How To Lease a Car: Car Leasing in Canada Explained

What is a car lease?

A car lease allows you to drive a brand new vehicle for a fixed period at an agreed monthly rate. Leasing doesn’t require a car loan approval or a hefty payment up front, but unlike typical financing plans, monthly lease payments go toward the use of the vehicle instead of the ownership of the vehicle. In other words, it’s essentially a long-term rental, and once the fixed lease period is over (typically between 2 to 4 years), then the customer must either return the car to the leasing company or purchase it for market value.

Leasing a car requires a down payment and monthly payments consisting of rental charges, interest, taxes, and the depreciation costs of the vehicle over time. The interest rate and fees can vary based on the vehicle you are leasing.

The pros and cons of leasing a car:

Benefits of leasing a car

There are plenty of benefits to leasing a new car, the main one being lower payments. The reason leasing a vehicle is beneficial is that you only pay for the depreciation of the car. Leasing is also a great option if you’re someone who struggles with commitment issues and can’t decide on a vehicle model? Or what interior to choose? A typical car lease contract only lasts 2 to 4 years and spans the early, problem-free days of a vehicle.

Once the contract is over, you can trade in your car for an upgraded model, a new colour, or a different vehicle entirely! This comes with the added perk of always being up to date on car manufacturers’ latest features and technologies while driving a brand new car more frequently, and this gives you a shot at a fresh manufacturer's warranty every few years, which may even include free maintenance such as oil changes and servicing.

So long as you can drive within the mileage cap outlined in your contract and avoid any major wear and tear damages to the car, you shouldn’t incur any additional fees outside of your monthly payment, regardless of the vehicle you choose.

Disadvantages of leasing a car

Before getting too excited about the low-cost, low-commitment pros of leasing a car, it’s important to understand the cons as well. The obvious downside to leasing a car is the fact that, despite making monthly payments, you never actually own the car that you’re driving. Once the lease term ends, you’re required to return the vehicle and restart the process from scratch, with no equity to use toward the purchase of your next ride. This is the key difference between leasing and buying (or financing) a car.

While it may be tempting to jump on an apparently low price tag at first, be careful because, in the long run, it could actually cost you more. It’s easy to get carried away in the cycle of upgrading your vehicle every 2 to 4 years, but repeatedly leasing cars over time will actually carve a deeper hole in your pocket than a one-time car purchase would, and in the end, you’ll have no vehicle to truly call your own.

Another aspect to carefully consider is the vehicle lease contract. Every car lease contract is embedded with rather restrictive guidelines, and if you fail to follow them, you could face costly penalty fees. These guidelines may include a mileage cap, as mentioned above, which restricts you to an annual kilometre limit (typically around 25,000 km/ year) that you’re expected to stay below. If you have a long commute to work or plan on making a few road trips, then you could face steep charges at the end of your lease term. For many Canadian drivers living in rural communities this kilometre limit is a deal breaker.

You can also expect to be charged penalty fees for dings, damages and considerable wear to the vehicle’s interior, exterior or drive performance at the lease end, whether the lease expires or you end the lease early. And, should you really have commitment issues and want to quit your contract before the term’s end date, be prepared to fork over whatever cash amount remains on your lease, which could be upwards of a few thousand dollars. Although seldom discussed, these additional charges are always outlined in the contract, so be sure to read it thoroughly and pay close attention to the details!

Who pays for insurance on a leased vehicle?

When you lease a car in Canada, you are responsible for paying the insurance premiums, just as you would if you were financing or owning a car outright. However, leasing companies typically have specific insurance coverage requirements, which usually include:

Liability Coverage: This covers bodily injury and property damage to others if you are at fault in an accident. Minimum limits are typically higher for leased vehicles.

Collision Coverage: This covers damage to your leased vehicle resulting from a collision, regardless of who is at fault.

Comprehensive Coverage: This covers damage to your leased vehicle from non-collision events such as theft, vandalism, fire, or natural disasters.

Gap Insurance: Some leasing companies may require or recommend gap insurance. Gap insurance covers the difference between the actual cash value of the vehicle and the remaining lease balance if the car is totaled or stolen.

Insurance premiums for leased vehicles can be higher compared to those for financed or owned vehicles because of the higher coverage limits required.

It’s crucial to maintain the required insurance coverage for the duration of the lease term. Failing to do so can result in penalties, additional charges, or even termination of the lease agreement by the leasing company. 

Can you return a leased car early?

