As car buyers go, Larisa Bogle seems ideal for leasing.

She’s a self-employed health practitioner positioned to take advantage of some of the tax benefits of leasing; she changes her vehicle every three years or so; and, she’s wants to keep her monthly payment as low as possible. With one daughter just finishing university and the second one starting, she wants to do what she can to keep control of her monthly cash outlay.

The lease payment on an Escape SE ($37,239 with options and fees) for a five-year term comes to $412/month – based on a 0.99% interest rate. Finance the same vehicle over five years at 0.0%, and the monthly payment is $621. That’s a difference of $209 a month, which is substantial.

For Bogle, there is both a financial and emotional argument to be made for leasing. On the financial side, with leasing she can take advantage of the tax benefits, cut her monthly payment, and preserve capital she might use for a down payment. Her leased vehicle will always be covered under warranty, thereby eliminating the worry of an unexpected and perhaps large cost of major car repairs.

What will she save on her monthly payment? An average of $60 a month, says data from J.D. Power & Associates Power Information Group data. The average monthly lease payment in Canada is $510, versus $570 for the average finance payment, although there’s more to those numbers, as we’ll see.

The lower payment largely explains why one-quarter of Canadians getting a new car choose leasing over buying. The quest for a monthly payment also explains why PIN data shows that 71 per cent of Canadians opt for a loan term of 72 months or more.

Not to be overlooked is the emotional piece of this story. Bogle prefers to drive a newer vehicle for a host of reasons, not least of which is safety. The latest models have the most up-to-date safety technologies and designs, thus they should be safer.

You will need to do a lot of homework if you plan to lease a new vehicle. If you can afford the monthly payment, buying is without question a better deal than leasing over time. Even if you opt to make payments for 84 months, at the end you very likely will drive for free for another eight years or so. Of course, not everyone is happy to drive a 10-, 12-, or 15-year-old car.

Leasing, however, would allow Bogle to swap the old for the new every three or four years and it might make great financial sense.

“But I wouldn’t own anything,” she says.

True. On the other hand, if she leases, she won’t be absorbing the cost of depreciation to the same degree. That is, the biggest one-time hit any new car buyer takes is driving off the lot for the first time.

Up to 20 per cent of the value of any new vehicle is incinerated the moment you take possession and hit the road. Those who buy a new car every three or four years lose thousands in depreciation. For regular and frequent car buyers, leasing is very likely a better option.

Bogle isn’t sold on leasing, however, and she’s smart to question what amounts to a very complicated financial deal.

“What if I choose to keep the car more than three or four years? If I lease, I have nothing; if I buy, my car is worth something,” she says.

True, true. But buying really makes the most sense if you keep that vehicle for five, six, seven, 10 years or more. Which is not a bad choice.

Research from DesRosiers Automotive Consultants shows that today’s new vehicle should deliver reliable service for up to 15 years or more than 300,000 km. The engineering/build quality of new cars is that good right across the board, regardless of automaker.

If you can afford the monthly payment, buying is without question a better deal than leasing over time. Even if you opt to make payments for 84 months, at the end you very likely will drive for free for another eight years or so. Of course, not everyone is happy to drive a 10-, 12-, or 15-year-old car.

If you lease, well, you will get a lower monthly payment AND you won’t tie up capital in a depreciating asset – a vehicle.  That can be important for businesses large and small. As one insider puts it, “Leasing is an excellent way for a certain type of consumer to be able to afford a better car – or a car at all – because of the lower monthly payment.” Leasing, then, is a price discussion, not a value discussion. “The value proposition will be greater if you own over the long term.”

Okay, let’s put some numbers on the bones of this story. Say you’re one of the 50,000 or so Canadians who will end up buying or leasing a Ford Escape compact crossover this year. To buy or lease?

The lease payment on an Escape SE ($37,239 with options and fees) for a five-year term comes to $412/month – based on a 0.99% interest rate. Finance the same vehicle over five years at 0.0%, and the monthly payment is $621. That’s a difference of $209 a month, which is substantial.

But at the end of five years, the buyer owns an Escape worth $20,000 or so, while the lessee owns nothing. Stretch the finance payments to 84 months, still at 0.0% from Ford Credit, and the monthly payment drops to $444 – about equal to the lease payment on a five-year term.

What should Bogle do? For now, she’s still a buyer, though if she keeps swapping vehicles every three or four years, she might be better off leasing to reduce her depreciation costs and free up the capital used for a down payment.

But if she decides to hang on to a new ride for the long term, the better deal is to stay put quite a few years after the payments are done.

WHAT YOU NEED TO KNOW ABOUT LEASING

A quarter of Canadian car buyers actually lease their new vehicles and for good reasons. Affordability (lower monthly payments) tops the list, but people who lease sometimes do so to preserve capital or enjoy a hassle-free ownership experience (the entire term is warranty-covered). Some lease to get the emotional charge of getting a brand a new vehicle every few years.

Here’s a warning, though. If you really care about your money, take time to sort through the details of your lease deal. Here’s why: leasing contracts are more complicated than purchase agreements.

