Leasing vs. Buying a Vehicle: How It Affects Your Debt Ratios

The Leasing vs. Buying Dilemma

Deciding whether to lease or buy a vehicle is a common concern for many Canadians. Whether it's a new or used vehicle, the choice between leasing and purchasing can impact your overall financial situation, especially your debt ratios.

For those looking to apply for a mortgage or refinancing through services like EzyLoan, it’s important to understand how these decisions could affect your ability to qualify.

Understanding Debt Ratios and Their Importance

• What are Debt Ratios?

  Debt ratios are a crucial factor when applying for a mortgage or loan. They represent the proportion of your income that goes toward repaying debts. A higher debt ratio can reduce your chances of securing a mortgage or refinancing.

  
  

• How Leasing and Buying Affect Your Ratios

  Overburdening yourself with vehicle debt can negatively impact these ratios, making it harder to get approved for a mortgage or other loans.

Leasing vs. Buying: What’s the Difference?

Leasing and buying are both ways of financing a vehicle, but they differ significantly in terms of costs, long-term value, and impact on your financial obligations.

• Leasing: You pay for the portion of the vehicle’s value you use up during the lease period. Typically, monthly payments are lower, but you don’t own the vehicle at the end of the lease. This can be advantageous if you want lower monthly expenses.

  
  

• Buying: When you buy, you finance the full purchase price of the vehicle and take on the entire cost of ownership, including depreciation. While monthly payments may be higher, you own the car outright once it’s paid off, which could be a long-term financial advantage.

How Leasing a Vehicle Works

• Initial Costs: Leasing often requires little to no down payment. You may only pay sales tax on your monthly payments, unlike buying, which requires taxes to be paid upfront or rolled into your loan.

  
  

• Monthly Payments: Lease payments are based on the depreciation of the vehicle, and they are usually lower than loan payments for buying the same vehicle. This could free up funds to allocate toward other financial priorities, such as investing in property or even securing an EzyLoan to help you improve your credit score.

  
  

• Lease-End Options: At the end of your lease, you can either return the vehicle or purchase it for its depreciated value. Many people prefer leasing for the flexibility it offers.

How Buying a Vehicle Works

• Down Payment & Loan Terms: When you purchase a vehicle, you typically make a down payment and then finance the remaining amount through a loan. This means higher monthly payments compared to leasing, as you are paying off the full vehicle price plus interest.

  
  

• Long-Term Costs: Once the loan is paid off, you own the vehicle outright, which can be beneficial if you plan to keep the car for a long time. You may also have the option of selling or trading it to recoup some value.

Key Financial Considerations: Leasing vs. Buying

• Leasing Example: If you lease a $20,000 vehicle with an expected resale value of $13,000 after two years, you pay for the $7,000 depreciation. This doesn’t include finance charges or any other fees.

  
  

• Buying Example: If you buy the same $20,000 vehicle, your monthly payments will be based on the entire purchase price, which includes the vehicle’s depreciation and interest charges. While you’ll own the car after paying off the loan, you are essentially "paying" for its depreciation as well.

Why Leasing May Be a Smart Financial Move

Leasing can be a good option if you want to minimize monthly payments and keep your debt ratios low. The lower monthly payments could allow you to allocate more funds toward other financial goals, such as paying down high-interest debts, saving for a down payment on a home, or even applying for an EzyLoan to help with personal financial goals.

Tips for Managing Your Vehicle Financing Decisions

1. Evaluate Your Debt Ratios: Always consider how your vehicle financing choice affects your debt ratios. Before committing to a lease or loan, speak to a financial expert or mortgage professional, like those at EzyLoan, to ensure your choice aligns with your long-term financial goals.

   
   

2. Consider Long-Term Financial Goals: If you are planning to apply for a mortgage or refinance your existing home loan, ensure your vehicle choice doesn’t hinder your debt ratios. Opt for financing options that leave room in your budget for other major financial decisions.

Choosing whether to lease or buy a vehicle is an important decision that can affect your overall debt ratios and future financial opportunities. By understanding the differences in financing options and considering your long-term goals, you can make a more informed choice.

If you need help assessing how your vehicle financing impacts your overall debt situation or want to explore EzyLoan options, feel free to reach out to our team.