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Buying vs. leasing: Should you lease your next car?

A quick guide to help you determine whether you should lease or buy your car

By

Car Buying Couple © Metro Portland Car Dealers

When you lease a car, you are basically renting it. Leasing is advantageous if you like to get a new car every 2 to 3 years, as it can lower your car payments or give you the opportunity to drive a more expensive car with a payment comparable to a less expensive car -- a Lexus on a Toyota budget. The chief disadvantage to leasing is that you must make a decision about buying a new car once the lease is up; you generally won't be able to keep the car an extra month or two while you decide what to buy next. Also, most leases have mileage caps; if you exceed the mileage allowed on your lease, you may be in for some hefty fees.

"But you don't own anything when you lease!"

This is one of the primary objections to leasing: You have no equity in the car. This is true -- but because cars depreciate, having equity in the car really doesn't gain you anything. Here's why:

Let's say Joan buys a car for $30,000. She pays it off in three years. She then sells the car, which is now worth $20,000. Her friend Kate leases the same car for 36 months. She pays out $10,000 in lease payments, then returns the car to the dealership and walks away. Both women have spent $10,000 to drive the same car for the same amount of time. The difference is that while Joan had $30,000 of her own money in play, Kate only had $10,000 tied up in the car; her down payment and/or monthly payments would have been a great deal lower than Joan's.

How car lease costs are determined

When you lease, your payment is based largely on the difference between what the car costs new and what it will be worth at the end of the lease (known as the residual value). Cars that hold their resale values well will be less expensive to lease; cars that depreciate rapidly will cost more to lease.

Compare a car with a high resale value -- say, a Toyota -- against a comparably priced car with a lower resale value, such as a Chrysler. If you are buying outright, the down and monthly payments will be similar. But if you are leasing, chances are the Chrysler will have a significantly higher lease payment, because it will be worth less at the end of the lease. Likewise, options that would raise the purchase price often have the opposite effect on a lease: A car with a manual transmission and no air conditioning will be cheaper to buy, but it may be more expensive to lease, as the car will have a lower residual value.

Mileage limits

Because a car's mileage affects its resale value, leases generally have an annual mileage limit, usually 10,000 to 15,000 miles per year. (The average American driver puts about 12,000 miles per year on his or her car.) Be sure to ask about the mileage limit as well as the cost-per-mile penalty for exceeding the limit. If it's too low, you can usually negotiate for a higher limit, but doing so will increase the cost of the lease. If you are a high-mileage driver -- 18,000 miles per year or more -- you may be better off buying the car instead of leasing. (Be warned: One unscrupulous dealer trick is to offer a low-cost lease with an absurdly low mileage limit.)

Tax advantages of leasing a car

If you use your car for business, you may be able to write the entire amount of your lease payment off your taxes (as opposed to writing off just the interest on a new-car loan). Tax regulations are constantly changing, so it's best to consult your accountant or tax professional about the tax advantages of leasing a car.

Gap insurance

Many leases require gap insurance; even if your lease doesn't, it's still a good idea to get it. Read more: What is gap insurance?

Who should lease their new car:
People who like to buy a new car every few years. Leasing will allow you to lower your payment or to drive a more expensive car with a monthly payment similar to a less-expensive car.

Who should not lease their new car:
People who like to keep their cars for a long time, high-mileage drivers, and those who don't want to be forced into a decision about buying another car at the end of the lease period.

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