Leasing companies play with a number of leasing contract variables and most consumers are not equipped with the financial acumen to assess them thoroughly. For the typical consumer, understanding what makes a good or bad lease deal is difficult; it’s a complicated finance product.

But the concept is simple enough. The lessee (you) rents a vehicle for a period of time at a monthly fee. During the lease period, the lessee is responsible for buying insurance, maintaining the vehicle and not exceeding a restriction of, say, 20,000 kilometres per year. Exceed it and you’ll typically face penalties.

When the lease is up, you have the option of buying the vehicle for a price generally specified in the leasing contract – a so-called closed-end lease with a purchase option.

For the most part, leasing companies in Canada are pretty good at disclosing contract details — things like the capital cost, interest rate, total interest cost, interest calculations, administration fees and so on. If you encounter a sneaky or fuzzy lease deal, or if you just don’t understand all of it, walk away – or take the contract away and ask for help from a financial advisor not associated with the lessor.

THREE CRITICAL FACTORS

For anyone contemplating a leasing contract, the three critical factors above all others are the capital cost, the interest rate and the residual value:

• * The capital cost (or cap cost) is the price of the vehicle, including options, as determined by the lessor.
• The residual value of the vehicle is the forecasted market value at the termination of the lease as determined by the lessor.
• The interest rate is the cost of borrowing money.

Monthly payments are based on the difference between the cap cost and the residual (or buyback) with the interest rate and other fees factored in. Leasing companies can manage any of the three big variables to structure the deal in order to achieve a particular monthly payment.

Consumers need to be clear on how the variables have been structured in order to determine the real cost of a lease. You’re not sure about any part of the deal, walk away or seek help from an independent financial advisor.

BEWARE OF THESE FACTORS WHEN LEASING

• You own nothing when the lease terminates; you have no equity in the vehicle. So if you don’t plan ahead, when the lease ends you may be scrambling for the funds to enter into another lease or to make a purchase.
• Normal wear and tear: Most leases require that the vehicle be returned undamaged; it’s up to the leasing company to determine what amounts to normal wear and tear. If you don’t look after your vehicle, expect a bill that could run into hundreds if not thousands of dollars.

So what’s normal wear and tear? Usually it includes small dings, minor dents, minor scratches, stone chips and reduced tire tread. Excess wear and tear includes broken or missing parts, dented body panels or trim, damaged fabric, cracked or broken glass, poor quality repairs, unsightly alterations, wheel damage tires with minimal tread remaining and mechanical or electrical malfunctions.

• Excess mileage charges: most lease agreements limit you to 20,000 km a year or less before you incur charges.
• Early termination fees and penalties: If you need to end the lease before the term expires, you may face large penalties. Find out what they are in advance, and if the lease is transferable. Most can be transferred to a qualified customer.
• Gap protection: This is a kind of insurance that covers the whole cost of the vehicle if an accident, fire or theft results in its total loss and the insurance settlement does not cover the financial obligations in the lease contract. Gap protection covers this difference and today is standard with most leases.

WHY YOU SHOULD CONSIDER LEASING

Consumers who buy a vehicle regularly, who have a pattern of getting a new vehicle every three or four years, might find leasing is ideal:

• It’s very clean, you don’t have to worry about the used vehicle sale.
• You get a lower monthly payment.
• You tie up a little less capital.
• And the monthly payment is more affordable versus a purchase.

OTHER REASONS TO CONSIDER LEASING

• You will always be driving a vehicle during its most trouble-free years and usually while the vehicle is still covered by the manufacturer’s warranty. In fact, you may spend next to nothing on maintenance because many new cars now come with basic service (oil change, etc.) free of charge. Even if that’s not the case, repair and maintenance will not take a large bite out of your wallet.
• Leasing approval is generally easier versus a loan. Consumers with marginal credit histories are more likely to be approved simply because they are not actually purchasing the vehicle.
• No resale or trade-in hassles: With leasing, the customer can return the vehicle to the dealer at the end of the contract as long as all of the lease obligations have been met. The lessee often has the option to buy the vehicle at lease-end, or to choose from other options. Most leases are closed-end which means they stipulate the value of the vehicle at the end of the contract regardless of current conditions in the used-car market.

IF YOU’RE CONSIDERING A LEASE, ASK YOURSELF THESE QUESTIONS:

1. How often do you change your vehicle? If you change fairly often (every 3-5 years), if driving the hottest new model with the latest technology is important, then leasing may be for you. Remember, the shorter the time frame, the more advantageous for leasing. If you’re into long-term ownership, leasing is a bad deal.
2. The need to free up capital. If for some reason you must have free capital as possible, leasing could be for you.
3. How much bother is it to be involved with your car? If it’s a pain to take care and re-sell your car, leasing might make sense.
4. Are you able to understand a complex financial document? Leasing contracts are generally more complicated than purchase agreements, so it takes a fair degree of sophistication to decipher their intricacies. If that’s doesn’t describe you, seek help or don’t sign.