Low interest rates and shifting dealer incentives are spurring the move
When Ian Pellat began thinking about trading in his old mini-van for a new one earlier this year, one thing was clear: this time things were going to be different.
"I had just finished five years of lease payments that left me with nothing to show for them," said Pellat, chief accountant at St. Mary's Hospital Center. "So I decided to buy my next mini-van outright. The payments are a little higher, but at least I am building equity in the vehicle."
Pellat, who is married and has two kids and a dog, is one of many Canadians who during the last five years have been moving en masse from traditional leasing plans to outright vehicle purchases.
"For me the biggest difference was interest rates," said Pellat. "They have come down so far, that it does not cost that much more per month to buy the mini-van than it does to lease it."
Leasing, once the method of choice for car buyers has fallen into disfavor. According to Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc, which tracks buying pattern in the industry, car leases, which as recently as 1997 accounted for 46.8 per cent of Canadian new vehicle sales, accounted for only 27.0 per cent during 2001.
Only 14.0 per cent of Canadian car buyers paid cash for their new vehicles last year. The rest, 59.0 per cent, turned to retail financing, which is enjoying a burst of popularity. The number of Canadians using retail financing to pay for their cars has close to tripled since 1997, jumping from 275,000 to 751,000 last year.
DesRosiers, agreed that interest rates are a key factor motivating the Canadian consumers' shift in preferences from leasing to retail financing. But it's not the lonely reason.
"Car companies have almost completely rethought their approach to leasing during the last few years," said DesRosiers. "Just look at all the zero per cent deals that the dealerships are offering customers. Those deals are being offered on financing contracts not leases."
According to DesRosiers automobile manufactures lost billions of dollars in the leasing market during the mid-1990s by over-estimating cars' residual values in leasing contracts. And when clients turned in the cars at the end of the their leases, manufacturers often had to re-sell them at a loss.
Crr companies have responded by lowering residual value estimates on leases. This makes the monthly payment more expensive. In addition they are not putting more of their incentives into retail financing as opposed to leases. The cumulative effect of these moves has been to make it cheaper for customers to buy their cars rather than to rent them.
Still purchasing a vehicle outright may not be for everyone said Terry Gaudreault, sales and marketing manager at Pointe Claire Chrysler, one of the top automobile salesmen in the province.
"Monthly lease payments are still lower than financing payments," said Gaudreault. "Many of my clients have mortgages, and on top of that must payments on two cars. And keeping their monthly payments down is their number one priority."
According to Gaudreault, leasing also benefits those who do not want to make long-term commitments or who change their car regularly.
Despite these advantages Gaudreault still favors outright ownership. "I come from an old school family that likes to think long-term," said Gaudrault. "And buying your car outright offers far better value."
However the decision of whether to buy of lease a car is even more complex in the case of business vehicles because of the tax consequences involved said Janet Newcombe, a tax specialist at Grant Thronton.
"When a company buys a car for business purposes, in general most of the costs are tax deductible," said Newcombe. "But the method of calculating the deductible portions differ based on whether the car is bought or leased."
And if a business vehicle is used by company employees for personal purposes such as driving to and from work, federal and provincial tax authorities require that an amount be put on the employee's T-4 slip at the end of the year.
"I hate to be non-committal, but their is no clear answer as to whether it is better to buy or lease a car," said Newcombe. "The best answer I can give on which is best is that it depends, on the individual's circumstances."
Photo caption: After leasing several mini-vans, Ian Pellat, (shown here with Terry Gaudreault, director of sales and marketing at Pointe Claire Chrysler) finally decided to buy one.
Sidebar: Tax Consequences for businesses
The tax consequences of a buy/lease decision for companies that pay for their employees vehicles are extremely complicated. They are subject to numerous calculations, exceptions and special circumstances.
The following conditions apply in cases where the employee uses his car for both work and personal use, and the personal use portion exceeds 10 per cent of total mileage.
Buying a car
Leasing a car
|© 2002 Peter Diekmeyer Communications Inc.|