When is ownership transferred?
When paid in full, a loan terminates and you assume ownership. Your bank sends you the title that had been held while the loan maintained an outstanding balance. When a lease period ends you forfeit the vehicle to the lessor, unless the lessor offers to sell the vehicle afterwards. During the entire lease period the lessor maintains ownership and simply allows you to use the car. Ownership is only transferred if you chose to buy the vehicle after the lease terminates.
Three key elements:
First, the adjusted capitalized cost is determined. This figure represents the real purchase price after elements such as the down payment, incentive discount and trade-in credit are deducted from the capitalized (actual) cost, while any fees or charges (e.g. destination) are added.
Second, the residual value, or estimated value of the vehicle at the end of the lease, is determined and then subtracted from the adjusted capitalized cost to yield a depreciation figure. The residual value depends on the length of the agreement, expected kilometres and make/model of the vehicle.
Finally, a lessor assesses the money factor, a number that correlates with the cost of borrowing money during the lease period.
General loan specifications:
Down payment amounts may range between 10 to 20 percent of the vehicle's total cost, although some purchases require no down payment. A typical loan period is five years with an annual percentage rate around 8 percent. Some manufacturers offer lower rates, but be sure to investigate any associated conditions or clauses.
What are the restrictions of driving a "borrowed" vehicle?
Annual kilometres restrictions are a major limitation for customers who choose to lease. Lessors want their vehicles returned in saleable low-kilometer conditions, so they place kilometer caps on them. A typical yearly figure is between 20,000 and 55,000 kilometres. Beyond the established limit, fees accrue on a per-kilometer basis, usually in the range of $0.10 to $0.25 per kilometer. So if most of your driving is local, leasing makes sense. However, if you consistently tack on 500 or more kilometres a week, definitely look into a loan.
What are the other virtues of a loan?
Loans are also sensible for those who want to customize their vehicles, plan on keeping their cars for long periods of time and plan to re-sell their vehicles to help recoup the costs of ownership or expenses of additional cars. For those who quickly wear vehicles out, loans may be safer bets as lessors often add "excessive wear" charges if the car is returned with wear over the limits established by the contract.
Leasing ensures that you'll always drive a late-model vehicle, won't have to pay for warranty-covered repairs and won't have to bother will re-selling at the end.