how do car leases work canada

[VanBeau]

A car lease in Canada is essentially a long-term rental agreement. You pay to use a new vehicle for a fixed period, typically 24 to 48 months, without owning it. Your monthly payment covers the vehicle's depreciation during the lease term, plus taxes, fees, and financing charges. At the end, you return the car to the dealer, often with the option to buy it at a predetermined price called the residual value.

The process starts with negotiating the vehicle's selling price, just like a purchase. This lowers the capitalized cost, which is the amount being financed by the lease. You'll typically make an initial payment, similar to a down payment. Your monthly payment is primarily the difference between the capitalized cost and the estimated residual value, plus a lease rate (similar to an interest rate). Leases also include mileage limits (e.g., 20,000 km/year); exceeding this incurs per-kilometer charges. You are responsible for maintaining the vehicle according to the manufacturer's schedule.

At lease end, you have three options: return the car and walk away (paying for any excess wear and tear), buy the car for its residual value, or lease a new vehicle. Leasing can be attractive for those who want lower monthly payments and enjoy driving a new car every few years, but it doesn't build equity.

Lease Component	Description	Typical Canadian Example/Data
Lease Term	Length of the agreement	36 months (3 years)
Annual Mileage Limit	Maximum km driven per year without penalty	20,000 km
Excess Mileage Charge	Fee for each km over the limit	$0.10 - $0.15 per km
Down Payment	Initial amount paid to reduce monthly cost	$0 to $3,000
Monthly Payment	Recurring cost	Varies widely by vehicle
Lease Rate (Money Factor)	Financing cost of the lease	Often equivalent to 3% - 7% APR
Residual Value	Predicted value of car at lease end	~50% of MSRP for a 36-month term
Security Deposit	Refundable amount held for potential damages	Sometimes required, usually equal to one payment
Disposition Fee	Charge for returning the vehicle at lease end	$300 - $500
Excess Wear & Tear	Costs for damages beyond "normal" use	Assessed at return; varies by damage

[BrielleDella]

I just leased my first car here in Toronto. For me, it was about the monthly payment. It's way lower than a loan payment for the same car. I put down a couple thousand, agreed to stay under 20,000 kilometers a year, and that was it. In three years, I just bring it back and get whatever is new and shiny then. It’s like a long-term test drive without the commitment of owning. You gotta keep it in good shape, but that’s just normal maintenance.

[VonAshlyn]

Think of it as a financial calculation. You're only paying for the portion of the car's value you use—the part it depreciates during your lease. The lender estimates the car's future value (the residual). Your payment is the difference between the current price and that future value, plus fees. The key is the money factor, which is the interest rate. A high residual and low money factor mean lower payments. It's a good fit if you want to minimize monthly outlay and plan to get a new car again soon.