Terms of Use:

When getting a new vehicle you have two options: leasing and buying. In almost all cases, leasing will only make good financial sense if you generally get a new vehicle every couple of years or if you can write the leasing expense off as a business expense. When you lease a vehicle you are effectively renting it with the option to purchase it at the end of the lease. Below are some simple comparisons between leasing and buying.

  • Ownership:
    Leasing: You do not own the vehicle. At the end of the lease you either turn the car back in or buy the vehicle at the residual value stated in the lease.
    Buying: You own the vehicle and get to keep it at the end of the auto loan term.

  • Up-Front Costs
    Leasing: Up-front costs may include the first month's payment, a refundable security deposit, a capitalized cost reduction (like a down payment), taxes, registration and fees, and other charges. Many times dealers will offer leasing deals that require less money down than required when buying a vehicle.
    Buying: Up-front costs include the cash price or a down payment, taxes, registration and fees, and other charges.

  • Monthly Payments
    Leasing: Monthly lease payments are generally lower than monthly loan payments because you are paying only for the vehicle's depreciation during the lease term, plus rent charges (like interest), taxes, and fees.
    Buying: Monthly loan payments are generally higher than monthly lease payments because you are paying for the entire purchase price of the vehicle, plus interest and other finance charges, taxes, and fees.

  • Early Termination
    Leasing: You are responsible for any early termination charges if you end the lease early.
    Buying: Depending on the loan, you may be subject to a buy-out charge if you end the loan early.

  • Vehicle Return
    Leasing: You may return the vehicle at lease end, pay any end-of-lease costs, and "walk away."
    Buying: You will have to sell or trade-in the vehicle if you decide you want a different vehicle.

  • Future Value
    Leasing: The future market value of the vehicle has no impact on you.
    Buying: The vehicle's market value drops over time, usually dropping the most during the first two years of ownership.

  • Mileage
    Leasing: Most leases limit the number of miles you may drive (often 12,000-15,000 per year). You can negotiate a higher mileage limit and pay a higher monthly payment. You will likely have to pay charges for exceeding those limits if you return the vehicle, usually 10 to 15 cents per mile.
    Buying: You have no restriction on how many miles you put on the vehicle, but higher mileage will lower the vehicle's trade-in or resale value.

  • Excess Wear
    Leasing: Most leases limit wear to the interior and exterior of the vehicle during the lease term. You will likely have to pay extra charges for exceeding those limits if you return the vehicle. Be sure and understand what is considered to be reasonable wear.
    Buying: There are no limits or charges for excessive wear to the vehicle, but excessive wear will lower the vehicle's trade-in or resale value.

So which is right for you? If you typically trade for a new car every four years or less, want to avoid the loan down payment of 10 to 20 percent, drive close to but not more than the 15,000 miles a year allowed in most leases and typically keep your vehicle in good condition to avoid end-of-lease penalties, you might well be happy leasing.

Even so, before you opt for a lease, keep in mind that that there is a reason why those low payments look so attractive: Instead of paying for the entire car, you're only paying the estimated depreciation over the time you are leasing it. So to get a really good lease deal, you need to look further than just the payments. You need to understand how leasing works, do your homework and negotiate as hard as if you were buying the car. Here is a step-by-step guide:

Master the jargon. You can't successfully negotiate a lease without becoming fluent in the industry's terms. Here's what you need to know before you start. The "capitalized cost" is the equivalent of the selling price, which you want to get down as low as possible. The "residual value" is the estimated worth of the car at the end of your lease. Your monthly payments are determined by the difference between these two figures, plus an interest charge known as the "money factor." Thus, raising the residual value or lowering either the capitalized cost or the money factor will lower your payments.

Look for a manufacturer-subsidized lease. These deals, often promoted in splashy ads in newspaper auto sections, are likely to be the cheapest available. To identify a generous subsidy, look in the ads' fine print for a residual value that's two percentage points or more above that published by Automotive Lease Guide (ALG), an independent research firm. To check the ALG value for a car, go to www.CarWizard.com, pick your model, and then select "Residuals and Factors."

Set a target and negotiate hard. You can find out the dealer's invoice cost for any car or truck. Set a target price about 2 percent above the dealer's cost ($400 on a $20,000 car, for instance). Start bidding below your actual target and plan to wind up near that figure.