Which is better? Everyone who has ever considered leasing has had this question cross their mind. So what is the answer?

It depends.

Leases and finance loans are simply two different methods of automobile financing. One finances the use of a vehicle; the other finances the purchase of a vehicle. Each has its own benefits and drawbacks.

It's not possible to simply say that one is always better than the other because it depends on your own particular situation and preferences.

You must not only look at the financial comparisons but also at your own personal priorities - what's important to you. Are maintenance risks and costs more important than long-term cost? Are long term cost savings more important than lower monthly payments? Is ownership more important than low up-front costs and no down payment?

So, making the lease or buy decision is not that easy. There are some things you need to know first.

Buying and leasing are different.

When you buy, you pay for the entire cost of a vehicle; regardless of how many kilometers you drive it. You typically make a down payment, pay sales taxes in cash or roll them into your finance amount, and pay an interest rate determined by the finance company. You make your first payment a month after you sign your contract.

When you lease, 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. You have the option of not making a down payment, you pay sales tax only on your monthly payments. With leases, you may also pay extra fees and possibly a security deposit that you don't pay when you buy. You make your first payment at the time you sign your contract.

Buy vs lease example:

As an 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, plus fees. When you buy, you pay the entire $20,000, plus finance charges, plus fees. 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 depreciation part of each monthly payment compensates the leasing company for the portion of the vehicle's value that is lost during your lease. The finance part is interest on the money the lease company has tied up in the car while you're driving it.

Finance payments also have two parts: a principal charge and a finance charge, similar to lease payments. The principal pays off the vehicle purchase price, while the finance charge is loan interest.

However, since all vehicles depreciate in value by the same amount regardless of whether they are leased or purchased, part of the principle charge of each loan payment can be considered as a depreciation charge, just like with leasing - it's money you never get back, even if you sell the vehicle in the future.

The remainder of each 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. It's what you get back if you sell the vehicle. The longer you own and drive a vehicle, the less equity you have.

To Buy or To Lease

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. What you have "to show" for your investment when your loan is paid off is only what is left over after 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; you have nothing "to show" for the money you've put into it. 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.

About 0% Loans vs. Leasing

Below is a comparison of a typical lease compared to a 0% loan and a more conventional loan. Does this mean leasing is always better? Not necessarily, because monthly payments are not the only factor that should influence your decision.

	LEASE	0% LOAN	6% LOAN
CAR PRICE	$23,000	$23,000	$23,000
DOWN PAYMENT	$1,000	$1,000	$1,000
INTEREST RATE	6%	0%	6%
RESIDUAL	$11,000	n/a	n/a
MONTHS	36	36	36
PAYMENT	$388.06	$611.11	$669.28

The answer usually involves financial analysis and comparisons of the two options - typically ignoring the fact that the consumer may have interests other than overall long-term cost that can't be factored into a simple financial comparison.

Although the authors of these writings often go into great detail, providing lease-buy calculators and the obligatory side-by-side cost analysis, the answers always come out the same - though frequently presented with a biased slant that reflects the author's particular viewpoint.

So, which is better, lease or buy?

It depends on what's most important to you. If you want lower monthly payments and like driving a new car, that's always under warranty, every two or three years, but are willing to pay a little more over the long haul to get those benefits, then you should lease.

If you want to be able to pay off your vehicle, be payment-free for a while, and drive it for as long as you want - but are willing to have higher initial monthly payments and maintenance costs, but lower long-term costs - then you should buy.