Everything You've Ever Wanted To Know About Leasing

Does leasing have you scratching your head? In this article we will cover all the moving pieces of a lease so that you can make a confident decision the next time you buy a new car.

Contractual Obligation

Leases are broken into two parts: the contractual obligation and the residual value. 

The contractual obligation is the sum of the payments you will actually make. The contractual obligation is NOT the full price of the car. It is only the amount you pay during the contract. When leasing you don’t pay for the full price of the car. You only pay for the portion of the car you will use. This is why lease payments are less than finance payments when compared on the same terms.

Example

You have a base payment of $302/month for 48 months. This means that your contractual obligation is $302 x 48 months = $14,496.

Note: this does not account for taxes, fees, or interest, but the principle is the same.

Residual Value

The residual value is what the manufacturer determines the car will be worth at the end of the lease depending on the term you choose. It is expressed as a percentage of the MSRP. 

Contractual obligation + residual value = MSRP

Example

The car has an MSRP of $25,000. For a 48 month (4 year) term the residual value is 42%. The lease would break down as follows:

$25,000 (MSRP) x 42% = $10,500 residual value

$25,000 (MSRP) - $10,500 (residual value) = $14,500 contractual obligation

This means that the manufacturer has determined that the car will be worth $10,500 after your 48 month (4 year) lease is completed. It also means that you have the option to buy the car at the end of the lease for $10,500 + taxes.

Taxes

When you lease a car you are not paying for the full amount up front. You are essentially renting the car from the manufacturer for a certain period of time. Because you aren’t actually buying the car up front, you don’t have to pay taxes in full. Instead, you only have to pay taxes per individual payment.

Lease payments are broken down into two main parts - the base payment and the taxes.

The base payment is simply the cost of your lease before taxes are applied.

In the example above, we determined that our base payment was $302/month. The actual payment including taxes would be:

$302 (base payment) x 15% HST = $347.30.

This means that the actual lease payment coming out of your bank account each month would be $347.30.

At the end of the lease you will have the option to buy the car and keep it as your own. To do this you must pay the manufacturer the residual value plus taxes. Because you’ve only been paying taxes per individual payment throughout the lease, that means that the government has not yet collected the taxes on the residual value.

In our example above the residual value is $10,500. If you wanted to buy the car at the end of the lease and keep it you would have to pay the manufacturer $10,500 (residual value) + 15% HST = $12,075. 

Standard vs Low-Kilometers

Most manufacturers offer two different preset lease kilometer terms.

A standard kilometer term is typically 24,000 kilometers per year.

A low-kilometer term is usually 20,000 kilometers per year.

Keep in mind that if you choose a lower kilometer term, the residual value of the car at the end of the lease will be higher, which means that your payment will be slightly lower than a standard kilometer term.

Additional Kilometers Pre & Post-Lease

If you know that you will need more than 24,000 kilometers per year you have the option to add additional kilometers to your lease when you’re first setting it up.

Most manufacturers will allow you to add additional kilometers to your lease at a cost of $0.07 per kilometer.

When you add kilometers to a lease, this will lower the residual value of the car and will slightly increase your payment.

If you do not buy additional kilometers at the inception of your lease but go over on your kilometers, the manufacturer will charge you $0.10 per kilometer that you’re over.

Payment Schedules

Payment schedules will vary by manufacturer but a lot of brands offer bi-weekly, semi-monthly, and monthly payment options for their lease customers. 

Once you determine the payment schedule for your lease (let’s use monthly payments, for example) you cannot change it. You may move the payment dates around but you cannot change the structure of the payments. For example, you can’t change from monthly to bi-weekly mid-lease.

Typical Terms

Lease terms will also vary by manufacturer. The most popular terms customers choose are:

36 months (3 years)

48 months (4 years)

60 months (5 years)

Some manufacturers will offer 12 or 24 month terms on select models. They may also offer partial-year terms, as well. For example, you may be able to get a 54 month lease which equals 4.5 years, or a 42 month lease which is 3.5 years.

Manufacturer On The Registration

When you lease a car the manufacturer has to appear on the registration as the primary owner. The process to renew your registration every year is exactly the same as if you owned the vehicle outright.

In Prince Edward Island, you can only have two registered owners on a single registration. Because the manufacturer is on the registration for a leased vehicle, that means that whoever owns the license plate on the car will be the second owner on the registration.

If you choose to purchase the car at any point throughout the lease, the manufacturer will be removed and you will become the sole owner of the vehicle.

Insurance Coverage And Accidents

Similar to when you finance a vehicle, you must carry full insurance coverage on leased vehicles. This is for your own protection, as well as for the manufacturer.

If you get in an accident with a leased vehicle, you must have it professionally repaired so as to avoid any potential charges for damage or poor condition of the car when the lease matures.

If you do get into an accident and have the car professionally repaired, you will not be charged at the end of the lease because of the accident. This is a major benefit of leasing. If your car is in an accident, you do not suffer any loss of value or depreciation because the manufacturer is taking the car back at the end of the term.

Compare that to trying to trade in or sell a car that has an insurance claim against it. The market can devalue these cars because of the claim.

Due on delivery refers to the amount that you have to pay when you first pick up your new car. This is made up of a few different things. These items may vary from dealer to dealer, or manufacturer to manufacturer.

First Payment

On every new lease you must make your first payment up front. In a lease, you pay and then you drive. This means that after you make your last payment you will have use of the car for the equivalent amount of time as your payment schedule is broken up. For example, if you were paying monthly, after you make your last payment you would still get to drive your car for one more month. If you were paying bi-weekly then you would get to keep the car another two weeks after you make your last payment.

