When it comes to the question about whether you should finance or lease, there are a lot of variables to consider before making a decision. Neither is better or worse, but they are fundamentally different in how they work.
I like leasing at this point in the market place because it carries less risk for the consumer. We are going to base our scenarios on the following car:
2024 Volkswagen Jetta
$30,000 + tax
Now, let’s say that you were to lease this particular vehicle. There are two main things that affect the payment; the interest rate, and the residual value. Let’s say that the residual value is set at 50% and that the interest rate is 0% (for simplicity), also this is based on 13% tax for the province of Ontario:
2024 Volkswagen Jetta
$30,000
36 month Lease
$471.35/mo taxes incl.
$15,000 + tax – Residual Value
Okay, there are a few scenarios why this might make sense for you:
The Collision; repaired
Let’s say that you are stopped at a red light, and all of a sudden WHAM, someone rear-ends you. Everyone’s safe, but in this example, your insurance company is going to deem that this vehicle is repairable. Ok, on to two sub-scenarios:
1) financed/purchased vehicle: If you own the Jetta, you now take responsibility for the fact that this vehicle has now had paint work and has been involved in a collision. You are legally required to disclose to the next buyer that your car has been involved in a collision (even if it wasn’t your fault!). Think back to when you’ve ever bought a pre-owned car. If the owner had told you that the particular vehicle in question had been involved in a collision. Would you still want the car? If so, would you still want to pay market value, or the same price that you would for a car that hasn’t been involved in a collision? Of course not. Therefore, a vehicle that has been involved in a collision loses value automatically. When you go to sell the Jetta (to a dealer or a private individual), you are going to take a financial hit on the new depreciated value of the car because it’s been hit.
2) leased vehicle: at the end of the term, you drop the keys off and walk away … the leasing company does not penalize you for the vehicle being repainted … it was fixed by the insurance company and is no longer your responsibility
The Collision; written-off
Okay, same scenario as before, but this time, the vehicle is deemed 'not repairable' by the insurance company. For the first year or two, many insurance policies have a limited waiver of depreciation. That means that no matter what condition the car was in, or how many KMs it had on it, you will get the full replacement value within the time specified. Same two scenarios.:
1) financed/purchased vehicle: You’ve owned the car for 2 years and 2 months. Your insurance company says that the car is worth $19,000. But you still owe $24,000 to the finance company! You are the one responsible for the difference of $5,000 because you are the owner of the car.
2) Leased vehicle: You’ve owned the car for 2 years and 2 months. Your insurance company says that the car is worth $19,000. But you still owe $24,000 to the finance company! Volkswagen Leases have gap insurance built in, therefore, the $5,000 difference is absorbed by the leasing company’s insurance, not you.
The same situation applies if the Jetta is stolen.
The markets; down market
Okay, in this example, the market has taken a tumble, and pre-owned vehicles are not what they were forecasted to be in a three year term. Remember that in our leased vehicle’s example, the residual set is $15,000. That means that because the car was $30,000, you’re making payments on the OTHER $15,000.
1) financed/purchased vehicle: At the end of three years, you need something bigger/smaller/sportier/more luxurious. It’s time to sell the car! Because you’re in a down market, your car is worth only $12,000. That means that the total cost of the car was $18,000 over three years.
2) leased vehicle: at the end of three years, you paid $15,000 for the car in your payments, so the total cost of the car was $15,000
The markets; up market
In this example, the market is booming, and pre-owned vehicles are not much higher than what was forecasted for a three year term. Remember that in our leased vehicle’s example, the residual set is $15,000. That means that because the car was $30,000, you’re making payments on the OTHER $15,000.
1) financed/purchased vehicle: At the end of three years, you need something bigger/smaller/sportier/more luxurious. It’s time to sell the car! Because you’re in an upmarket, congratulations! The gamble paid off and your car is worth $18,000. That means that the total cost of the car was $12,000 over three years.
2) leased vehicle: at the end of three years, you paid $15,000 for the car in your payments, so the total cost of the car was $15,000. But the lease-end carries a purchase option with it! Buy the car, sell it for $18,000, and make $3,000 on the sale.
The point that I'm trying to make is that leasing carries less consumer risk with it. Many manufacturers have lost a ton of money on poor leasing strategies. During down markets, they were forced to take back cars that they owed $15,000 on, but were only worth $12,000. However, the consumer didn't lose the money, and that's the point.
Imagine if a car has 100,000 KMs on it at the end of a lease term. You've driven the car out of warranty and for the best years of its life! Is someone going to want to pay a premium price for a car that has been used for that amount of KMs? Would you?