Yes, you can return a leased car early in Canada, but it often comes with additional costs and considerations. Here's what you need to know:

Early Termination Fees
Most lease agreements include penalties for early termination. These fees can be substantial and might include:

• Remaining lease payments
• Early lease termination fees
• Depreciation costs
• Lease-end fees such as a lease disposition fee

Negative Equity
If the car's current market value is less than the remaining lease obligations, you may have to pay the difference, known as negative equity.

Lease Buyout
Some lease companies allow you to buy out the lease early. This involves paying the remaining lease balance plus any early termination fees. You can then sell the car to recoup some costs, but this depends on the car’s market value.

Lease Transfer
In some cases, you can transfer the lease to another person through a lease transfer or lease assumption. However, there may be fees associated with this transfer, and the new lessee must be approved by the lease company.

Trade-In
Another option is to trade in the leased car when you buy or lease a new vehicle from the same dealership. The dealer might roll the remaining lease balance into the new lease or loan, but this could result in higher monthly payments.

Steps to return a leased car early:

1. Review your lease agreement: Understand the terms, fees, and penalties for early termination.
2. Contact your leasing company: Inform them of your intention to return the car early and inquire about the specific costs involved.
3. Evaluate your options: Consider whether buying out the lease, transferring it, or trading it in makes the most financial sense.
4. Prepare the car for return: Ensure the car is in good condition to avoid additional charges for excessive wear and tear.
5. Complete the paperwork: Follow the leasing company’s process for early termination, including signing any necessary documents and paying fees.

Considerations

• Financial impact: Early termination can be costly. Calculate the total expenses to ensure you’re making a financially sound decision.
• Market value: Check the car’s market value to determine if buying out the lease and selling the car privately might be a better option.
• Credit impact: Defaulting on lease payments or returning the car without proper settlement can negatively impact your credit score.

Buying out a car lease in Canada

Buying out a car lease in Canada involves purchasing the leased vehicle either at the end of the lease term or, in some cases, before the lease term ends. Here’s a detailed guide on how the process works:

1. Review your lease agreement
Check your current lease agreement for the buyout terms, including the residual value (the car's estimated value at the end of the lease). This is the amount you’ll pay to buy the car.

2. Determine the buyout timing

• End-of-Lease Buyout: This occurs at the end of your lease term, where you pay the residual value plus any applicable fees.
• Early Buyout: You can choose to buy the car before the lease term ends. This involves paying the remaining lease payments, the residual value, and possibly an early termination fee.

3. Evaluate the car’s market value
Compare the residual value with the car’s current market value. If the residual value is lower or comparable to the market value, buying out the lease could be a good financial decision.

4. Arrange financing
If you don’t have the cash to buy the vehicle outright, you’ll need to arrange financing. You can: Apply for a car loan from a bank or credit union or you can check if the leasing company offers financing options for the buyout.

5. Notify the leasing company
Inform the leasing company of your intention to buy out the lease. They will provide you with the necessary paperwork and the final buyout amount, which may include taxes and fees.

6. Complete the paperwork
Fill out and submit all required paperwork, which may include: Buyout form provided by the leasing company and loan documents if you are financing the buyout.

7. Make the payment
Pay the buyout amount as specified by the leasing company. This can be done through: A lump-sum payment if you’re paying in cash or financing through a loan if you’ve arranged one.

8. Transfer ownership
Once the payment is processed, the leasing company will transfer the title and ownership of the car to you. Make sure you receive all necessary documents, including: The vehicle title, bill of sale and lien release, if applicable.

9. Register the car
Visit your local provincial or territorial licensing office to register the car in your name. You’ll need to provide:

• Proof of purchase.
• Proof of insurance.
• Completed transfer of ownership documents.
• Pay any applicable registration fees.

Considerations

• Car Condition: Ensure the car is in good condition, as any excessive wear and tear could affect the buyout decision.
• Warranty: Check if the car is still under warranty or consider purchasing an extended warranty.
• Financial Impact: Ensure the buyout and any associated costs fit within your budget and financial plans.
• Future Maintenance: Consider potential maintenance and repair costs as the car ages.

Benefits of buying out a lease

• Ownership: You gain full ownership of the car.
• Avoid Fees: You avoid lease-end fees, such as excessive wear and tear charges or mileage overage fees.
• Familiarity: You already know the car’s history and condition.

Lease vs Finance 

Below we examine the key differences between leasing and financing the same car as these are the two most popular methods of obtaining a new vehicle in Canada.

Ownership

Lease: When you lease a new car, you’re essentially renting it for a set period (usually 2-3 years). At the end of the lease term, you return the car and can either lease a new vehicle or choose not to lease another car.

