Leasing a vehicle in Canada: your guide to the basics

How leasing a car works

Leasing a car is basically renting it long term.

A lease involves paying for the right to drive a car for a predetermined period of time. Unlike financing or outright buying a car, leasing involves no change in ownership. The lessor (usually the financing or leasing company holding the lease) continues to own the car. You, as the lessee, simply get to drive it for a while.

Vehicle leases come with restrictions, such as:

• A limit on how many kilometres you can drive the vehicle each year. You can usually choose from different mileage limits, though your lease payments will increase alongside the limit. Around 25,000 km per year is common.¹
• You’re expected to return the vehicle in relatively good shape. Normal wear-and-tear is acceptable, but there can be penalties for excess wear (including the tires) or other damage. You’ll also have to stay on top of regular maintenance.
• Ending a lease early is costly, as you’ll usually have to buy out the remaining lease costs and pay a termination fee.

Restrictions aside, the process of leasing a new car looks a lot like buying one. You’ll still visit dealerships, take test drives, sign some paperwork, and pay some money. Lease payments are usually monthly. When you sign a new lease, you’ll pay some upfront costs such as a refundable deposit, taxes, fees, and sometimes a down payment. You’ll generally have to undergo a credit check as part of the process.

What happens at the end of the lease depends on the terms. If you have a closed-end lease, you can hand the car back and walk away or lease another one. Or, you can buy the car for the amount that was determined at the beginning of the lease. This is the most common type of lease. A rarer type is the open-end lease, for which you make payments and then return the car at the end of the lease. The dealer or leasing company sells it, and if it’s sold for less than the predetermined residual value, you have to make up the difference. In all leases, the terms for post-lease return or purchasing are laid out in the lease agreement.

The leasing company determines the residual value (the car’s value at the end of the lease). It is subtracted from the purchase price of the car, with the difference being basically the vehicle’s depreciation over the length of the lease. That difference, plus any fees, is divided by the number of months of the lease to determine the monthly lease payment.

Lease-to-own agreements

Many leases provide the option to buy the car at the end of the lease term. But you can also find leases in which the intention to buy the car is part of the agreement from the beginning.

Such lease-to-own contracts are less common than standard leases. You’ll typically find them at smaller dealerships, and you shouldn’t expect to have the same variety of choice in vehicles. It’s also common to pay weekly or bi-weekly under lease-to-own agreements (rather than monthly).

Lease-to-own agreements are available without a credit check. Even someone with poor credit can get a lease through such an agreement. Though, unlike standard lease agreements, they don’t improve one’s credit score.

Lease takeovers

If you’d like to end your lease before the term expires without paying for it, you may be able to transfer it to someone else. If you’re seeking a new car, taking over someone else’s lease can be a way to save money. You won’t have to pay any of the setup costs associated with a new lease.

The person taking over the lease will inherit the car and the terms of the lease, including any mileage limits. If you’re considering taking over a lease, make sure you’re clear on the terms of the contract you’re inheriting.

Leasing a used vehicle

It’s possible to lease a used vehicle. It works basically the same as leasing a new one. There will still be a limit on how far you can drive each year and you’ll have to pass a credit check, for example. If you lease a certified pre-owned vehicle from a dealership, it should still even be under warranty.

The advantage of leasing a used vehicle is that the monthly payments will be lower.

Benefits of leasing

As with any decision, there are benefits and drawbacks to leasing a vehicle.

Pros and cons of leasing

Pros

Cons

Cheaper than financing in the short term You’re always driving a relatively new car, usually still under warranty Short contracts and lower commitment You get to hand over the car before long-term maintenance issues start to crop up Many lease agreements include free scheduled maintenance (like oil changes) No need to worry about the vehicle’s depreciated value

You get no ownership of the vehicle in exchange for your payments More expensive than financing in the long term Potential added costs, like excess wear and tear penalties Limits on how much you can drive the car each year You’re locked into the lease term unless you can find someone to take it over (or pay the termination fee) You’ll have to return the vehicle in the same condition, so you won’t be able to customize it

Leasing vs. financing

Financing a vehicle means taking out a loan to buy it.

