Automobile leasing can be a very attractive alternative to buying for many people, although maybe not for everyone, as we'll discuss later. You must decide about the importance of these benefits to you. So, what are the potential benefits of leasing when compared to conventional new-car purchase loans?

Lower Monthly Payments
Because you're only paying for the portion of the car or truck that you actually use, your monthly payments are 30%-60% lower than for a purchase loan of the same term.


More Car, More Often
Since your monthly payments are lower, you'll be able to get more car for the same money and drive a brand new vehicle every two to four years, depending on the term length of your leases.


Fewer Maintenance Headaches
Most people like to lease for a term length that coincides with the length, in months, of the manufacturer's warranty coverage so that if something major goes wrong with their car, it's always covered.


Lower Upfront Cash Outlay
Most leases require little or no down payment, which makes getting into a new car more affordable and frees up your cash for other things. However, you can choose to make a down payment to lower your monthly payment amount.


Lower Tax Bite
In most states and in Canada, you don't pay sales tax on the entire value of a vehicle when you lease. You're only taxed on the portion of the value that you use during your lease. The tax is spread out and paid along with your monthly lease payment.

No Used-Car Hassles
With leasing, the headaches of selling a used car are eliminated. When your lease ends, you simply turn it back to the leasing company and walk away, unless you decide to buy it or trade it.

Even with all of the above benefits, leasing requires more discipline and commitment than buying. Therefore, you'll want to examine your motives and qualifications to determine if you are a good leasing candidate. Please read the next topic, Who Should Lease?

Who Should Lease?

Although you may be attracted to the many benefits of leasing, you should consider the questions below before making a decision. If you answer "yes" to any of the questions, it's a good indicator that leasing may not be right for you. To do otherwise could cause you a great deal of unhappiness and unnecessary financial pain.

Do you think there is a chance you'll want to end Lease contracts are purposely written to discourage, even prevent, early termination. To do so usually means you'll pay termination charges and all remaining payments. Therefore, if you lease, you should have a stable lifestyle and a good job situation to minimize the possibility of needing to terminate early. Wanting or needing to end a lease early is the most common problem people have with leasing.


Do you typically drive your cars more than 15,000 miles a year?
Lease contracts limit the number of miles you can drive to 10,000-15,000 miles per year. If you exceed your limit, you're slapped with "excess mileage" charges at the end of the lease. Sometimes, additional miles — if you know you'll be driving more — can be "bought" up front at the time you sign your lease, at a lower per-mile cost.


Do you mistreat your cars or fail to keep them in good condition?
Leasing companies require that you return their car at the end of the lease with no more than "normal" wear-and-tear. Anything more and you'll pay for the damages. You are responsible for insurance, upkeep, and maintenance just as with a purchased car. Some people mistakenly believe the leasing company is responsible.


Do you think you'll want to customize your car, make modifications, or repaint it?
A leased car doesn't belong to you, it belongs to the leasing company. Therefore, you cannot make modifications and install custom equipment that alters the car. If you do, you'll likely be charged for the cost of repairs to undo what you've done.

Do you prefer "fad" cars or cars that frequently change style?
These types of cars usually lose resale value quickly, which means their lease "residual" value is lower. Low residual value translates into higher monthly lease payments. This kind of car could easily have a higher monthly lease payment than a more expensive car with a better resale history.

Are you emotionally attached to the idea of owning your vehicle?
When you lease, you never have ownership, unless you choose to buy at lease-end — which about a third of all leasers do. Leasing is not all that different than buying with a loan, in which case the bank holds the title and you don't own your car until the loan is paid off. It's just that, when buying, you build up equity because of your higher monthly payments and, when leasing you don't.


Do you like paying off your loans and driving your cars until the wheels fall off?
One of the benefits of leasing is that you can drive a new car every two, three, or four years. However, you'll always be making payments. To many people, this is an acceptable tradeoff considering the benefit of always having a new car that is always under warranty. And you still have the option to buy at the end of the lease if you really want to get a respite from those payments.


Do you have a flawed credit rating?
Because leases typically require a smaller down payment and lower monthly payments, you generally must have a better credit rating than would be required for a loan because of the higher risk to the lease provider. If you have a history of making credit payments promptly and don't have an excessive debt load, you're going to be fine. Otherwise, you may have to pay a higher interest rate to lease or, worse, be refused.

