Leasing vs. Buying: What Is Best for You?

According to Statistics Canada, the average Canadian puts 20% of their income towards an auto loan every year. Financing a vehicle is an option for Canadians who want to eventually own the car they’re paying off. However, some Canadians are leasing their vehicles – a popular alternative to financing.

What is the difference between a lease and finance agreement?

Ownership is the main difference between lease and finance agreements. With lease agreements, you return the car to the dealer at the end of the contract, and your payments cover the depreciation of the car’s value. Leasing is basically the same as a long term rental. You don’t own the car, but you usually have the option to buy it at the end of the term.

With finance agreements, every payment you make goes toward owning the car, and when the loan is paid off, you have 100% equity. Loan payments are usually higher than leasing costs since you're covering the entire value of the car.

Although monthly payments on a lease are generally cheaper than financing, lease agreements come with annual kilometre restrictions, early termination stipulations, accumulative wear & tear charges, and various other additional fees that should be taken into consideration if you're trying to decide what type of finance is right for you.

A simple way to look at it is:

Financing = Buying a car.
Leasing = Renting a car for several years.

You may have the option to finance or lease the same vehicle. Leasing the car may have lower upfront costs and lower monthly payments, but financing the same car means when you have paid it off it is yours to keep.

We’ll cover the pros and cons of each option throughout this article to help you make an informed decision on what type of vehicle purchase makes the most sense for your needs and your driving habits. 

How does leasing a vehicle work?

When you lease a vehicle, you make regular payments on a car over a short-fixed term (typically 2-4 years) and then return the vehicle once the lease is up. Leasing, like renting a car for a long period of time, means you only pay for the car’s value that you use. Unlike financing or owning a vehicle, you’re only required to pay for the depreciation costs of a leased car. Due to this factor, leasing a vehicle typically has a lower initial payment and lower monthly payments.

How does financing a vehicle work?

When you finance a vehicle, you’re entering into a contract with a lender where you agree to make payments over a set period of time with the end result of you owning the vehicle outright. Dealerships have relationships with a ton of lenders who can work with individuals facing a wide variety of financial situations. Once you’re approved for auto financing, it’s your responsibility to make all monthly payments on time and in full.

Although approval rates are often based on a borrower’s financial situation, vehicle financing is a great tool for rebuilding credit, and options to refinance and trade-in the vehicle before the loan is up are available. Once a loan term finishes, the vehicle officially belongs to the borrower. Many individuals prefer the idea of vehicle ownership over constantly paying monthly lease payments on new vehicles.

If you decide that financing your next vehicle is the right path for you, Canada Drives makes car shopping (and financing) easy. You can get pre-approved for your auto loan online in minutes and we will connect you with a local dealership partner in your area who will show you all the vehicles you qualify for. All you have to do is pick the one you want and drive away!

Finance Lease vs. Capital Lease vs. Operating Lease

If you are doing some research on leasing a vehicle you may come across articles that compare two different types of lease options, Finance (Capital) Lease and Operating Lease. 

When leasing a car, the difference between a finance lease, capital lease, and operating lease comes down to ownership, accounting treatment, and financial obligations. Here's how they apply in a car leasing scenario:

1. Finance Lease vs. Capital Lease (Same Thing)

A finance lease (also called a capital lease) for a car is structured more like a loan than a traditional lease. The lessee (you or a business) assumes most of the ownership risks and rewards.

How It Works:

• The car is recorded as an asset on your balance sheet (if a business lease).
• Lease payments are split into principal (reducing liability) and interest (expense).
• You typically have an option to buy the car at the end of the lease for a nominal or guaranteed amount. 
• The lease term covers most of the car’s useful life (e.g., 4–5 years on a car with a 6-year life) and the car has no alternative use to the lessor at the end of the lease. This results in higher monthly payments as you are essentially paying for the entire value of the car over the course of the lease. 

Who Uses It?

• Businesses that want to keep the car after the lease.
• Individuals who want eventual vehicle ownership rather than continuous leasing.

Example:

You lease a car for 5 years with an option to buy it for $1 at the end. Since the lease transfers ownership benefits, it’s treated as a finance lease.

2. Operating Lease (Traditional Car Lease)

An operating lease is a typical car lease where the leasing company (lessor) retains ownership, and you return the car at the end of the lease term.

How It Works:

• Lease payments are treated more as rental expenses, resulting in lower leasing costs. 
• You return the car at the end of the lease unless there's a purchase option (often at market value).
• The lease term is usually shorter than the car's useful life (e.g., 2–4 years). This results in lower monthly payments because the lessor will be able to sell the car when you return it. 

Who Uses It?

• Individuals who want a new car every few years.
• Businesses that prefer low monthly lease payments and tax benefits without ownership.
• People who drive within mileage limits (e.g., 12,000–15,000 km per year).

Example:

You lease a car for 3 years, pay a monthly fee, and return it at the end with no ownership. As mentioned above, in most cases you will have an option to purchase the vehicle at the end of your lease term. The purchase price at the end of an operating lease will be higher than the purchase price at the end of a finance lease.

Which One Is Right for You?

Finance Lease: Best if you want to own the car eventually and can handle higher lease payments.

Operating Lease: Best if you prefer lower monthly lease payments, flexibility, and new cars every few years.

How is leasing different from financing?

When you finance a car, the entire cost of the vehicle, including fees and taxes, is stretched out over the length of the term. The shorter the term length, the higher the monthly payments, and the longer the term length, the smaller the monthly payments. Although the average car loan length is roughly 6-7 years, payments for a financed vehicle will eventually end.

