Car Leasing Guide: How to Lease a Car in Canada

What is car leasing?

Car leasing is a popular way of financing a vehicle. Instead of owning the car outright, when you lease a vehicle, you commit to hiring it for an agreed-upon amount of time at a set monthly or annual price. 

These long-term rental agreements typically last between 3 and 5 years. During this time, you’re effectively paying for the depreciation of the vehicle before handing it back to the leasing company. 

In this article, we’ll answer questions like “How does leasing work in Canada?” before sharing the tips and tricks you need to avoid paying over the odds.

Why consider car leasing in Canada?

Leasing is a popular way to finance car use in Canada. In the past, leases accounted for between 60% and 80% of car finance deals. However, rising interest rates and the cost-of-living crisis mean that fewer Canadians are buying used cars. Despite this trend, leasing is not going anywhere because of the following benefits.

• Leases allow you to drive a new car every few years.
• You don’t need as large a downpayment to finance a deal.
• Lease payments are typically lower than monthly payments for financing equivalent cars.
• A lot of leasing companies offer maintenance as part of the lease.
• You don’t need to worry about the deprecation of your asset because you just hand it back to the leasing company.

Types of Car Leasing Options in Canada

If you want to lease a car in Canada, you have a few options that will suit drivers with different needs and finance situations. Let’s take a look at the four main possibilities you can choose from.

New car leases

New car leases are the most common type of car leases in Canada. Typically, these arrangements mean you can drive a new car for around 2 to 4 years for reasonable monthly payments. 
The benefits here include:

• Access to the latest models and trims.
• Lower monthly payments compared with purchasing.
• Warranty coverage for the lease period.

Used car leases

While used car leases are less common than new car leases, they’re growing in popularity in Canada. Some of the reasons why you should lease a used car in Canada include:

• Monthly payments are lower than a new car lease.
• Lease terms are typically around 2 to 3 years.

However, there are some things to consider before signing up to lease a used car, such as:

• The vehicle will be older, which might mean higher maintenance costs are a factor.
• The selection of cars might be more limited.

Lease-to-own agreements

A lease-to-own agreement is like a midway point between leasing and financing if you can’t qualify for financing or don’t have an adequate downpayment, a lease-to-own agreement can offer the flexibility you need to get the deal over the line.

Here are some common features of these deals:

• Monthly payments include the car rental costs plus some money to put aside for the eventual outright purchase.
• Option to buy the car when the lease ends.
• Sometimes, the costs are higher than leasing or purchasing alone.

Lease takeovers

Lease takeovers allow someone to take over the remaining payments and responsibilities of an existing auto lease from the original leaseholder. They’re becoming a popular option in the Canadian market because they’re flexible and affordable.

Some key features include:

• Shorter rental periods.
• Low down payments.
• Some serious bargains are possible.

Leasing vs Financing

Leasing and financing are two different ways to get your hands on your dream vehicle. However, there are some differences that you need to know about. 

Flexibility

Leasing: Offers flexibility to upgrade to new models every few years.

Financing: Involves a longer commitment to a particular vehicle.

Ownership

Leasing: No ownership. You're essentially renting the vehicle.

Financing: You can build ownership over time and own the car once the loan is paid off.

Long-term Costs

Leasing: Continuous payments can be more expensive in the long run.

Financing: Potential for long-term savings once the car is paid off.

Upfront Costs

Leasing: Lower upfront costs; often requires less initial cash outlay.

Financing: Higher upfront costs typically require a down payment.

Equity

Leasing: No equity is built; you return the car at the end of the lease term.

Financing: Builds equity as you pay off the loan, which can be used in future purchases.

Restrictions

Leasing: Mileage limits and restrictions on modifications apply.

Financing: No mileage restrictions and full freedom to modify the vehicle.

Pros of leasing

Some of the pros of leasing a car include: 

• Lower upfront costs
• Maintenance is included in the monthly payments.
• Short lease terms allow you to switch cars more often.