Finance: When you finance a car, you’re taking out a loan to purchase it. Once you’ve paid off the loan, you own the car outright and can keep it as long as you want.

Payments

Lease: Lease payments are typically lower monthly payments than loan payments because you're only paying for the car's depreciation during the lease term, not the full purchase price.

Finance: Monthly loan payments are typically higher than lease payments because you’re paying off the entire purchase price of the car, plus interest.

Mileage Limits

Lease: Leases often come with mileage limits, and exceeding these limits can result in additional fees.

Finance: There are no mileage restrictions with financing, so you can drive as much as you want without worrying about penalties.

Maintenance

Lease: Some leases include maintenance packages, which can help with regular upkeep costs.

Finance: You’re responsible for all maintenance costs and repair costs once the car is out of warranty.

Customization

Lease: Leasing usually doesn’t allow for modifications or customizations to the vehicle.

Finance: You can customize or modify the car as you like.

Resale Value

Lease: At the end of the lease you do not own the vehicle. In most cases you will have the option to buy out the car at the end of the lease. Your lease agreement will include the buyout terms, including the residual value, which is the car's estimated value at the end of the lease term. This is the amount you would pay to buy the car.

Finance: When you finance a car, you have the option to sell it or trade it in later. You can also benefit from any resale value it may have.

Car leasing options

There are a few car leasing options in Canada, and depending on your personal needs and interests, one may be better suited than the others.

• Standard rental leases offer you the opportunity to drive brand new vehicles, so long as your credit profile is approved. You’ll be expected to make a small down payment, followed by monthly payments for the remainder of your car lease term. Once your lease term expires, you must return the car to the dealership, where you may choose to extend the lease or trade in your current car for a newer ride.

• Leasing to own, on the other hand, gives you the option to purchase a vehicle once its lease term expires. You’re required to make regular payments, often on a weekly or bi-weekly schedule, but rather than paying for the mere use of the vehicle, your payments will help you accumulate equity. This option is typically offered by smaller dealerships to customers with bad credit, as a credit check is often skipped over in the approval process. All a customer needs in hand is their proof of identity, residency or citizenship, proof of income, and occasionally proof of insurance. However, although the approval process is more lenient, you typically won’t have a roster of shiny, brand new vehicles to choose from, as you would in a standard car lease agreement.

• Lease takeovers can be a great opportunity to get a good deal on a lease by taking over someone else's lease payments. The upstart costs and fees are lower, and often there is a cash incentive to taking over someone’s lease. With that said, there are also some risks to taking over a lease, such as inheriting vehicle condition and mileage overages which may come as a surprise at the end of the lease if you don’t inspect the lease terms.

• Leasing a used car or certified pre owned is possible and is often the case if you’re in a lease-to-own agreement. In other instances, a customer may wish to terminate their lease contract early and seek someone who would be willing to take over their payments. If that someone is you, then you could save money on down payment costs, but before you jump in the driver’s seat, be sure to thoroughly inspect the vehicle for any damage, wear, or kilometre overage, as you assume responsibility once you take over lease payments. And, while it may seem cheaper to go with a used car rather than a new one, you may end up incurring heavier costs for maintenance, as the warranty expires, and the car’s reliability decreases with age.

Can you get a one-year car lease?

A short-term car lease is typically a minimum of two years. One-year leases are available but they’re rare. If you do find a dealership offering a one-year lease agreement, you’ll find that your monthly payment will be very high due to depreciation. However, you might be able to lease a used car and bypass high depreciation costs. Alternatives to one-year vehicle leases include long-term rentals and a lease takeover.

Leasing a car lets you drive a brand new vehicle without the more expensive cost of purchasing one. Of course, car leases are appealing to many; who wouldn’t want to drive a high-end car without the big price?! If you’re one of the many interested individuals, you’ve already weighed the pros and cons and now you're wondering “how do you lease a car”?

How to lease a car in Canada in 9 steps

Leasing a car lets you drive a brand new vehicle without the more expensive cost of purchasing one. If you’re one of those interested individuals who has already weighed up the pros and cons and is now wondering “how do you lease a car”?

If you're intent on leasing a car, these 9 steps will guide you through the process. In an ideal situation where you know exactly what you want, leasing a car can be done pretty quickly. For others, it may take up to a couple of weeks.

Check Your Credit Score

 

Create a Budget

 

Find the Right Car

 

Find the Right Dealership

 

Book a Test Drive

 

Consider a Down Payment

 

Review Your Lease Agreement

 

Start Making Payments

 

Remember Routine Maintenance