With a leased vehicle, monthly payments are calculated by the vehicle’s residual value (the value of the vehicle that is leftover once the lease is finished) and the car’s total sale price. Because this number is often lower than a loan for auto financing, monthly payments when leasing a vehicle are known to be more affordable.

However, once the term on a leased vehicle is up, you’re required to either buy-out the vehicle or return it and repeat the process. Most Canadians who choose to lease don’t buy the vehicle and instead return it for a new vehicle and new lease, which restarts a payment process. The payment cycle on a leased vehicle can be a turn-off to customers who want to own the car at the end of the term.

Leasing a vehicle is a convenient option for Canadians who aren’t interested in owning a vehicle and want lower monthly payments. The leasing process is also appealing to people who prefer changing their vehicles every few years to models that are newer and fall within the warranty period.

Although leasing a vehicle might seem financially convenient regarding lower monthly payments, over time, the cost of leasing several vehicles will eventually be higher than the cost of owning a vehicle. When you finance a vehicle, you’re given the freedom to use the car at your convenience, regardless of the mileage used. With a leased vehicle, there are set kilometre-limits, and going over these limits on a leased contract results in hefty fees.

Additionally, borrowers who finance a vehicle aren’t required to return their vehicle – once it’s paid for, it’s theirs to keep. Leasing a vehicle means you’re stuck with the car and payments until the lease is over and returning it before the lease is up can be extremely costly. For people who finance and want to return their vehicle due to financial or lifestyle changes, options, like refinancing and trading in the vehicle, are common and easy to do. When you lease, these options aren’t available to you.

Leasing companies understand that some wear-and-tear is bound to happen over the course of a leased term, however, any substantial wear & tear of a leased vehicle will come straight out of the borrower’s pocket. The difference between cost, convenience, and flexibility of leasing versus financing are major and should be researched before you decide which path to take. Other factors to note are the penalties that come alongside leasing and financing.

Leasing penalties

Leasing companies want to ensure that borrowers will stay driving the vehicle through the duration of the term. These companies make money off your payments and put the cash towards paying off the vehicle so that they can continue leasing it. Due to this, leasing contracts typically include penalties that you won’t find when financing a vehicle.

As mentioned earlier, there are a lot of options available for people who are financing and want to change their vehicle or their monthly rates. However, these options don’t exist with leasing.

The penalties for terminating a car lease early could require you to pay for the remaining payments on the lease, an early termination fee or any negative equity left on the vehicle. An option for people who want to end a lease term early is to try and transfer the lease to a friend or family member. However, this option isn’t available to everyone. If you’re in a lease and want to get out early, buying out the leased car and trying to sell it yourself or trading it in could be the best option for saving as much money as possible through the turn-in process.

If a leased car has accumulated a lot of wear & tear once the term is over, the borrower must settle with the leasing company to pay for the accidents, and these are typically resolved through the manufacturer instead of a local mechanic, which can sometimes be more expensive.

Financing penalties

When you agree to finance a vehicle, the vehicle is used as collateral while you’re making your monthly payments. Any late payments could result in hefty fees and increased interest rates, and any missed payments could result in repossession of the vehicle and serious credit score damage. Another financial penalty for financing is getting stuck into a lengthy contract and owing more in payments than the actual worth of the vehicle.

Vehicle finance lets you rebuild your credit score, however when you enter a financing agreement, ensure that the repayment plan fits into your budget, otherwise, you could face serious credit penalties if you can’t make your payments.

Can you lease a car in Canada with bad credit?

Yes, you can lease a car with bad credit in Canada, but it may be more challenging. Lenders and dealerships look at your credit score, income, and financial history to determine your eligibility. Here’s what you need to know:

Options for Leasing a Car with Bad Credit in Canada

1. Go Through a Subprime Lender

• Some dealerships and financial institutions specialize in bad credit car leasing.
• Expect higher interest rates and possibly a larger down payment.

2. Use a Cosigner

• If you have a family member or friend with good credit willing to cosign, this improves your approval chances.

3. Make a Larger Down Payment

• A higher down payment lowers the lender’s risk and increases your approval chances.

4. Consider a Lease Transfer (Lease Takeover)

• A lease transfer allows you to take over someone else’s lease, often with fewer credit requirements.

5. Go for a Shorter Lease Term

• Some lenders may approve a short-term lease (12–24 months) more easily than a long-term one.

6. Improve Your Credit Before Applying

• Paying down debts and checking your credit score (Equifax/TransUnion) can help.

7. Get an Online Pre-approval to Weigh All Your Options

• Sites like Canada Drives have special financing programs designed for customers with lower credit scores. You can get pre-approved online in minutes to see what financing, lease, and vehicle options you qualify for. In some cases it may make more sense and be more affordable to finance a vehicle with bad credit than lease one. 

What to know before buying a previously leased car

An off-lease vehicle is a car that was previously leased by someone but has been returned to the dealership at the end of the lease’s term. If you’re considering a pre-owned vehicle, recently leased cars have some advantages that standard used cars don’t have, improving the vehicle's resale value. Previously leased cars: 

• tend to have less mileage
• usually require fewer repairs and maintenance

These advantages are due to the leasing terms that were agreed to by the lease owner—to keep the car in good condition.

Another advantage to consider with previously leased cars is the warranty coverage. Dealerships tend to offer all sorts of extended warranties, but previously leased cars are often still covered under their original manufacturer's warranty due to the short length of most lease terms. It’s worth noting that leased cars usually qualify for manufacturer and dealership certified pre-owned programs too due to their well-kept condition. 

There are many advantages of buying a previously leased car, but that doesn’t mean you should buy the first previously leased car you find! Off-lease cars can have issues, so as with any used car you have your eye on, you should still do your research, perform a test drive, request an inspection, and get a CARFAX vehicle history report.

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