Should you lease or finance?

You’re shopping for your new vehicle and you’ve fallen in love. You’ve found the perfect partner for the twists and turns along life’s windy roads.

This car is the perfect model, it's accessorized just right and it’s even the color you want. In other words, you’ve found ‘The One’.

The only problem? ‘The One’ comes with a price tag and a variety of ways to combat this price tag. For most, it comes down to two options: to finance or to lease?

This is a perennial question that most people have their own opinion on. At Kelowna BMW, we’re completely unbiased about which option our customers opt for. After all, financially it’s the same outcome for us. However, it’s not the same outcome for our customers which is why we’re going to examine the meaning and consequences of both options.

I remember reading a statement in a book one time that said financial planners agree that we should buy things that appreciate and lease things that depreciate. But before we can examine whether this is true, let’s break down the differences between a loan finance and a lease.

What’s a loan finance?

So what’s a loan finance? A loan finance includes taking out a loan because buyers don’t have the money to pay with cash or they don’t wish to tie that amount of money up. If there’s no down payment, if a car sells for $55,000 you will need to borrow $55,000.00 plus tax, PST & GST and then luxury tax on the purchase. It is important to note that the tax you pay is dependent on the province you primarily reside in not the province you buy in. Interest is then calculated on the total amount and divided by the number of months you finance.

The longer the term, the more interest you pay and the longer it will take to be at the breakeven point where what you owe is what the vehicle is worth. In other words, you’re able to drive now and pay over time. The major advantage? If kept long enough, the vehicle will be paid for.

What’s lease got to do with it?

In comparison with a lease, instead of borrowing the full purchase price and both the tax or luxury tax, you’re only borrowing the depreciation of the vehicle over the term. We call this the ‘usage of the vehicle’. This is calculated through factoring in the kilometers driven and the number of months or term of the leasing.

In other words, with a 3-year lease, you're paying about 40% of the depreciation over the term plus tax and or luxury tax on the monthly payment. You’re not paying for the entire vehicle. Everything not included in this amount is known as the residual tax. When you pay the taxes on the payment or usage per month or when the lease ends, you can buy the vehicle for its upfront residual value plus taxes.

Alternatively, if it turns out that your car wasn't meant to be and you're within the kilometers paid for in the lease, with a lease you can walk away.

What’s the best option?

Both leasing and financing have their own unique advantages. With financing, when the vehicle is paid for there are no more payments. Once the manufactures warranty runs out you could extend the warranty or cover the cost of both repairs and maintenance of the vehicle yourself. If you plan on keeping your vehicle for six, seven, eight years or longer, this is a serious consideration.

On the other hand, leasing offers gap insurance that covers the remaining amount owed if the vehicle was written off in an accident or damaged in any other way. Leasing also offers a walk away option at the end of a lease if the vehicle sustains any damage. A large accident declaration listed on a financed vehicle you still own will reduce the vehicle's value on resale, depending on market conditions. Finally, when leasing in BC you save the luxury tax at the end of the term, should you choose to buy.

While the debate over whether to lease or finance is tricky, don’t be overwhelmed. Both options make good sense depending on your personal circumstance and driving habits. Personally, I think the advantages are skewed in favour of leasing as it offers more options, flexibility, lower payments and the peace of mind of always having a vehicle under manufacturer's warranty. Nevertheless, with both options you’ll be able to drive in the sunset hand in wheel with your new partner in crime. Now that’s the important part.

Oh the other important part? Remember that all driving is simply better in a new BMW.