There are three ways to pay for a car: lease it, finance it with a loan, or pay cash. Leasing vs buying comes down to what you pay for. A lease charges you for the part of the car’s value you use up during the term, plus a finance charge, and then you hand it back. A loan or a cash purchase pays for the whole car, and you keep whatever it’s worth at the end. This page works through each option on the same car and compares the totals. It’s one step in our guide to buying a car in Canada.
Quick comparison
| Factor | Lease | Finance | Pay cash |
|---|---|---|---|
| What the monthly payment covers | Expected depreciation over the term plus a finance charge | The full price plus interest, spread over the loan term | No payment after purchase |
| Over many years | A payment every year, as one lease follows another | Payments stop when the loan is paid off | No interest at any point |
| Ownership | No, unless you buy out the lease | Yes (the lender holds a lien until payoff) | Yes |
| Kilometre limits | Yes, set in the lease | No | No |
| Changes to the car | Restricted | Allowed | Allowed |
| End of term | Return the car or buy it out | Keep the car | Keep the car |
| Tends to suit | Drivers who want a new car every few years and stay within the kilometre allowance | Drivers who keep a car long after the loan ends | Buyers with cash beyond their emergency savings |
How leasing works
A lease payment is built from four numbers:
- Capitalized cost: the negotiated price of the car, less any down payment or trade-in.
- Residual value: what the leasing company expects the car to be worth at the end of the term. It’s set by the lessor, usually as a percentage of the MSRP.
- Money factor: the lease’s interest rate, written as a small decimal. Multiplying it by 2,400 gives the approximate annual percentage rate.
- Term: usually two to four years.
Each month you pay the depreciation (capitalized cost minus residual, divided by the number of months) plus a finance charge (capitalized cost plus residual, times the money factor). Sales tax is charged on each payment rather than on the full price up front.
At the end of the lease there may be charges for kilometres over the allowance, for wear beyond what the lease calls normal, and a disposition fee. The lease vs buy calculator explains the mileage penalties and each of the lease-end options: returning the car, buying it out at the residual, or rolling into a new lease.
Lease example
| Lease terms | Example |
|---|---|
| MSRP (no down payment) | $40,000 |
| Residual value (60% after the term) | $24,000 |
| Money factor | 0.0025 (about 6% a year) |
| Term | 36 months |
| Depreciation part of the payment | $444.44 |
| Finance charge part of the payment | $160.00 |
| Monthly payment (before tax) | $604.44 |
| Total of payments | $21,760 |
At the end of the term you return the car. You’ve paid $21,760 for 36 months of driving and own nothing, or you can buy the car for its residual of $24,000.
Lease pros and cons
| Pros | Cons |
|---|---|
| The payment covers only part of the car’s value | No ownership at the end |
| The car is usually under the manufacturer’s warranty for the whole term | Kilometre limits and charges for excess wear |
| A new car every few years with no resale to arrange | Ending the lease early is expensive |
| Sales tax is paid on each payment, not the full price at once | Changes to the car are restricted |
How financing works
Financing means borrowing to buy the car. You own it, the lender registers a lien on it until the loan is repaid, and the payment covers the full price plus interest. Your rate depends on your credit, the lender and the term; current rates by credit score and lender are compared in the best car loans in Canada, and the process of getting pre-approved, comparing dealer financing and choosing a term has its own guide.
Finance example
| Financing terms | Example |
|---|---|
| Purchase price | $40,000 |
| Down payment (20%) | $8,000 |
| Amount financed | $32,000 |
| Interest rate | 6% |
| Term | 60 months |
| Monthly payment | $618.65 |
| Total of payments | $37,119 |
| Interest paid | $5,119 |
| Total paid, including the down payment | $45,119 |
When the loan ends you own the car outright, and from then on the cost of keeping it is insurance, fuel and maintenance.
Stretching the same loan to 84 months lowers the payment to $467.47 but raises the interest to $7,268 , and a long term makes it more likely you’ll owe more than the car is worth for the first few years.
Financing pros and cons
| Pros | Cons |
|---|---|
| You own the car and can sell it at any time | The payment covers the full price, not just depreciation |
| No kilometre limits or wear charges | Repairs after the warranty ends are yours |
| Payments end, and the years after payoff cost much less | Early in the loan you can owe more than the car is worth |
| You can change the car as you like | Lenders usually require collision and comprehensive coverage until the loan is paid |
Paying cash
Paying the full price up front avoids interest entirely. On the example car, cash costs $40,000 before tax, against $45,119 with the loan above: the $5,119 difference is the interest . The trade-off is that the cash is no longer available for an emergency or an investment, so the comparison depends on the loan rate you’d pay and what that money would otherwise earn. A cash buyer also takes the whole depreciation and, if the car is written off, depends on the insurance payout.
