Ten Things You Must Know Before Buying or Leasing Your Next Car

The basic concept of leasing is explained succinctly by leaseguide.com: "When you buy, you pay for the entire cost of a vehicle, regardless of how many miles you drive it...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." In other words, you're paying primarily for the depreciation on the car. At the end of the lease, you either turn the car back over to the leasing company or purchase it for a pre-determined amount.

One method is not always better than the other. It depends not only on the terms, but on your own preferences and personal habits. If having a new vehicle every two or three years is important to you, leasing may make sense. If you can't afford the car payment without a sizeable down payment but you don't have a sizeable down payment, leasing may make sense. If lower long-term costs are important to you, buying may make sense.

Here are the ten things you must know to decide whether it'll cost you less to lease your next car or buy it.

1. The biggest mistake you can make is to judge the lease solely by the amount of the monthly payment, which can be manipulated to make even the worst deal look good. Understand how a lease works and what to watch for to protect yourself before you head to the dealer's.

2. Short-term costs of leasing are always lower than short-term costs of buying. The long-term costs of leasing are always higher than the long-term costs of buying, assuming that you keep the car you purchase outright for a number of years after your loan is paid off.

3. If you lease for the length of the manufacturer's warranty, you'll never have to pay for major repairs.

4. You can lease without a down payment, although making one will lower your payments.

5. Terminating a lease before it's up can be extremely costly.

6. Since you don't own a leased car, you can't change it, paint it, or add equipment to it.

7. Sign only closed-end leases, which means that if at the end of the lease, the car is worth less than the leasing company estimated when you signed your lease, they, not you, absorb this cost. Read the fine print of the proposed lease and make sure you understand all the terms.

8. Putting more miles on the car than the lease allows can cost you big money, since you'll pay so much per mile for every mile driven over the allowance.

9. Negotiate the lowest capitalized cost or lease price of the vehicle you'll be leasing because your payments are based on this cost. A good lease will offer you a price below the Manufacturer's Suggested Retail price.

10. The best cars to lease are those with the best book value after the term of the lease. Since they depreciate less, you pay less. You can look up lease ratings to see which cars retain their value better and will therefore give you the best lease deal. Stay away from cars which depreciate quickly unless you're willing to pay more and can afford to do so.

For $20 you can purchase a lease kit online that will not only tell you the lease rating of many cars but will help you analyze a proposed lease to see if it makes sense for you. The program can be used any time you're considering a lease, and could save you a lot of money.

Car Lease Example
You lease a $25,000 vehicle for two years. At the end of the two years, the vehicle's value is estimated to be $15,000. Your payments over the life of the lease will total $10,000 (the difference between the $25,000 purchase price and the $15,000 value at the end of the lease), plus finance charges to compensate the leasing company for the money they have invested in the car, plus fees.