Posted at 6:00 a.m.
1. The happy cash payment
In times of high interest rates, cash purchases should not be neglected, especially if funds can be used that would otherwise provide only modest returns.
Give up a 3% return to avoid a 7% loan? The saving is equivalent to a net return of 4%.
This is the equivalent of a safe return, moreover! “Not paying interest, that’s pretty much certain!” says David Poliquin, portfolio manager at BGY, Integrated Financial Services Inc., with humor during a conference call with his colleagues Marc-André Vachon and Vincent Bouchard.
“When the person already has investments, already has assets or already has less expensive borrowing capacity, buying without financing with the dealer can be a very serious option. In fact, we’ve been recommending it much more frequently to our clients in recent months,” he adds.
2. Long-term possession
“For someone who wants to keep their vehicle for a long time, now and always, buying remains the solution that will save the most money in the long term,” says Jesse Caron, automotive expert at CAA-Quebec.
Under current conditions, one might be tempted to opt for leasing with the sole objective of reselling the vehicle at a profit at the end of the leasing period.
“But who knows if the values will be maintained in four years? For someone who buys their vehicle to keep it for a long time, buying remains the best solution. »
However, the problem can be put another way.
3. Leasing: another financing option
Don’t be fooled by appearances: the financed purchase and the lease are both debts.
In reality, leasing is equivalent to taking out a loan repayable over 80 to 90 months, but the object of which must be returned, refinanced or resold after 36 or 48 months.
For the lease of a Subaru Crosstrek in the amount of $31,117, at the rate of 3.99%, the monthly payment is set at $402 (before taxes) for 48 months.
At this rate and under the same conditions, a standard loan would be fully repaid in approximately 88 months. After 48 months, the balance on this loan would be approximately $15,000. According to data from the dealer’s website, the residual value at the end of the 48-month lease is set at $15,096. Please note that GST and QST will be added to the redemption value.
“Leasing is much more like financing in the form of a mortgage,” describes Marc-André Vachon. With a mortgage, I still have debt to refinance after the five-year term. The same for a rental car. »
4. The Residual Value Game
“The residual value is established by the manufacturer according to the number of kilometers of the contract, the duration of the term and its market positioning”, specify the experts of BGY.
Should we be concerned about a higher fixed residual or redemption value due to the current second-hand market? At similar interest rates, a higher cash value means that the monthly payments will be lower during the lease, notes Marc André-Vachon. Of course, the buyback value to be financed will be greater, but if, at the end of the lease, the market value is lower than the residual value, nothing prevents the customer from returning the vehicle. In the opposite case, he will be able to benefit from a higher market value.
5. The decisive point: the interest rate
“The interest rate is going to be an extremely major element in the equation, probably the most important”, notes David Poliquin.
The issue of taxes adds a superficial layer of complexity to the dilemma. When leasing, taxes are added to the monthly payments, while when buying, they are included in the amount financed. “In summary, either we pay interest on taxes, or we pay taxes on interest! “laughs David Poliquin.
But in the end, the lower interest rate will usually dictate the choice between buying and leasing.
CAA-Quebec agrees with this analysis…as long as we maintain sound budgetary discipline, says Jesse Caron.
“Indeed, leasing can be attractive if the interest rate is lower than the financing rate,” he says. But you have to be careful because some people could take advantage of this low interest rate to maximize the monthly payment, saying to themselves: I had a budget for $600, I’m going to rent $600. And buy a more expensive vehicle than expected.
6. The question of the second term
In terms of interest, however, the uncertainty relates to the “second term” of our lease. At the time of acquisition, it is generally unknown under what conditions the financing of the cash value will take place. With purchase financing over a longer period, the uncertainty of the interest rate is resolved.
“This is an element that can be in favor of the purchase”, recognizes David Poliquin.
Nevertheless, the interest rate at the beginning of the possession remains a decisive factor, while the amount of the debt is at its zenith. The principle is as follows: a near benefit is preferable to a distant benefit.
At the time of the initial transaction, when the rental rate is favourable, we can consider this option more serenely if we foresee that the financing of the second term can be done under the auspices of a mortgage loan at a favorable rate or a other means of low-cost financing, emphasizes Marc-André Vachon.
7. Prior agreement
Whether for a purchase or a lease, there is a good chance that the coveted vehicle will not be delivered for several months. If there is a change of model year in the meantime, the price of the vehicle may have increased at the time of delivery. Financing or leasing terms – interest rate, redemption value – may also have changed.
“We don’t want to sign the sales contract before taking delivery of the vehicle, even if the dealer is pressuring us to do so,” recommends Jesse Caron.
Instead, we will sign a prior agreement in which the price is specified, a question of “not finding ourselves paying an overvalued price in relation to market conditions that may have changed when we take delivery of the vehicle”.
8. Non-financial benefits
“You have to understand that when you buy a car, you have to look at both options, and it’s often a very mathematical decision,” says David Poliquin. But basically, renting has a lot of advantages over buying. »
So much so that at similar interest rates, BGY experts tend to favor leasing.
The most important of these advantages is the possibility of returning the keys at the end of the rental.
“It’s not an obligation,” he continues. It is a possibility, an option. Having an option is always good. »
The customer retains the option of returning the car, keeping it or reselling it or transferring the lease, depending on whether or not the cash value is higher than the market value. In short, he has latitude.
9. The gap guarantee
A truck driver didn’t see your SUV and rammed it. Only a modern sculpture remains. Unfortunately, if the indemnity paid by the insurer is less than the balance of the loan, you will have to pay the difference (unless of course you have the replacement cost endorsement).
This worry does not have to be with leasing. In the event of a total loss, the monthly payments cease and the gap guarantee clears you of all negative accounts.
This is also a reason not to pay a cash deposit when renting.
“If the debt is greater than the fair market value of the vehicle at the time of the accident, the cash that I initially put on the car disappears at the same time as the debt”, formulates Vincent Bouchard.
10. The security deposit
However, there is another way to pay a contribution to the rental.
The guarantee or security deposit does not reduce the amount of the debt. It will be returned at the end of the rental. It will not disappear in the event of an accident with total loss.
This contribution “does not lower the amount on which interest is calculated, but it lowers the overall interest rate of the rental. And that is often very interesting”, observes David Poliquin. “We regularly do this analysis for our clients. Typically, when you put $1 on it, that dollar enjoys the equivalent of a 6-12% return. »
“In general, at equal rates, we prioritize the lease over the financed purchase, because there is the possibility of returning the vehicle at the end of the term, there is the option of a security deposit and there is a guarantee of ‘gap’, conclude our experts.
11. The exception of incorporation
A final point: the problem of buying or renting arises differently for people whose business is incorporated.
“When you are incorporated, there are many tax elements that come into play, whether the vehicle is used for professional purposes or not! emphasizes David Poliquin. We do the math, and in most cases, we recommend renting. »
12. The Electric Case
You are considering a new electric vehicle. Should the rapid progress of technology encourage you to favor renting, for fear that the car will be obsolete before long?
This concern does not enter into the decision, if we are to believe Simon-Pierre Rioux, president of the Association of electric vehicles of Quebec (AVEQ), with whom we have established contact.
“In Quebec, 93% of electric vehicle owners have purchased the vehicle,” he notes. You can make sure people have done their math. »
He himself had this fear when he bought his first electric car in 2013.
“Have the vehicles lost their value? Not at all, because there was a lot of demand for low-range used electric vehicles, simply because people wanted to use them for shopping and their daily routine. »
The problem arises all the less in 2022 as the autonomy of several models exceeds 400 km. “These vehicles will not lose their value. »