Some manufacturers offer either a low promotional rate or a cash rebate, not both. The guide to financing a car shows how to compare a 0% offer against a cash rebate on the same car.
Total cost on the same car
The examples above use the same $40,000 car. Over six years, before sales tax, insurance, fuel and maintenance:
| Two leases in a row | Finance | Pay cash | |
|---|---|---|---|
| Paid over six years | $43,520 | $45,119 | $40,000 |
| What you have at the end | A car to return | A six-year-old car | A six-year-old car |
The buyer’s real cost is what was paid minus what the car can be sold for at the end, so the result turns on depreciation. The longer a buyer keeps the car after the loan ends, the further the totals move apart, because the leaseholder keeps paying and the owner doesn’t. The comparison of new vs used cars covers how fast cars lose value by age. Sales tax works differently on each path: on a lease it’s charged on every payment, and on a purchase it’s charged on the price at once (see sales tax on a car for each province’s rate and the trade-in rule). For your own numbers, the lease vs buy calculator adds tax and resale value.
The rest of the running cost, insurance, fuel, maintenance and registration, is broken down in the cost of owning a car in Canada. Whichever way you pay, the price you negotiate sets the starting point: see how to negotiate a car price and the best time to buy a car.
Which option suits whom
Leasing tends to suit drivers who:
- stay within the lease’s kilometre allowance year after year;
- want a new car every few years and the warranty coverage that comes with it;
- would rather not deal with selling a car;
- value a predictable payment over owning an asset.
Financing tends to suit drivers who:
- drive more than a lease allows;
- plan to keep the car for years after the loan is paid off;
- want to modify the car or sell it whenever they choose;
- have a steady income for the payment and a credit file that gets a competitive rate.
Paying cash tends to suit buyers who:
- have the money without drawing down their emergency fund;
- face a loan rate higher than what the cash would earn elsewhere;
- want no debt and the simplest transaction.
Depreciation and the lease payment
Depreciation is the largest cost of most new cars, and it’s what a lease payment is mostly made of. A buyer absorbs it as a lower resale value instead. How much a car loses each year, and how buying a few years old changes that, is covered in new vs used cars.
Car loan rates
Loan rates depend on your credit score, the lender and whether the dealer’s manufacturer is running a promotion. The current rates by credit score, and the banks, credit unions and online lenders that offer them, are compared in the best car loans in Canada; the car loan calculator shows the payment for any rate and term.
Business use
If you use the car for business, the deduction rules differ between leasing and buying. For passenger-vehicle leases entered into in 2026, the deductible lease cost is capped at $1,100 a month before tax, and for a car financed with a loan taken out that year, the deductible interest is capped at $350 a month, both in proportion to business use. The full rules, including capital cost allowance on a purchased car, are in vehicle expenses for the self-employed. Employees whose employer requires them to use their own car follow different rules, covered in deducting your car as an employee, and a car your employer provides is a taxable company car benefit.
Common pitfalls
- Underestimating kilometres on a lease. Excess-kilometre charges are billed at the end of the term, all at once.
- A large down payment on a lease. If the car is written off early, the down payment is generally not returned.
- Very long loan terms. They lower the payment but raise the interest and the time spent owing more than the car is worth.
- Shopping by payment alone. A low payment can hide a long term, a high rate or add-ons rolled into the price.
- Emptying savings to pay cash. A repair or job loss then has no cushion.
Frequently asked questions
Can I negotiate lease terms?
Yes. The capitalized cost (the car’s price), the money factor and some fees are negotiable. The residual value is set by the leasing company.
What happens if I want to get out of a lease early?
The options are to pay the early termination charges, transfer the lease to another person through a lease-takeover service if the leasing company allows it, or buy out the lease and sell the car. A buyout and sale only comes out ahead when the car sells for more than the buyout price.
Is 0% financing always better than a cash rebate?
Not always. It depends on the size of the rebate and the rate you’d pay on a regular loan; the guide to financing a car works through the comparison.
Do I pay less tax when leasing?
You pay sales tax on each lease payment rather than on the full price up front, so the tax is spread out. Over a lease you pay tax only on the part of the car’s value you use, plus the finance charge; if you buy out the lease at the end, tax applies to the buyout too.
Can I lease with bad credit?
Leasing companies check credit just as lenders do, and a weak credit file can mean a refusal or a higher money factor. The guide to financing a car covers the options when your credit is poor.
Related resources
Sources
The figures and rules on this page come from these sources, last checked against them on September 4, 2026. How we check facts.
- Department of Finance Canada: Government Announces the 2026 Automobile Deduction Limits and Expense Benefit Rates forβ¦