Leasing a VehicleJan 25th, 2021
Many customers have never seriously considered leasing as an option. There seems to be a lot of confusion when it comes to leasing a vehicle. While leasing is not for everyone, about 40% of our new car customers actually do go this route. Let us shed some light on how Honda Canada leases work so that you can decide if this an option worth taking a closer look at.
Generally, there are there are three ways of paying for a car:
- Cash (in the form of a certified cheque or bank draft)
- Finance loan
Paying for a vehicle with cash, is of course, the most straightforward way but let’s face it; many of us if not most would be hard pressed to come up with all of the cash necessary to purchase a new vehicle. As such, the majority of purchasers choose some form of loan.
With financing you borrow the money to pay for the car. The interest is essentially the rent on the money that you are borrowing. You pay off the principal (the actual purchase price of the car) along with the interest or “rent” in installments over a pre-determined term. At the end of that term, the vehicle is yours. One of the main objections when it comes to leasing is that you don’t own the car at the end of the lease. However, even with finance loans, the vehicle is not truly yours until the very last payment is made.
With a lease, the mechanism is essentially the same. You borrow money at a set interest rate for certain period of time. The money that you are borrowing in this case is the difference between the purchase price and the residual or projected value of the vehicle at the end of the lease. Since you are not financing the whole purchase price you can expect the payments to be considerably smaller (depending on the interest rate and term length, of course) and that is probably the most compelling reason for leasing. Now, you can go some way to lowering a finance payment if long financing terms are available, say 7 or 8 years. However, typically, the interest rate rises with the length of the term. In pursuit of a low finance payment, you may end up paying a considerable chunk of interest over and above the actual purchase price.
When you come to the end of your lease, you have a few options. You can buy the vehicle outright for the residual value (money still owing) plus processing fee that Honda Canada charges (currently $418). You can pay cash or refinance the remaining amount. Also, you don’t have to wait until the end of the lease to buy out the car. You can purchase it in full at any point in the lease without penalty.
If you like you can sell the vehicle privately or to a dealership like ours or use it as a trade-in and you might even find yourself in the position to make a small profit. For example, if the residual value is $16,000 and the trade-in value or private selling price is $18,000 the $2,000 difference is yours to keep, or apply to the next purchase. Honda Canada only requires that the money owing on the lease is covered one way or another.
Leased vehicles are usually particularly desirable additions to our used car inventory. They are one “owner” vehicles and because they are scheduled to be returned to the manufacturer they are usually well taken care of cars with detailed service histories and without excessive km. This is all the better if the leased vehicle started at T&T Honda and was serviced here.
In the end, very few leased vehicles are simply returned to Honda Canada, about 2% in our experience. What if you should decide to return your car when your lease is up? What are your obligations? Can you simply turn over the vehicle and the keys and walk away? Actually, yes, as long as you have stayed under the allotted km and your car has only experienced normal wear and tear. Most Honda Canada leases allow for 24,000 km/year or 96,000 km in total. There is a charge of 12 cent for every km over 96,000. Items that exceed normal wear and tear might include a cracked windshield, worn tires, and big dents. You can address these yourself before returning the vehicle or pay Honda Canada for the necessary fixes, as determined by their assessors.
Though lease returns to Honda Canada are rare there are some circumstances where they make a lot of sense. For example, you might be involved in accident that warrants expensive repairs. That could push the trade-in or market value below that of the residual. However, as long as the repairs are done to Honda Canada’s standards you will not be penalized when returning the vehicle.
Given the variety of end of lease choices that are available, T&T Honda makes a point of reaching out customers about a year before the lease is over to help guide them to the decision that makes the most sense given their particular circumstances.
So, what sort of customer does a lease appeal most to? The lower payment makes vehicles at a certain price point more available to those on a tighter budget. The car is also under warranty for the duration of most leases. Many value the peace of mind that that brings. If you enjoy driving newer cars more often, cars that come equipped with latest infotainment and safety then a lease might be right for you too. Though you can pre-purchase extra km at a discount, those who expect to put on a lot of km should probably steer clear of leases.
As always, we are here to help guide you to the purchase option that makes the most sense for you, given your priorities and unique circumstances.