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Line of Credit, Lease vs. Finance: What Makes Sense For You?

After you have chosen your next car and negotiated the price, the question becomes, “What is the best way to pay for it?”  One article can’t give a definitive answer for every situation, but we can present questions to help you to navigate the various choices.

Let’s Say That You Have The Money To Buy The Vehicle Outright...

If you are in a position to pay cash for a vehicle, the question to ask is, “Can I generate an after-tax rate of return on my money that is greater than the interest rate being charged to Finance or Lease the car?” If you can make 10% on your money and the Finance or Lease rate being offered is 5%, then you would be ahead investing your money and Financing or Leasing the vehicle. If your money isn’t earning a significant return, or the future returns are uncertain, you might use your cash to purchase the vehicle.

Secondly, you may ask yourself if you are willing to pay leasing costs in order to have a guaranteed ‘buyback’ of the car, and eliminate the risk of accelerated depreciation. If you would like the certainty of knowing what your vehicle will be worth in 3 years’ time, a lease will give you a guaranteed number.

Let’s Say You Don’t…

The reality for most Canadians is that they will require financing of one sort or another to purchase an automobile. If you decided to borrow money to make your purchase, you would then decide whether to source your own financing or go through your Automotive dealer. Interest rates on various personal Lines of Credit (LOC) offered by banks vary considerably depending on the individual. They are variable, in that the rate varies with changes in the Prime Lending Rate. They may require a high monthly payment. Also, you need to consider whether you may need ‘room’ on your LOC in the future for significant expenses such as a home renovation.

Automotive dealers have associations and dealer agreements with many financial institutions; from all the large Canadian Banks, various Credit Unions, and the Financing divisions of the Automobile manufacturers they represent. Generally, only the manufacturers will offer Leasing, as they have the distribution network to efficiently re-market Lease returns. A good Finance Manager at a car dealership can ‘shop’ the best rate for you, give meaningful guidance, and put you into the most appropriate financial product.

Lease or Finance?

Leasing offers some important advantages. The fixed monthly payment, especially when a maintenance plan is rolled into the lease, allows for accurate budgeting and ownership costs. The most typical lease terms ensure that you are within the warranty period and minimize servicing costs. Also, by changing into a new vehicle more frequently, you will have the benefit of the latest technology and safety advancements. The monthly lease payment also offers a more competitive figure, due to the residual value remaining at the end of the term. You can look at the monthly payment as being representative to the portion of the vehicle that you are using. It is important to be mindful of the kilometer allowance that you select prior to signing the lease; Porsche Financial Services Canada offers ultra-low kilometer allowance options, as well as the ability to prepay for excess kilometers up front. If excess wear and tear is a concern, there is a lease-end protection plan offered that covers the related charges.

Financing will generally cost less because the lending institution does not have the risk and expense of re-marketing the vehicle. Keeping a vehicle for longer means that the overall depreciation per year will be less than that it would be when changing into a new vehicle more often. Also Financing offers more flexibility to pay down the loan earlier. A finance contract will include tax payable on the entire purchase price, where with a lease you don’t pay tax on the Residual Value unless you purchase the car. Some provinces have very high taxes, especially on luxury vehicles, so understanding the tax implications of the contract is important.

What About ‘Incentive’ Rates?

When Automotive manufactures compete for market share or see excess inventory on their dealers’ lots, they offer incentives in various forms – these can be cash rebates or subsidized interest rates for Lease or Finance programs. Sometimes they will bump up residuals on Leases to make the payment more attractive. Customers can often be offered a choice between a low rate or a cash discount. Sometimes these incentives are paid by the manufacturer, the dealer, or both. Knowing where the incentive is coming from can help you with your negotiations. Choosing the best option involves quantifying the cash equivalent of the low rate which can be done with some basic math (see the links to the video series below).

How can I make sure there are no mistakes on my Lease or Finance Contract?

Mistakes can happen, and it is a good idea to use a financial calculator, or smartphone app, to calculate your payment independently and compare it to the contract you are about to sign. The more conversant you are with Leasing and Financing terms, and the numbers that make up the payment calculations, the better you will be able to understand the contract that is presented to you. It is a good idea to ask for a draft of the Lease of Finance contract before you pick up the vehicle, to give yourself adequate time to review it.

What More Do I Need To Know?

As with any type of borrowing, the most important things to consider are the overall interest cost and the flexibility of the contract. Also, estimating the depreciation of the vehicle throughout the term of the Lease or Finance contract, and identifying at which points you are likely to have positive or negative equity, will let you know when you can trade your vehicle without having to pay a lump sum.

by Lawrence Romanosky, GSM Porsche Centre Calgary

For a deeper dive into the structure and calculations behind Automotive Leasing and Financing please view the following video series that explain these concepts in detail:

Lease and Finance Terms Explained: What You Need To Know

Applying the Theory: When to Lease and When to Finance

Anatomy of A Lease - Pt. 1

Anatomy of A Lease - Pt. 2

Anatomy of A Lease - Pt. 3

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Date Posted: October 29, 2019