I like leasing at this point in the market place because it carries less risk for the consumer. We are going to base our scenarios on the following car:
2024 Volkswagen Jetta
$30,000 + tax
Now, let’s say that you were to lease this particular vehicle. There are two main things that affect the payment; the interest rate, and the residual value. Let’s say that the residual value is set at 50% and that the interest rate is 0% (for simplicity), also this is based on 13% tax for the province of Ontario:
2024 Volkswagen Jetta
$30,000
36 month Lease
$471.35/mo taxes incl.
$15,000 + tax – Residual Value
Okay, there are a few scenarios why this might make sense for you:
The Collision; repaired
Let’s say that you are stopped at a red light, and all of a sudden WHAM, someone rear-ends you. Everyone’s safe, but in this example, your insurance company is going to deem that this vehicle is repairable. Ok, on to two sub-scenarios:
1) financed/purchased vehicle: If you own the Jetta, you now take responsibility for the fact that this vehicle has now had paint work and has been involved in a collision. You are legally required to disclose to the next buyer that your car has been involved in a collision (even if it wasn’t your fault!). Think back to when you’ve ever bought a pre-owned car. If the owner had told you that the particular vehicle in question had been involved in a collision. Would you still want the car? If so, would you still want to pay market value, or the same price that you would for a car that hasn’t been involved in a collision? Of course not. Therefore, a vehicle that has been involved in a collision loses value automatically. When you go to sell the Jetta (to a dealer or a private individual), you are going to take a financial hit on the new depreciated value of the car because it’s been hit.
2) leased vehicle: at the end of the term, you drop the keys off and walk away … the leasing company does not penalize you for the vehicle being repainted … it was fixed by the insurance company and is no longer your responsibility
The Collision; written-off
Okay, same scenario as before, but this time, the vehicle is deemed 'not repairable' by the insurance company. For the first year or two, many insurance policies have a limited waiver of depreciation. That means that no matter what condition the car was in, or how many KMs it had on it, you will get the full replacement value within the time specified. Same two scenarios.:
1) financed/purchased vehicle: You’ve owned the car for 2 years and 2 months. Your insurance company says that the car is worth $19,000. But you still owe $24,000 to the finance company! You are the one responsible for the difference of $5,000 because you are the owner of the car.
2) Leased vehicle: You’ve owned the car for 2 years and 2 months. Your insurance company says that the car is worth $19,000. But you still owe $24,000 to the finance company! Volkswagen Leases have gap insurance built in, therefore, the $5,000 difference is absorbed by the leasing company’s insurance, not you.
The same situation applies if the Jetta is stolen.
The markets; down market
Okay, in this example, the market has taken a tumble, and pre-owned vehicles are not what they were forecasted to be in a three year term. Remember that in our leased vehicle’s example, the residual set is $15,000. That means that because the car was $30,000, you’re making payments on the OTHER $15,000.
1) financed/purchased vehicle: At the end of three years, you need something bigger/smaller/sportier/more luxurious. It’s time to sell the car! Because you’re in a down market, your car is worth only $12,000. That means that the total cost of the car was $18,000 over three years.
2) leased vehicle: at the end of three years, you paid $15,000 for the car in your payments, so the total cost of the car was $15,000
The markets; up market
In this example, the market is booming, and pre-owned vehicles are not much higher than what was forecasted for a three year term. Remember that in our leased vehicle’s example, the residual set is $15,000. That means that because the car was $30,000, you’re making payments on the OTHER $15,000.
1) financed/purchased vehicle: At the end of three years, you need something bigger/smaller/sportier/more luxurious. It’s time to sell the car! Because you’re in an upmarket, congratulations! The gamble paid off and your car is worth $18,000. That means that the total cost of the car was $12,000 over three years.
2) leased vehicle: at the end of three years, you paid $15,000 for the car in your payments, so the total cost of the car was $15,000. But the lease-end carries a purchase option with it! Buy the car, sell it for $18,000, and make $3,000 on the sale.
The point that I'm trying to make is that leasing carries less consumer risk with it. Many manufacturers have lost a ton of money on poor leasing strategies. During down markets, they were forced to take back cars that they owed $15,000 on, but were only worth $12,000. However, the consumer didn't lose the money, and that's the point.
Imagine if a car has 100,000 KMs on it at the end of a lease term. You've driven the car out of warranty and for the best years of its life! Is someone going to want to pay a premium price for a car that has been used for that amount of KMs? Would you?
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