It's a common dilemma: lease vs buy, buy vs lease. Leases and purchase loans are two very different methods of automobile financing. Each has it's own benefits and drawbacks. It's not possible to simply say that one is better than the other because, well, it depends ... You must not only look at financial comparisons but also at your own personal priorities — what's important to you.

Let's look first at just how buying and leasing are different. When you buy, you pay for the entire cost of a vehicle. With leasing, you pay for only a portion of the vehicle's cost, which is the part that you "use up" during the time you're driving it.

For example, if you lease a car that costs $20,000, but is worth only $13,000 after 24 months, you pay for the $7000 difference (this is called depreciation), plus finance charges. When you buy, you pay the entire $20,000, plus finance charges. This is fundamentally why leasing offers significantly lower monthly payments than buying.


Lease payments are made up of two parts: a depreciation charge and a finance charge. The payment compensates the car's owner (the leasing company) for loss in value of its asset, as well as interest on the total amount of money they have tied up in the car while you're driving it.


Loan payments also have two parts: a principal charge and a finance charge. The principal charge pays off the vehicle's full purchase price, while the finance charge is interest. However, since all vehicles depreciate in value by the same amount regardless of whether they are leased or bought, part of the loan principal payment should be considered as a depreciation charge, exactly like with leasing — it's money you never get back, even if you sell the vehicle in the future.

The remainder of the loan principal payment goes toward equity. It's what remains of your car's original value at the end of the loan after depreciation has taken its toll. Equity is resale value — what you get back if you sell the vehicle. The longer you own and drive a vehicle, the less equity you have.

So, buying a car with a loan is essentially like putting money into a declining-value savings account — you never get out as much as you put in. A portion of every payment you make is lost to depreciation. A terrible investment by any measure.

Leasing, then, is similar to buying, but without the "savings account." You only pay for what you use. It's true that you'll own nothing at the end of a lease, but what you don't own is the same part of the car — the depreciated part — that a buyer too doesn't own at the end of his loan.

With leasing, you at least have the option of putting your monthly payment savings into more productive investments, such as mutual funds or stocks that have the possibility of increasing in value. In fact, many experts encourage this practice as one of the benefits of leasing, though most people will typically find other uses for the money they save by leasing — such as paying the rent or buying groceries.

Does this mean that leasing is always a better way to go? Not necessarily.


Every magazine article or book you'll ever read about leasing addresses the question, "Is it better to lease or to buy?". Although the authors of those writings often go into great detail and rigorous financial analysis, often providing lease-buy calculators, the answers always come out the same — though frequently presented with a biased slant that reflects the author's particular viewpoint.


Let's simplify the answers and summarize them here:
The monthly cost of leasing is always significantly less than the cost of buying. For the same car, same price, same term, and same down payment, monthly lease expenses will always be 30%-60% lower than loan payments. That's a fact.

The total short-term cost of leasing is about the same as the cost of buying, assuming the buyer sells his vehicle. The overall cost of leasing compared to buying, over the same lease/loan term, is approximately the same, more or less, assuming the buyer sells his vehicle at the end of the loan. Comparisons sometimes show buying to cost a little less use to fewer fees and the assumption that a purchased vehicle will return full market value if it were sold or traded (often a bad assumption). However, if you factor in the benefits of wisely investing your monthly lease savings, the net cost of leasing can easily be less than buying.

The total long-term cost of leasing is always more than the cost of buying, assuming the buyer keeps her vehicle. If a buyer keeps her car after her loan has been paid off and drives it for many more years, she spreads her cost over a longer term. It doesn't take rocket science to figure out that the cost of leasing five different cars over a period of ten years is greater than the cost of buying one car and keeping it for ten years. If long-term financial benefits were your only interests in acquiring a new car, you would always choose to buy, preferably with hard cash, and keep the car for many years.

So, which is better, lease or buy? It depends on what's most important to you. If you want lower monthly costs and like a driving a new car every two or three years, but are willing to pay more over the long haul to get those benefits, then lease. If you want to be able to pay off your vehicle, be payment-free for a while, and drive it for a long time — but are willing to make higher payments for four or five years — then you should buy.