Pros of financing

Some of the pros of financing a car include: 

• Each payment brings you closer to buying the car, allowing you to build equity.
• No annual mileage limits.
• If you pay off the vehicle, you won’t have any monthly payments.

Buying used

Buying a used car offers you the best of both worlds. Here are some of the reasons why it’s a compelling option.

• Save money on upfront and monthly costs.
• Build equity with each monthly payment.
• No annual mileage restrictions.
• When you buy a used car, you can avoid the more dramatic depreciation. 

Costs Involved in Leasing a Car

There are three primary costs involved with leasing a car. Let’s explore each one. 

Upfront payments

Before you take out a lease, you’ll need to provide a downpayment. The exact amount will vary from dealer to dealer, but it will typically be between 1 and 12 months' worth of payments upfront. If you make a larger upfront payment, it will lower your monthly costs.

You’ll also need to pay a processing fee. This fee covers the lease brokers sourcing, marketing, and processing costs.

Monthly costs

Once you’ve sorted your upfront payment, you’ll need to think about the ongoing costs of leasing a car. The most significant cost will be your monthly lease payments. The average monthly lease payment in Canada is around $450 before tax. However, this will vary depending on the make and model of the car you lease.

Insurance is another monthly cost that you will incur. These payments are not part of the monthly charges you’ll pay to a lease broker, so you’ll need to arrange things separately. You’ll also need to pay taxes, such as GST/HST or PST.

Finally, depending on the particulars of your lease agreement, you might need to pay maintenance and service costs. 

End-of-lease fees

Once your lease has expired, you may be liable for several potential fees. These include:

Excess mileage: When you lease a car, the broker doesn’t want you to drive it into the ground. As such, leases typically come with a mileage limit. In Canada, these limits are, on average, around 24,000 kilometres per year, but it can vary a lot depending on the lease. 

If you exceed the average over your agreed time period, you’ll need to square it up at the end. Typically, ranges are between 8 to 20 cents per additional kilometre. So, make sure that you factor in things like commutes, holiday trips, and anything other driving you might do before you sign on the dotted line.

Wear and tear: Leasing companies expect a little wear and tear over the course of your agreement. However, what is considered normal wear and tear and what is considered excessive is the difference between paying a chunky fee at the end of your lease. 

Normal wear and tear:

• Minor scratches on the exterior.
• Wear on tires.
• Wear on internal fabrics.

Excess wear and tear:

• Deep scratches or dents on the exterior.
• Cracked or broken windshields.
• Rips or tears in interior fabrics.
• Tires with tears or heavy wear.

When you hand the car back to the vehicle company, they’ll perform a thorough check on the vehicle. Anything in the excess category will most likely result in extra charges.

Early termination fees

Ending a lease before the agreed date can also result in an early termination fee.

Damage repair costs

If your car gets damaged outside of what is considered normal wear and tear, you have a few options. You can get the car repaired before you return the vehicle. Alternatively, you can return the damaged car and pay the additional charges.

Understanding Lease Terms and Conditions

Before you consider leasing a vehicle, it’s essential to understand the terms and conditions that underpin each agreement. We’ve touched on some of these areas above in the section about the costs involved in leasing a car, but it’s time to take a deeper look at the clauses that matter when you're leasing a car.

Mileage caps

As we mentioned above, the typical car leasing deal in Canada comes with a mileage limit of between 12,000 and 24,000 kilometres per year. If you go past these limits, you can expect to incur charges of around 6 to 20 cents per kilometre.

Leasing companies include mileage caps because the more a vehicle is on the road, the faster its value depreciates. Maintaining resale value is an important part of a leasing business model, and mileage caps allow these companies to protect their assets.

How mileage caps work

Here’s a quick rundown of how mileage caps work.

The mileage cap is typically worked out over the course of your lease. For example, if you lease a car for three years at 20,000 kilometres per year, your mileage cap will be 60,000 for the entire lease.

