Intro to "Monthly Payments when Leasing or Financing a Vehicle"

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The monthly payments calculated with a long term contract for the use of a car or any other vehicle (motorcycle, snowmobile, boat, ATV, RV, etc.) will differ significantly depending on whether the vehicle is leased or financed.

For starters, when you lease a vehicle, you pay for its use during a definite period only, without becoming the owner at the end of the term. The monthly cost related to the lease will then reflect the cost of one month of use. The calculations are made differently in the case of financing, because it is a purchase with payments that are spread out over a period of time. The costs are applied on the whole term and then amortized on a fixed period of time, ranging usually between 1 to 5 years.

The payments will be smaller when leasing because the contract includes a residual value at the end of the term and you will pay on a monthly basis until the balance reaches that residual value. The monthly payments are calculated on the total amount to finance minus the residual value. In the case of financing, you don't have a residual value and the contract requires you to pay the total amount, until the balance reaches zero. Your payments will therefore be bigger.

Additionally, when leasing, the percentage of taxes will be applied only on the monthly rent and the initial cash down, and not on the full amount. This means that the monthly payments are calculated on the total amount excluding taxes, as opposed to financing where the taxes are applied immediately on the total price of the vehicle, and the payments are calculated after. If there is cash down, it will be applied on the price including taxes, and the payments will be calculated on the remaining amount. You will then pay the interests on the taxes when you finance.

The taxes seem higher when financing, but if you decide to buy the vehicle at the end of the lease (at the residual value) you will pay taxes on that residual value. However, if you exchange an old vehicle with a new one, no tax is applied on the exchange value and the taxes will be applied on the net amount after the exchange has been done. You consequently save taxes when exchanging a vehicle.

Finally, the monthly lease payments are made at the beginning of the month so you won't pay any interests on the first payment, only capital. When you finance however, the monthly payments are made at the end of the month, so you will pay cumulated interests on the first payment.

You can verify what will be your monthly payments using the calculator Monthly payments when leasing or financing a vehicle.

These reasons explain why the interest is lower when you finance a vehicle. If you want to have a better picture of the total costs when renting and/or financing a vehicle, and evaluate your options, you can complete the Buy or Lease a Car (Vehicle)? calculator.

Try the calculator Monthly Payments when Leasing or Financing a Vehicle >