Car Financing in Ontario


When you buy a vehicle you have a few different ways of paying for it. If you have enough money to pay off the full value of the car right away you can buy it outright, but that is rare. For most Ontarians, they need to borrow from a bank or other lender in order to pay for a car by leasing or financing it. Below you can read our guide on leasing and financing a car works and what the advantages and disadvantages are.


Leasing a Car in Ontario
When you lease a vehicle, you enter into a contract with a dealership or leasing company that provides you with use of the car for a set period of time. In exchange, you have a set monthly lease payment for the duration of the lease and you are responsible to for the insurance and maintenance. At the end of the lease, you can choose to buy the vehicle or return it to the dealer and then lease or buy a different one.

There are a few benefits to leasing a car:

  • Lower Monthly Payments - you only pay for the depreciation in value of the car not its full value
  • Shorter Terms - leases usually don't last as long
  • Newer Cars - because you don't buy the car you can choose instead to lease another new car at the end of the term

However, there are restrictions on what you can do with the vehicle that come with extra cost penalties if you do not adhere to them-one example is a limit on how many kilometers per year you can drive it. You also pay additional fees if you want to end the lease before it is finished.


Did You Know? On average, a new car is only worth around 37% of what you paid 5 years after you bought it. Some vehicles depreciate more or less than this, so depending on what model you choose when you lease it you can save or spend a lot of money.

Financing a Car in Ontario
When you get financing for a vehicle you are getting a loan directly from a bank, dealership, or credit union to buy the full value of the car. You can negotiate the length of time required to pay off the loan, the interest rate and monthly payments. Basically, if a car costs $10,000 and you only have $4,000 that you can pay right away, you ask for the rest of the $6,000 in a loan and in return they charge interest that is spread over the monthly payments for the duration of the loan.

Here are the benefits for financing a car:

  • No Restrictions - because you're buying the car you own it and have no restrictions on how you use or customize it
  • Early Termination - at any point you can pay off the full remaining value of the loan with no extra penalty fees
  • Flexibility - you can get a car loan for used vehicles rather than just new ones and you can resell and use the value to pay off your loan early

When you finance a vehicle you get full ownership. You can drive it however much you want with no restrictions or additional penalties to pay. You can also sell or trade in the vehicle before the loan is over and use the value to pay off the rest of it without extra payments.


Did You Know? When Canadians buy a new car, 57% choose to pay for it with a loan, compared to 17% who choose to lease it. The remaining 26% pay cash to buy it outright. 10 years ago, as many as 45% of car buyers leased, so the current trend has swung heavily in favour of financing.

No Credit / Bad Credit Car Loans
For some people, it is more difficult to get leasing or financing for a vehicle. This includes people who have bad credit due to previous bankruptcies or other financial difficulties, or people with no credit such as new Canadians who just immigrated to Ontario. The reason is because for both getting a lease and getting a loan, the bank or dealership will run a credit check. If you have a history of bad credit or have no credit history, they consider you a risk to fail to make your payments.

However, it is not impossible to buy a car when you have bad credit or no credit. You can improve your credit situation by opening bank accounts, getting a credit card, or taking out a smaller loan and then making all your payments on time. This shows that you are trustworthy and can make your payments on time.

If you still have bad credit, there are a number of companies that offer "subprime" leases and loans if you have a pressing need for a car. These will have more restrictive conditions and higher interest payments because you are still considered a risk, but good financial companies will make sure to work with you to find a vehicle that you can still afford.


Did You Know? You can improve your credit score by proving that you can make payments on any debt or loan you have: credit cards, lines of credit, interest payments, rent, utilities, and so on. Some have a better impact than others, but if you pay in full and on time they all help.

What's Better: (Financing vs. Leasing vs. Buying)
There are three different ways of buying or paying for a vehicle, each with their own benefits and drawbacks.

When you lease a vehicle, it is usually only worthwhile if the terms suit your needs:

  • Pro - you usually have a lower monthly payment than with a loan and you only pay for a portion of the vehicle's value
  • Pro - If you want to have a new car every few years, it allows you to do so without paying as much
  • Con - you do not own a vehicle that you lease and if you are not meet the terms and restrictions you have to pay penalty fees that can be very costly
  • Con - you cannot lease used vehicles which are less expensive than new cars

Financing a vehicle
, or taking out a loan to pay for it, is generally more appealing to car shoppers in Ontario. Here are the pros vs cons:

  • Pro - you own the vehicle and do whatever you want with it without having to worry about any penalties
  • Pro - it is more useful for people who want to own one car for many years but keep the flexibility of what they can buy and when they can end the loan
  • Con - usually has higher monthly payments and longer term than a lease

The only way to avoid paying interest and extra fees when buying a vehicle is to buy it outright, where you pay for the full value of the vehicle up front. Here are the pros and cons of this option:

  • Pro - you save a lot of money in the long term because you do not have to pay any interest in monthly payments
  • Pro - like with financing, you own the car and have no restrictions or potential penalty fees with how you use or customize it
  • Con - comes with a much greater upfront cost so you have to have a lot of cash on you in order to buy most cars outright

It's important that you know ahead of time what your wants and needs are when buying a car. If you're going to drive it more than average you will have to worry about penalty fees if you lease it, for example. But if you're only going to use it sparingly and want to save on payments, you can constantly upgrade to a new vehicle every few years and save every month.


Summary
With these three payment options, you have a few different ways of buying a vehicle. Each has their benefits and their drawbacks, and if you do your research you should be able to determine what method would be the most beneficial for your situation. If you always want to be driving a new car every few years and won't use it in a way to incur any penalty fees, then leasing is for you. If you want to own the same car for many years without any restrictions, then financing would be best. Or, if you have a lot of cash you can buy the car outright and save yourself a lot of money in interest payments. It's your choice!


You might also be interested in these guides:

How to Buy a Car with Bad or No Credit

How Lease Payments Are Calculated

How to Get the Cheapest Car Insurance in Ontario

//Steven Lien SR00162663