While the mileage limit is per year, you can distribute those miles across the entire term. In other words, you can exceed the mileage over the year, but if you want to avoid charges, you’ll need to average it down during the other years.

Reducing or avoiding mileage cap penalties when leasing a vehicle

Excess mileage can cost up to 20 cents per kilometre. While the initial cost of your lease might seem appealing, this overall cost can escalate quickly if you’re a heavy user. Here are some tips that can help you reduce mileage cap payments.

• Before you sign a lease contract, accurately work out how much mileage you’ll use per year. 
• Depending on the leasing company, you can negotiate extra miles before you sign your contract. While this process would see your monthly costs rise, it could save you money over the long term.
• Alternatively, some leasing companies allow you to purchase extra kilometres upfront. Compare these costs against paying extra miles at the end of your lease.
• Finally, if you unexpectedly go over your average, you can consider a lease transfer to someone who uses fewer kilometres.

Wear-and-tear charges

Wear-and-tear charges are an essential component of car leasing in Canada because they help ensure a vehicle will be returned in appropriate condition. However, for the leaseholder, they constitute a risk that can significantly add to your overall outgoings.

In an earlier section on the costs of leasing a car in Canada, we defined the difference between normal wear-and-tear and excess wear-and-tear. 

Typically, leasing companies will focus on two core areas when evaluating damage to the car. They are:

Exterior: Glass, lights, body panel, tires, wheels.

Interior: Stains, cuts, tears, and permanent marks.

These checks generally occur near the end of a lease and can be carried about by the leasing company or a third-party appraiser who works for the automaker.

If damage that is considered in excess of normal wear-and-tear is discovered, you should expect to pay some extra costs. The exact amounts will depend on the damage, but minor damages could be in the hundreds, while bigger issues could be well into thousands of dollars.

It’s worth having the car assessed for damages by your own third-party assessor before you hand it back, especially if there are some areas that could constitute excess wear and tear.

Mitigating wear-and-tear penalties when leasing a vehicle

Aside from driving unbelievably cautiously, there are a few different ways that you can protect yourself from excess wear-and-tear charges. 

For starters, some companies offer protection plans that offer protection against excess wear and tear up to amounts like $5,000 or $10,000. 

Alternatively, you can sign a lease damage warranty at the time of your lease. These arrangements could cost somewhere between $750 and $1,500, meaning they add to your upfront payments. However, depending on what happens during your lease, it could end up saving you money.

Early termination penalties

There are several scenarios where someone commits to a lease but needs to terminate the agreement early. Some of the more frequent scenarios involved changes of circumstances with employment, health, moving state or country, or even dissatisfaction with the car. 

Whatever the specifics are, in most cases, you’ll need to pay an early termination penalty. However, what that will look like depends on the contract. 
Let’s take a look at a few different common scenarios.

• The early termination fee is the most common mechanism at play. It involves a fixed fee that is specified in the contract, which can be as low as around $200 or as high as $1000 per report.
• On top of the termination fee, some leasing companies will demand you pay the remaining lease payments. So, for example, if you have completed two years of a three-year lease, you’ll need to pay the balance for the remaining year. These fees can be substantial, which explains the existence of lease transfers and buyouts.
• Some leasing businesses will also factor in the deprecation costs for the remaining time of your lease. From their perspective, depreciation is already built into your monthly lease payments, and an early termination disrupts this calculation, losing them money.

Residual value

Residual value refers to the value of the car once the lease ends. So, for example, if you lease a car priced at $30,000, it will typically lose 20% in the first year and be valued at $24,000, or 30% by the second year and be valued at $21,000

These calculations are a huge driver in how your monthly costs are worked out. Where this becomes interesting to the buyer is that once the lease is over, the residual value and the market value may be different. For example, if the market value is higher than the predetermined residual value, it could make sense to buy the vehicle at the end. 

