Leasing a Car (Script 196)
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This script explains leasing a car in BC for personal or family use (consumer leases). It does not cover business leases. Cars are expensive machines. Before you lease one, you should compare leasing with buying to see which is best for you.
What is a lease?
A lease is an agreement to rent and use someone else’s property, in this case, a car. A lease is usually long term. And usually, you must be at least 19 years old to sign a lease. It can last from several months to several years. At the start of a lease, you make a first, or initial, payment. You may also have to pay a security deposit. After that, you make monthly payments.
Leasing is an alternative to buying—both have advantages and disadvantages. If you lease, you don’t own the car. And you have different rights and responsibilities than if you buy.
Leasing often means a lower first (initial) payment and monthly payments compared to buying. Leasing may also mean lower taxes because taxes are based on the monthly payments, not on the total purchase price. Many drivers can afford a more expensive car, or one with more options, if they lease.
On the other hand, you pay interest on a lease. So it may cost more, in total, to lease than to buy a car without financing. And when you lease, the dealer or lease company still owns the car and may control who drives it and the maintenance schedule you have to pay for—even though you drive and insure the car, and make monthly lease payments for it.
What types of car leases are there?
- a straight lease—with this, you return the car when the lease ends and owe nothing more. This is rarely used now.
- a lease with an option to purchase—this comes in two forms: open and closed
- closed—you pay the agreed-on amount if you decide to buy the car at the end of the lease.
- open—you may have to pay an extra amount at the end of the lease. How much more you have to pay is set in the lease contract. Before signing a lease, a dealer estimates what a car will be worth at the end of the lease (the residual value) and then calculates the monthly payments based on that estimate. If the car is worth less at the end of the lease, you have to pay more to make up the difference. You may also have to pay extra if you drove more than the lease allowed or if the car has more than normal wear.
What must a lease agreement tell you?
A lease agreement is a legally binding contract, so make sure you understand it before you sign it. Section 30 of the BC Motor Dealer Act Regulation requires a lease agreement to have the following information:
- a summary of costs and credits for any extended warranty due when you sign the lease.
- all express warranties and guarantees for the vehicle made by the manufacturer or motor dealer.
- who is responsible for maintaining and servicing the vehicle.
- a description of any insurance, including types and amounts of coverage, that you must provide and pay for.
- any limit on your use and enjoyment of the vehicle, including who can drive it and any requirement to get permission to take the vehicle outside of BC.
- the amount of tax in each periodic payment you must make under the agreement, based on the tax rate at the time of disclosure.
- the cooling-off period (described in the next section).
Section 16(c) of the Sale of Goods Act requires a person selling or leasing goods to ensure the goods have no lien or charge on them, or to tell the person leasing the goods about the lien and have them agree to the lease knowing about the lien.
Section 101 of the Business Practices and Consumer Protection Act requires the dealer to give you a Lease disclosure statement before you sign the lease. Read it carefully. It has all the key terms and details of the lease.
What is a cooling-off period?
You get one business day after you sign the lease to cancel it—this is the cooling-off period. During this time, the law requires the car to stay with the leasing company. If you change your mind in that time, you can cancel the lease and get your money back without penalty. While you have the whole day to cancel, it’s better to tell the dealer during business hours in writing. Some days that do not count in the cooling-off period: statutory holidays, Sundays, and any day the dealership is closed do not count. So if you sign a lease on a Saturday, Monday is the cooling-off day when you can cancel the contract.
You can waive (give up) the cooling-off period. If you want to do that, you must do it in writing. Read the lease documents carefully because they may include a waiver.
What can happen if you have trouble paying a lease?
If you default on a consumer lease (stop paying it), the dealer or creditor may be able to take the car back (seize it) or sue you for all remaining lease payments. Depending on the type of lease (a security lease or a true lease), they may be able to do both. You would need legal advice on that and on whether the “seize or sue” rule and the “two-thirds rule” apply.
The dealer or creditor could also extend a lease if you are having trouble paying it. That might create a new lease and the dealer or creditor would have to give you a new disclosure statement. Even if an extension is not a new lease, it would change the term and your total cost, and those changes would have to be disclosed. And if the dealer or creditor invites you to delay a payment, they must tell you if you will pay interest on the delayed payment.
Business leases are different—a dealer or creditor may be able to sue you and seize the car. Generally, your rights and responsibilities depend on whether you sign a lease or a secured lease agreement. You can talk to a lawyer before you lease to find out what type of agreement you are signing. As well, check script 246, called “Buying Goods on Credit, Credit Cards & Credit Bureaus”.
What are the differences between consumer and business leases?
You don't normally get a tax deduction for a consumer lease, only for a business lease. Check with Canada Revenue Agency for details.
For a business lease, you don't get the protection of 3 laws: the Business Practices and Consumer Protection Act, the Personal Property Security Act or the Motor Dealer Act. So if there's a mechanical problem with the car, you still have to continue paying the lease. The Sale of Goods Act still give you some protection that the car is suitable for its purpose—but only if you lease the car mainly for personal, family, or household purposes. If you want to lease for business purposes, you should first get legal and accounting advice—before you lease.
What happens when a lease ends?
There are several possible outcomes when a lease ends. You should discuss them before you sign the lease. You may still owe money when the lease ends. The car goes back to the dealer, or you may have an option to buy it for a certain price. Whether you owe money depends on the type of lease you signed (types of leases are explained earlier in this script).
With a straight lease, you return the car and owe nothing more. With a closed lease with an option to purchase, you pay just the agreed-on amount if you decide to buy the car. But with an open lease with an option to purchase, you may have to pay an extra amount. You may also have to pay extra if you drove more than the lease allowed or if the car has more than normal wear. Some dealers may also want to charge other fees at the buy-out time. So before you sign a lease, ask about any fees that the dealer will charge at the time of buy-out. Discuss them with the dealer and get them in writing—before you sign the lease agreement.
The dealer can use your security deposit to pay for kilometer overages or damage to the vehicle that must be repaired. The lease agreement should say when you get your security deposit back and when the dealer can keep it.
If you buy a vehicle at the end of the lease, it’s a new transaction. So motor dealers and salespeople must make all their required declarations, especially the declaration that the vehicle meets the safety requirements of the Motor Vehicle Act when they sell it. The declarations are listed in the Vehicle Sales Authority of BC glossary of buying terms.
How a dealer ensures that a vehicle meets the Motor Vehicle Act is a business decision—the Act does not say how. Generally, a dealer will do an inspection to ensure a vehicle meets the Act. Depending on the original lease, the dealer may charge you for the inspection. Discuss it with the dealer before you agree to lease a vehicle.
Leasing a car is quite different from buying one. If you decide to lease, you have less protection than if you buy. Leases are usually long term and normally help the dealer more than you, the consumer. Read the lease agreement carefully and consider taking it to a lawyer before you sign.
For more information on leasing a car, check the buying guide on the website of the Vehicle Sales Authority of BC. It has information on consumer help and complaints. This website also describes the Motor Dealer Customer Compensation Fund (which may cover financial losses from leasing a vehicle if the dealer is no longer in business).
[updated June 2018]
The above was last reviewed for accuracy by Ian Christman and edited by John Blois.
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