PPSA

PPSA - Personal Property Security Act.

By definition, a PPSA fee is:

‘A PPSA Registration is a registration made by a creditor against a debtorregistering a lien on a moveable property. A PPSA Registration serves as notice to all third parties of the security interest held by the lender (secured party) against the borrower (debtor).’

When the manufacturer registers a lien against your new car, they are essentially making sure that if you default on the lease (or loan) that they have legal rights to take the car back.

PPSA fees change from lender to lender. This means that not only does each manufacturer have different amounts for their PPSA fees, but each individual bank does, as well.

PPSA fees are also adjusted regularly. Most lender’s PPSA fees are very similar.

The amount of the fees are directly tied to the length of the term you choose. The longer you choose to finance or lease a vehicle for, the higher the PPSA fee will be.

Currently, the most you can expect to pay for a PPSA fee is in the neighborhood of $150 (+/-).

Cash Down / MSD

There are two ways to put money down on a lease.

Cash down is the same on a lease as it is on a finance. The amount of cash you put down will reduce the amount you’re financing. You’re essentially paying a chunk up front and thus avoiding interest on the amount you put down.

When you put cash down on a lease, it goes against the contractual obligation which lowers your payment, but it does not affect the residual value. If you decide to return the car at the end of the lease, you do not get this money back. In that case, the only purpose it serves is to lower your payment while you are in the lease.

If you choose to buy the car either at the end of the lease or during, then your cash down has lowered the amount left to pay. It is equity up front in the lease.

The other form of putting money down on a lease is called a Multiple Security Deposit (MSD). An MSD will lower the interest rate of your lease. You also get the MSD back at the end of the lease or whenever the lease is terminated (e.g. you trade it in, or buy it out early).

The manufacturer holds this money and then returns it to you. In exchange for ‘lending’ them this money the manufacturer reduces your interest rate.

MSDs can be a great return on your money in the right situations.

Example

Let’s say you put $5,000 down as a multiple security deposit on a lease. As a result, you’ll save $1,500 in interest over the term of the lease from the reduction in interest rate.

You will then get this $5,000 back at the end of the lease or whenever the lease is terminated.

If you keep the lease full term and take advantage of the full $1,500 in interest savings, you would realize a return on your cash of 30% ($1,500 / $5,000 = 30%).

There are few places that you could earn a surefire 30% return on your money.

Taxes

Taxes are only paid per individual payment on a lease. Your lease payment is broken into the base amount and the taxes.

For example if your base payment is $300, assuming you live in the maritimes where the HST is 15% (as of this writing) then your total lease payment would be $300 + 15% = $345.

If you choose to buy out the lease either at the end or during, you will pay the remaining contractual obligation + the residual value + taxes.

For example, if the residual value is $10,000 and you wanted to buy the car at the end of the lease you would pay $10,000 + 15% HST = $11,500 total.

Options At Lease End

When you reach the end of your lease you have 3 primary options.

1. Buy the car for the residual amount + taxes. If you choose this option then you will own the car and the manufacturer has no further interest in it. Basically, you pay the remainder and continue driving it. This must be done through a dealership.

2. Return the car to the manufacturer and take another new car on a fresh contract whether it be a lease or finance (or you could pay cash). Most manufacturers have a loyalty program. If you’ve made your payments well on the lease you may even be preapproved for another brand new car.

3. Return the car to the manufacturer and walk away from the brand altogether. You have the option to return the car and then try a completely different brand or if you don’t need a vehicle anymore you aren’t obligated to buy another vehicle.

Potential Charges

At the end of the lease the dealership or a third party hired by the manufacturer will have to complete a condition report on your car.

Whoever performs the condition report has a form provided by the manufacturer where they go over your car to look for unrepaired damages, missing parts, excess kilometers, etc. 

If they find anything that is billable per the manufacturer’s guidelines, then you will be sent a liability statement. The liability statement is a bill for any damages or excess wear and tear.

The manufacturer expects to get the car back in good condition. Normal wear and tear is to be expected and some minor items like light scratches or even small dents may be forgiven.

Kilometer Overage

If you go over on your kilometers you will be charged $0.10 per kilometer you are over. For example, if you are 1,000 kilometers over you would be sent a bill for $100.

Missing Parts

If you return the car with missing parts such as the owner’s manual, hubcaps, key fobs, floor mats, etc you may be billed for the replacement cost of these items.

Unrepaired Damage

Each manufacturer has a set of parameters for what is considered to be unrepaired damage. Usually, this is determined by measurement. For example, any scratches or dents that are larger than ‘x’ inches will be billed per item. For instance, items on front fenders may be $200 each. Normal wear and tear is acceptable. The manufacturer does not expect the car to be in showroom condition, but they don’t want it back with damage. Damage can also come in the form of broken or cracked bumpers, mirrors, headlights, taillights, etc.

Tires

If your lease matures in the summer, the manufacturer expects to get the car back with summer tires on it. This is to prevent customers from returning a vehicle with worn out winter tires that are no longer usable. Again, the manufacturer wants to receive the car with the proper equipment. The tires do not have to be new, they must just pass safety inspection.

Glass

Similar to unrepaired damage on the body panels, if you return the car with unrepaired stone chips or cracks in the windshield, then you will be charged for the cost of replacing the windshield.

There are several things that you may be billed for at lease end. Most manufacturers have a Lease End Protection plan that will waive the majority of these charges (if there are any). This protection must be purchased when you are originally setting up the lease. It cannot be purchased after the fact.