $300-800 for interior stains or damage. Budget for these potential costs.
End-of-Term Options
When Financing Ends
- The car is yours
- No mileage to worry about
- Can sell it, trade it, or keep driving it
- Vehicle has equity value
When Leasing Ends
You have three options:
- Return the vehicle and walk away (after paying any fees)
- Lease a new vehicle and start fresh with lower payments
- Buy out the lease at the predetermined residual value
Quick Tip
The buyout option can be attractive if your vehicle's market value is higher than the residual value stated in your lease contract. Compare the buyout price to market prices on AutoTrader.ca or Kijiji Autos.
When Leasing Makes Sense
Consider leasing if you:
- Want lower monthly payments to fit your budget
- Like driving a new car every few years with the latest features
- Drive less than 20,000 km per year
- Want to avoid major repair costs (always under warranty)
- Use the vehicle for business (tax benefits)
- Don't want the hassle of selling your old car
- Live in a province with high sales tax and want to reduce upfront costs
When Financing Makes Sense
Consider financing if you:
- Want to own your vehicle and build equity
- Drive more than 20,000 km per year
- Plan to keep the car for 5+ years
- Want the freedom to modify your vehicle
- Don't mind dealing with maintenance after the warranty expires
- Want a long-term lower total cost
- Need a vehicle that can handle tough conditions without worry about wear and tear
The Total Cost Comparison
Let's compare the same $35,000 vehicle over different time periods:
3-Year Scenario
- Lease: $450/month × 36 months = $16,200 (plus fees, return car)
- Finance: $650/month × 36 months = $23,400 (still owe ~$15,000, or own car worth ~$20,000)
5-Year Scenario
- Lease: $450/month × 60 months = $27,000 (2 leases, return car)
- Finance: $650/month × 60 months = $39,000 (own car worth ~$15,000)
Quick Tip
Financing costs more short-term but builds equity. Leasing costs less monthly but you have nothing at the end. Think about your 5-10 year plan, not just the next 2-3 years.
Common Misconceptions
"Leasing is just throwing money away" Not necessarily. You're paying for transportation, just like renting an apartment isn't throwing money away if you're not ready to buy a house.
"You can't negotiate a lease" False! You can negotiate the vehicle price (capitalized cost), down payment, interest rate (money factor), and sometimes even the mileage allowance.
"Financing always costs less overall" Not always true, especially if you trade in your financed vehicle every 3-4 years. You lose money on depreciation just like a lease.
Making Your Decision
Ask yourself these questions:
- How many kilometers will I drive annually?
- How long do I plan to keep this vehicle?
- Is minimizing monthly payments my top priority?
- Do I want the flexibility to modify my car?
- Will I use this vehicle for business purposes?
- What's my upfront budget for taxes and down payment?
Use our comparison calculator to see real numbers
Key Takeaways
- Leasing offers lower monthly payments, newer vehicles, and reduced upfront tax burden, but you don't build equity
- Financing costs more monthly but you own the asset and have unlimited mileage
- Tax treatment differs: financing taxes the full price upfront, leasing taxes monthly payments
- Mileage limits are crucial - lease penalties can be expensive for high-mileage drivers
- Business users often benefit from lease tax deductions
- Consider your driving habits, budget, and long-term plans before deciding
- Both options can be negotiated - don't accept the first offer
Next Steps
Ready to crunch the numbers? Use our interactive calculators to see which option works best for your budget and driving habits.
Calculate financing payments
Calculate lease payments