Whether you lease or finance, you’ll make monthly (or weekly) payments for your car. However, when you finance a vehicle, you do own it. Eventually, you’ll pay off the loan and the vehicle will be entirely yours — no more payments. Loan payments are typically higher than lease payments, but of course that depends on many factors, like the value of the vehicle and the length of the loan repayment.

So how do you decide whether to lease or finance a vehicle? That’s a topic all to itself. But ultimately, it comes down to cost. Lease payments tend to be lower than car loan payments, so you’ll save money in the short term. But eventually, loan payments become zero, and you’ll still have your car. If you continuously lease a vehicle, you’ll always have a new-ish one, but you’ll never reach the zero-payment stage.

To help you decide, you can use a lease or loan calculator to crunch the numbers.

Insurance considerations

Like any car in Canada, you’ll need to have car insurance for your leased vehicle. By law, you need to have third-party liability coverage to drive your car no matter what.

However, if you lease your vehicle, the lessor will require that you have more than just liability coverage. Leased vehicles must have collision and comprehensive coverage, which are otherwise optional. All perils coverage is acceptable too, as it’s basically a combination of the two. You may also be required to have a deductible under a certain amount.

You’ll also have to have the vehicle’s owner listed as the loss payee on the policy. Since they own the car, they’ll receive the settlement in the event of a total loss of the vehicle. This is accomplished by adding an endorsement like OPCF 5 (in Ontario) or Q.E.F. No. 5a (in Quebec).

If you buy car insurance from Square One and indicate your vehicle is leased, we’ll automatically add the right endorsement to your policy.

Commonly asked questions

How long are typical car leases?

When you lease a car, you can choose how long you want your lease term to be, within a certain range. Typical car leases last between two and five years. Two years is usually the minimum lease term available.

Can you end a car lease early?

It’s possible to end your lease early, but you usually have to pay for the privilege. Depending on the terms of your agreement, you may have to buy out the rest of your lease, pay a termination fee, or both. Given present vehicle shortages, some used models are valuable enough that a dealer may be willing to buy your leased vehicle back — but don’t count on it. ²

If you want to end your lease early, discuss your options with the leasing company. Or, try to find someone to take over your lease.

How much does a car lease cost in Canada?

The cost of a lease varies greatly depending on the value of the car, the lease term, and other factors. For example, the expected monthly lease payment for a $45,000 car is between $684 and $697. ³ You can reduce your monthly payments by making a down payment upon signing the lease, though down payments aren’t generally required.

What happens at the end of a car lease?

At the end of the lease, you’ll have to return the vehicle to the leasing dealership. They’ll complete a post-lease inspection for damage or undue wear and tear. Depending on the results, you may be responsible for paying additional charges.

There are several options available when you reach the end of your car lease. First, you can simply return the vehicle and walk away. You may also be able to buy the vehicle. The cost of doing so would be the residual value, predetermined in your lease agreement. After doing that, you could flip the car to another buyer — depending on the residual value, you might be able to earn some spare cash.

If you had any equity in your lease (from a down payment or a trade-in), you could also trade that in for a new vehicle lease. Or, if you’d like to keep driving your lease, you might be able to sign a new lease for the same vehicle.

Sources

1. Alini, Erica. “3 numbers you should check before deciding whether to lease or buy a car.” Global News, 21 Apr. 2017, globalnews.ca/news/3395054/3-numbers-you-should-check-before-deciding-whether-to-lease-or-buy-a-car.
2. Tchir, Jason. “Is there a way to end my car lease early without owing thousands in payments?” The Globe and Mail, 28 Jan. 2024, www.theglobeandmail.com/drive/mobility/article-is-there-a-way-to-end-my-car-lease-early-without-owing-thousands-in.
3. Corke, Matt and Hurst, Stacie. “Car lease calculator.” Finder, 14 Dec. 2023, www.finder.com/ca/car-loans/car-leasing/car-lease-calculator.

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