There are many variables involved when deciding between leasing or purchasing a car. Most people who buy a new car do so through financing. They make monthly payments to their lender and eventually own the vehicle. Leasing also requires monthly payments, but typically you don't own the car at the end of the lease. There are pros and cons to each option that are dependent upon your financial situation, lifestyle and preferences.
Down Payment
The ability to come up with cash for a down payment sometimes is the determining factor in choosing a lease over financing to purchase a car. Down payments for leases typically are lower than when buying a car because with a lease you're paying only for the portion of the car covered by the length of the lease. In other words, when you buy a new car, you're financing the cost of the entire purchase price over the length of the loan. With a lease, which usually lasts two or three years, you're paying for a partial cost the car, namely the first two or three years. The residual cost of the vehicle -- what it's worth at the end of the lease period -- is owned by the car company. Cars with higher residual values will have lower monthly payments; those with lower residual values will have higher monthly payments. Thus down-payment amounts are lower for leased cars.
Monthly Payments
When purchasing a car, you at least know that as long as you keep the car you'll some day own the vehicle outright and won't always have a monthly payment. As long as you're leasing, you'll always have a monthly payment. You'll never own the vehicle outright, unless you purchase the car at the end of the lease, which may require you to get an auto loan. Monthly payments on a purchased car normally are higher than with a leased auto, all other things being equal, such as make, model and price.
Equity/Depreciation
Because automobiles depreciate so quickly, many people dismiss the advantages of building equity in a purchased car. But if you plan to keep the car for a long time -- well past the length of the loan -- then buying a car makes sense. You can sell the car once you've paid off the loan or continue to drive it. People with children approaching driving age sometimes use this buying strategy, knowing that a teenage driver will be piloting the car once it's paid off.
Driving a New Car
Some people like the idea of driving a new car every few years. If that's the case, a lease is for you. You'll always have monthly payments, but you'll always be driving a new car. You also can afford more car for the same monthly payments. The residual price at the end of the lease allows for more bang for the buck.
Mileage and Maintenance
Leased vehicles have mileage restrictions, usually in the neighborhood of 15,000 miles per year. If you know that you'll be driving well over that limit, be prepared to pay a mileage fee at the end of the lease. Ten to 15 cents per mile is a typical penalty for going over the mileage limit, and luxury cars have even higher penalties. One of the myths of leasing a vehicle is a notion of "free" maintenance. This usually isn't the case. You are responsible for all standard maintenance on a leased vehicle, and you usually are required to use authorized dealers to perform such maintenance tasks. Insurance costs usually are lower for owned vehicles than for similar leased cars.
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