Can you explain a car lease to me please (Canada)

My wife leased a car and has been making the lease payments for several years. She no longer needs the car and wants to end the lease and give the car back to the dealership. Apparently this is not straight-forward and they want a large amount of money to end the lease.

My vague understanding is that a lease is:

  • a locked-in rental agreement with penalties to end the the agreement
  • you don’t have any equity in the car - it belongs to the dealership
  • at the end of the lease period you do have a special buy-out option whereby with a further lump sum payment you can buy the car.

This is all very crappy and we don’t know what to do. Abandoning the car to the dealer will affect her credit rating.

Any clarifications or suggestions would be greatly appreciated.

Certainly the standard principle for a lease is that you are committing to pay a certain amount over a certain period of time.

Normally you can’t get out of it without paying up to the end of the contract or perhaps you have clauses in there which cap the buy-out amount. That can end up being less than the outstanding contract amount but it still won’t be cheap. It is highly unlikely that you’ll be able to just hand the car back without financial penalty.

I’m sorry you and your wife are struggling. You seem to have the gist of leases right. The money you pay at the end of the lease to own the car is called the “residual value.”

There are rare occasions when you can have equity in your lease - if the car is worth more than the money you continue to owe on the lease plus the residual value. In the real world, it’s pretty rare that there is any meaningful amount of equity in a leased car. Since you still owe a bunch of money on the lease, it’s pretty clear your wife doesn’t have any equity.

There are at least a few ways to get out of this.

  1. Keep paying the lease if you can bear the hardship. It’s costly but it will preserve her credit rating and she can take this as a lesson learned about making financial commitments that she can’t keep.

  2. Find someone else to take over your lease. There are dedicated websites where people swap leases and I sometimes see people advertising leases on car sales websites like Craigslist and I have no personal experience doing this but I can imagine it’s not that easy. You will have to deal with the lease finance company to find out how to transfer your lease to the new lessor. The finance company may require your wife to stay on the lease as the new lessee’s guarantor, so she won’t really be off the hook if the new lessor defaults. When I see leases advertised, the sellers assume that the new lessor wants to pay the whole amount of the lease payment but that doesn’t make any sense. I wouldn’t want to make the same payment I would have on a brand new car to drive their used one. Accordingly, I imagine to attract someone, you might have to subsidize the lease somewhat so it’s cheaper for the new lessor. I don’t know how you arrange that with the finance company.

  3. Pay the penalties for early termination. Ask the finance company how much it will cost you to terminate the lease. If you can afford it, it could be your best option. The termination payments may be less than the cost of making all the lease payments, insurance, parking, etc. so it could still save you some money. Of course, your wife will have to find some other way to get around.

  4. Default. If you really can’t make the payments, talk with the lease finance company about how to minimize your costs for defaulting. If you surrender the car and the keys, you may be able to save some of the repossession penalties. They will still be able to come after her for whatever she owes on the contract.

You need to look at the terms of your lease agreement. Your options should be all spelled out there.

I haven’t leased a car directly, but my understanding based on friends and family that have, is everything you said is correct.

You’ve signed a contract for a set amount of dollars for a set period of time to use their vehicle. At the end of the contract you give the vehicle back. If you decide to break the contract you pay a hefty penalty. If you exceed the kilometre allowance, you pay a very very hefty penalty.

I’m not a believer in leases for exactly the reason you’re finding now. Leases are a cheap way to get a car in the short run and a very expensive way to get a car in the long run. If your circumstances change, you’re locked in, plus in the end you have nothing to show for all those payments.

A close friend changed jobs had a much longer commute. He hit his kilometre allowance and sat the car in his driveway for 11 months, still paying the lease, because the penalty cost per kilometre to keep driving would have exceeded the value of the car. After his experience I decided I’d rather buy a cheaper (used) car that I could afford and have some equity in rather than lease a nicer car.

There are companies who specialize in getting out of leases. I’d suggest you contact one of them. This is one some friends have used, but there are many out there:LeaseBusters - Home

Part of the problem is that the term “lease” can mean several different things. Some are more like an ordinary rental agreement that can be cancelled at fairly short notice, others are for a fixed term (three years is pretty common) and the costings are predicated on the lease running for the full term. Some include maintenance and some don’t, but they all have penalties for going over the agreed mileage (would a Canadian say kilometreage?) and for any damage that is not normal ‘wear and tear’.

As pointed out above, the rules will be set out in the contract; if you have any problem interpreting them, you might need to take legal advice.

Edit - The advice from GMANCANADA above is probably more useful.

She’s been paying for several years? I hardly ever see leases beyond three years in length. Like others have said, it’s going to be spelled out in the agreement, along with the maximum number of miles permitted during the lease without incurring further charges.

I’ve leased three cars and they were all “3 years and 30,000 miles.” In each case, at the end of three years I simply dropped off the car at the dealer and left. (They were all under 30,000 miles and had no damage other than normal wear and tear.) I could have dropped them off earlier, but I would have owed the lease charges for the remaining months.

One option a dealer might offer is to “trade-in” the car for another model and a new lease.

The big downside of this is you have another sucky lease. Probably even suckier as they will roll in some costs from the old one into the new one.

So: Good News! This might be an option. Bad News! You are not likely to want to do this.

The only time leasing is a better deal than buying a car is when the car is an essential tool of your business. In that case, the reduction of taxes on your business is just about enough to make it less expensive. If your insurance is also a business expense, it will likely make it a more substantial savings. For private use, it is almost never a good deal.

The same arithmetic will likely apply to the various renegotiations or extensions of leasing. Profit margins on auto leasing are fairly narrow for the companies.


If you want to drive a new-to-3-years-old car all the time, leasing may be better than constantly buying new and trading in just because it lowers transaction costs.

Constantly driving a very new car is a very expensive way to transport yourself around, and I don’t recommend it unless you’re quite rich. But if you do fall into that slice of humanity and like to spend your money on driving new cars, leases can make sense.

There are also services that allow people to essentially subcontract out the remainder of their leases. I assume these are available in Canada as well. It usually involves the “buyer” of the lease to pass the same credit checks as the original user of the car, and then a charge (which may be several hundred dollars) for all the paperwork to transfer to the new driver.

Google things like “swap a lease” to see if that may be an option.

Not really. Leasing most of the time is merely a great way to transfer money from your bank account to the dealer’s.*

The core advantage to the customer is ease of doing things. You are paying money to make things simpler. A lot of money. And not much simpler.

Even if you have a fetish about always driving a newish car, this still isn’t the best decision.

  • There are exceptions. Sometimes the dealers goof up and the car is not worth as much as they were hoping when the lease expires. So they are stuck with the undervalued car instead of the customer.

Businesses lease cars for two reasons: They like simple - 1. a monthly bill that is easy to deal with and only one supplier. 2. They don’t want a valuable and depreciating asset on their books. 100 cars can easily be valued at over $½million so any calculation that involves ‘expected return on capital’ will become skewed. Many companies try hard to own nothing at all - you can lease premises, machinery, office equipment and anything else. If you want to go extreme, you outsource all your secretarial and accounting needs as well.

Not quite.

I leased a car and paid it off after 1 month because I got a better deal from the dealership with a lease than with even a cash purchase at the dealership, even after all applicable fees. Of course, the dealership was not expecting me to pay it off immediately - in fact, they even lied to me and told me that I was REQUIRED to make the first 3 months payment, presumably so they could make a profit.

(I suppose you could say that I didn’t REALLY lease the car - that my lease was a lease in name only.)

To be fair, owning your secretaries and accountants has been legally troublesome for the last few centuries apart from return on capital calculations.