What is a lease?
A lease is like a long-term car rental since you don’t actually own the vehicle. A leasing agreement runs over a series of months (36, 48, 60) with a set monthly payment. Leasing is available for both new and used cars.
The dealer and the company that owns the leased vehicle (lessor) are most often not the same organization. The dealer helps arrange the lease and offers other services to the consumer (lessee). Generally, the dealer does not handle the monthly lease payments and is not the organization with which you sign the lease; these functions are performed by an independently owned and operated finance company.
You are encouraged to speak to leasing professionals at your dealership to assist you with detailed questions or concerns before you enter into a lease agreement.
Remember: Like any contract, consumers should always understand the terms of a lease agreement before signing it.
Types of Leases - Closed or Open
Closed-End
The most popular lease type is an option lease or closed-end lease. This type of lease allows consumers to return a vehicle at the end of the lease and either walk away or buy the vehicle for a pre-arranged amount. You are not required to make any additional payments unless there is physical damage, the kilometres driven are higher than agreed upon, or there is excessive wear and tear. Most manufacturer leases are closed-end.
Open-End
The alternative type of lease is called a residual obligation lease or open-end lease. Residual value is the leasing company’s best guess as to what the car will be worth at the end of the lease. Consumers lease the vehicle and make the scheduled payments similar to the closed-end lease; however, at the end of the lease, the consumer is responsible for covering any shortfall between the residual value and the actual price the lessor sells the vehicle for. This type of lease is not as common because of the risk to consumers needing to make additional payments at the end of the lease term.
Pros and Cons of Leasing a Vehicle
| Pros |
Cons |
Value: At the end of a lease, the buyout value of the vehicle may be higher than similar vehicles available.
A higher end value may mean smaller monthly lease payments.
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Cost: Consumers have the option to buy the vehicle at lease end, but paying out the remaining value of the car may cost you more than purchasing a similar used vehicle |
| Choice: When a lease term is finished, consumers can return or buy the vehicle, or sign a lease for a different vehicle. |
Extra Charges: The vehicle must be returned in a reasonable condition or else additional charges may be added for excess wear and tear. Consumers may be able to purchase additional insurance packages to cover future wear and tear. |
| Warranty: Leasing, like buying a new, or recent model, vehicle means it will be under warranty so repair expenses should be minimal. |
Less Flexibility: If you are leasing, you do not own the car. You've made a promise to pay monthly payments over a specific period of time. These terms will be difficult to break or renegotiate without incurring significant financial costs. There are lease "take over" services available that may offer a less expensive solution to an early lease termination. |
| Risk: Leasing allows you to switch cars every few years without taking on the risk of low resale values. |
Kilometre Limits: Lease agreements outline the maximum number of kilometres the vehicle can be driven. It will result in a penalty if over the limit. You can negotiate an additional kilometre allowance upfront before signing which may cost less than waiting until the end of the agreement. |
| Lower Payments: Monthly payments may be lower for lease agreements than finance agreements. |
Responsibility: You still are responsible for maintenance, repairs, licencing and insurance, despite not owning the vehicle.
Replacing your vehicle frequently: Whether you finance or lease, changing vehicles every three to five years means you are always making a monthly car payment. Over the long-term this will be more expensive than holding onto a paid-up used car.
Leaving Ontario? Most agreements require permission for extended leaves from the province.
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Factors that may contribute to excessive charges
- Vehicle exterior and interior (rust, scratches, paint chips, stains)
- Neglected maintenance (oil changes, check engine light on)
- Tires and wheels (including tread depth)
- Windshield and lamp lenses (scratches, cracks)
- Damaged electrical components
- Excess mileage.
Tips to avoid lease-end wear and tear charges
- Do not exceed the number of kilometres the vehicle is allowed to be driven
- Maintain the vehicle responsibly
- Take care of maintenance issues as they arise to avoid more significant problems later
- Repair scratches, dings, stains to upholstery and replace any missing or broken parts before lease end.
What to do ahead of the vehicle return date
- Review manufacturers' online tools and checklists to help determine if your vehicle will be subject to excess wear and tear charges
- Take photos of the vehicle's interior and exterior to document issues that might raise the excess wear and tear charges
- Consumers should contact the lessor and review the policies in the agreement to ensure there are no surprised when returning the vehicle
- Have repairs estimated by an unbiased dealer. This may cost less than having the lessor handle the repairs
- Keep all documents for your lease agreement, including maintenance records
- Ask your dealer for copies of any work orders or repair invoices you are missing
- Insist that you, or your dealer, be on site during the vehicle inspection as they are often conducted by third parties
- Clean your vehicle before returning it to the dealership.
Glossary of Terms
Lease
A lease is a way of obtaining a vehicle for a set period of time, usually over a series of many months (36, 48, 60 months). It is like a long-term rental and you can lease either a new or a used vehicle.
Lessee
The person who leases the vehicle.
Lessor
The company that owns the leased vehicle.
Excess Wear and Tear Fees
This is a cost determined at the end of a lease agreement if damage to a vehicle is above and beyond what the original agreement detailed. This cost can result from: missing parts, dents, paint damage, cracked or chipped glass, mechanical damage, holes, tears or burns to upholstery.
Residual Value
The estimated value of a vehicle at the end of a lease agreement. Customers, depending on the type of lease agreement, may be asked to pay the difference between the residual value and the price the lessor was able to sell the car for at the end of the lease.
Down Payment
Amount of money put towards the purchase or lease of a vehicle.
Annual Percentage Rate
This is the yearly interest due on a loan which includes interest and other fees. All these costs are expressed as a percentage of the total cost of borrowing.
Excess Kilometre Charge
If the number of kilometres driven is higher than originally agreed upon, the customer will be asked to cover the cost of the extra kilometres driven. For example, if the kilometre charge is $0.12/kilometre and the vehicle is driven an additional 10,000 kilometres, the extra charge will amount to $1200.
Lease Term
This is the length of the lease which is usually measured in months (24, 36, 48).
Monthly Payment
The monthly amount to be paid for a lease. It is determined by the amortization period of an agreement. The longer period of time it takes to pay back a loan, the smaller the monthly amount is.
Early Termination Fee
A fee charges to the lessee should a lease agreement be terminated early.
Total Obligation
The sum of all payments, over and above the cost of an item, required to be made by the lessee during the term of the lease.