End-of-Lease Options

In previous sections, we’ve touched upon what happens at the end of your lease. Now, it’s time to take a closer look at your options when your leasing contract expires.

Returning your car and avoiding additional fees

The typical outcome at the end of a lease is to return the car to the leasing company. However, while this scenario is fairly simple, it can be complicated by the potential additional fees that you may incur during the process.

Here’s a quick checklist that can help you avoid additional fees.

• Gather up all the relevant paperwork, including your lease agreement, vehicle manual, and service records.
• Check the annual mileage limits against what you have on the clock to calculate if you owe for excess kilometres.
• Clear the car interiors and exteriors in anticipation of the inspection.
• Collect and return any accessories, such as extra keys, satnav systems, floor mats, and so on.
• Set up an appointment with the dealership for the final inspection and a time to finalize all your paperwork.

Lease takeover

In the above section on early terminations, we mentioned the prospect of lease takeovers. Here’s how the process works.

• You list your details on a specialized marketplace or website.
• Buyers look at the specifics of your deal and bid for leases that meet their needs.
• Once you’ve found a buyer, you can iron out the terms.
• Your leasing company will run a credit check on the new buyer.
• If the buyer is approved, you can finalize the paperwork at the dealership and hand over the vehicle.

A lease takeover can be a good option in some situations. Life circumstances can change, and a takeover is a good way to exit a lease without suffering excessive penalties. However, it’s important to note that transferring your lease will involve some costs, typically between $300 and $600 before taxes. 

Finally, while transferring leases between provinces in Canada is typically workable, much depends on the company you’ve leased from. So, before you go down this path, check if it’s fine with your leasing company or if any additional documents are required.

Lease buyout

A lease buyout describes the process of buying your leased car either at the end of your lease or when your lease expires. Depending on the particularities, there are some compelling reasons to buy out your lease, such as buying a car at a lower price, releasing equity through a buyout and sale, or avoiding potential excess mileage or wear-and-tear fees.

However, despite these benefits, it can be a complex enough process, with a lot of negotiations, communication, and paperwork.

Thankfully, Clutch offers a seamless process for people who want to end their lease but don’t want all the hassle that comes with that. 

Here are some of the more compelling reasons to use Clutch for lease buyouts.

• We manage the different aspects of the lease buyout, saving you from dealing with buyers.
• You don’t have to negotiate with dealerships or financial institutions, we do it for you.
• We handle all the documents and paperwork required, saving you time.
• There are costs involved with exiting a lease, but we deal with the financial aspects for you, meaning you don’t have to stump up cash for the process.
• We charge a one-time fee that covers everything, including any money you need to pay to the leaseholder.

Once everything is in order and the buyout is complete, you get a quick transfer of your money. To get started, complete our short form and get an instant offer for your vehicle.

Alternatives to Traditional Leasing

While leasing is popular, there are alternatives to the traditional model.

Short-term leases: Short-term leases offer flexibility, with deals for as little as 1 to 2 years.

Lease transfers: Lease transfers allow buyers to take over another person's lease.

Subscription services: Subscription car leasing services are growing in popularity. They can be an excellent choice for people who need cars for less than twelve months or who would like to change, make and model a lot.

Buy a newer model year used car: One of the best ways to save money on payments and reduce your insurance is to buy a used car. If you buy from a trusted party or get the OK from a good mechanic, you could get a real bargain.

Consider Clutch for Your Next Used Car

Leasing a car makes sense if you want to save on monthly payments, upfront costs, and maintenance, all while driving a newer model car. However, mileage restrictions, potential charges for wear and tear, and a lack of owner could give you second thoughts.

If you want to avoid rapid depreciation, save money over the long term, and not be surprised by unpredictable costs or extra mileage charges, buying a used car can be the best solution. 

Check out Clutch’s fantastic range of used cars today for a more sustainable and economical purchase.