Lease or Buy a Vehicle For Business?

How does financing a vehicle work? 

To finance a vehicle, you borrow money to cover its purchase. You then repay the loan, with interest, in monthly payments over a predetermined period. 

Generally, once you make your final loan payment, the vehicle is yours. The advantage of financing your vehicle is that you’re free to change your mind: you can sell your vehicle at any time and use the proceeds to pay off the balance of your loan, typically with no penalty. 

If you choose to finance your new vehicle, there’s no limit on how many miles you can put on the odometer. It’s also up to you whether to repair any minor damages that occur to the vehicle. 

Good to know: Most car loans allow you to make extra payments against the principal balance, which reduces the interest you’ll pay. If you choose to finance, you may very well be able to shorten your loan’s repayment term. 

What’s negative equity? 

Many financial institutions will allow you to stretch your repayment over six, seven or even eight years in order to reduce your monthly payments. This may seem like a good idea at first, but it’s not necessarily a smart move. During that time, your car will depreciate in value. That means you could end up with negative equity, where your vehicle is worth less than what you paid for it. The problem arises when you decide to sell your vehicle. You may find that the amount you receive likely won’t cover the balance of your loan. 

How does leasing a vehicle work? 

When leasing a vehicle, you’ll typically sign a 36-, 48- or 60-month lease. If you opt for this type of agreement, be aware of the following: 

•  The leasing company you enter into an agreement with retains ownership of the vehicle. 
• Your monthly payments cover the cost of its depreciation during the lease term. 
• Your monthly payments are determined by the residual amount, which is the vehicle’s value at the end of the lease. This amount is indicated in your lease agreement. 
  
• If you purchase the vehicle at the end of the lease, you’ll pay the equivalent of the residual amount. 

Good to know: Your monthly payments may be lower if you lease rather than go the financing route. 

At the end of your lease, you have three options: 

1. Return the vehicle to the dealer. 
2. Purchase it under the terms of your lease. 
3. Negotiate a new lease on a new vehicle. 

What’s excess mileage? 

All leasing agreements set an annual mileage allowance in order to determine the amortization schedule. At the end of your lease, you’ll be charged a penalty for each kilometre over this allowance. 

For example, if you drive 70,000 km on a vehicle with a 3-year lease and an annual allowance of 20,000 km, you’ll end up with 10,000 km in excess mileage. If your agreement indicates a penalty of $0.12 per kilometre, you’ll be charged $1,200 when your lease ends. If you think you’ll exceed the annual allowance, see about getting a lease with higher mileage. Don’t be surprised, however, to pay higher monthly payments too. 

What other fees can you expect when you return your vehicle to the dealer? 

At the end of your lease, you’ll be billed a surcharge for any damage deemed unreasonable, as determined in your lease agreement. 

With this in mind, it may be cheaper to take your vehicle to the repair shop before returning the vehicle to the dealer. Don’t forget that you’ll have to pay the bill even if you don’t actually own the car. 

Can you terminate your lease agreement? 

Yes. However, if you terminate your agreement early, the leasing company could charge you a hefty fee. That’s why it’s important to ask yourself this: What’s your plan if you can’t make your monthly payments or if you no longer need the car while it’s still under lease? Do the calculations before signing the agreement. 

Is it a good idea to buy the vehicle once the lease is up? 

If you only drive 10,000 km a year, but your agreement allows you to travel twice that distance, the vehicle’s value may be higher than the residual amount at the end of your lease. 

Technically, you could purchase the car and resell it at a profit. However, certain factors that are hard to predict, such as the demand for your specific model of used car, complicate the matter. 

If you do decide to purchase the car at the end of your lease, it would be better to pay the residual amount in full rather than take out a loan, since you would also be carrying interest. 

What else should you consider before buying or leasing a vehicle? 

What does the warranty cover? 

Whether you lease or finance the purchase of a vehicle for your business, it will come with a manufacturer’s warranty from the automaker. Before signing your lease or loan agreement, check its duration and what exactly it covers. 

For example, the powertrain (which includes the engine, transmission, driveshaft, differential and axles) could be guaranteed for five years and the rest of the vehicle for only three. 

Why is it important to know what the warranty covers? 

• If you sign a five-year lease, you run the risk of having to pay out-of-pocket for repairs that are no longer covered by the warranty on a vehicle you don’t own. This is especially true for brakes and tires, which typically have to be replaced before the end of a lease. 
• If you finance the purchase of a vehicle for six or seven years, you may be stuck with costly repairs that are no longer.  covered by the warranty while still paying off your loan, which could put you in a difficult financial situation. 

Should you make a down payment on your new vehicle?

If you’re financing the purchase of a vehicle, it’s best to make the biggest down payment you can comfortably afford. By doing so, your principal and interest payments will be lower. 

This advice makes less sense if you lease: you may reduce your monthly payments with a down payment, but you won’t really save money in the long run. If you decide to buy the car at the end of your lease, the cost will be the same. 

What are the tax implications of buying or leasing a commercial vehicle? 

Before deciding whether to buy or lease a vehicle for your business, take the time to weigh the pros and cons from a tax and financial perspective. Here are a few questions to help guide your decision: 

• Will a down payment affect your cash flow? 
• If you decide to buy a vehicle, will maintaining it make your daily expenses less manageable? 
• How much capital cost allowance (CCA) are you eligible for if you buy or lease a vehicle? 
• What deductions will you be entitled to depending on the type of vehicle you choose? 

Learn more about our financing solutions for your business and our various bank accounts and packages tailored to your needs.