How much does financing a new car really cost?

One of the most important questions you may have when considering purchasing a new vehicle is should you finance your new vehicle, or should you lease it. At the end of the day, whether you buy with cash, lease, or finance, you are going to need to come up with a way to pay for your vehicle.

This article is all about the true costs of financing a car versus leasing it.

Since the CRA allows vehicle buyers to depreciate the cost of a vehicle (up to $30,000), for the purposes of this article, we will choose a vehicle with a sales price of just slightly under $30,000 (before tax).

We will also be choosing the extended warranties and service packages because this is likely to a) reduce the overall cost of ownership of the vehicle and b) maximize the vehicle’s resale value.

We chose the 2021 Civic Sedan LX ($23,400.00), with the Honda Plus 5-year 100,000km warranty ($1,185.00), and the 16″ Enkei M52 wheels & Michelin X-ICE Snow Tire Package ($1,768.00). The total price of the vehicle is $28,143.00 ($31,238.73 with taxes in Saskatchewan).

Under a 5-year lease, according to the Honda Leasing calculator (60 months at 2.99% APR), the buyer of this vehicle would be paying $395.43 per month. and the value of the vehicle at the end of the term would be $9,680.51 (according to Benson @ Meidle Honda in Saskatoon). The total cost of borrowing in the case of leasing is $3,136.41.

Under a 5-year financing option, again, according to the Honda Leasing calculator (60 months @ 1.99$ APR), the buyer of this vehicle would be paying $548.38 per month. Since at the end of the term the buyer would own the vehicle outright, the residual value (in this case) is merely used as a resale value for the vehicle. The total cost of borrowing in the case of financing is $1,608.45.

Technically you are paying $152.95 dollars more per month to drive a new Honda Civic when you finance as opposed to leasing, however, when you finance you also end up with the vehicle at the end of the term.

Under a 5 year lease, you end up paying a total of $23,725.80 in total over the course of 5 years to lease the car or $4,745.16 per year.

In the case of financing, you end up paying $32,902.80 in total over 5 years, or $6,580.56 per year. When you finance, you also end up with a vehicle worth $9,680.51 at the end of the term. This means that you are actually paying $23,222.29 to drive for 5 years or $4,644.46 per year.

Even though a consumer is paying more per month for Financing a vehicle (because technically they own it), you are actually paying less to drive. In the example of a Honda Civic, you are paying $4,644.46 per year to drive the vehicle you finance, and $4,745.16 per year to drive the vehicle you lease.

It is important to also note that the true cost of a vehicle depends upon each individual’s situation, and it is important to talk to an accountant before you chose to lease or finance a vehicle.

sources

https://www.mileiq.com/en-ca/blog/vehicle-depreciation-taxes/#:~:text=The%20maximum%20CCA%20rate%20you,T777%20Statement%20of%20Employment%20Expenses.

https://www.honda.ca/buildyourhonda?model_key=civic_sedan&model_year=2021&trim_key=lx_10663&transmission_key=10707-CVT&color_key=rallye_red&interior_key=bkblack_fabric_%5E2020_civic_sedan&accessory_keys=14627_16%E2%80%9D_enkei_m52_wheels___michelin_x_ice_snow_tire_package&protection_program_keys=&warranty_key=_5_year_100000_km_1&province=SK&term=60&offer_keys=&payment_method=lease&trim_toggle=excludes#/summary

https://www.edmunds.com/car-leasing/the-residual-value-of-leasing.html

https://unsplash.com/photos/dgquDmlhRAI