Should You Lease or Buy Your Next Car?

The greatest benefit of buying a car is you will actually own it one day, which also means you'll be free of car payments until you decide to buy another one. The car is yours to sell at any time, and you are not locked into any type of fixed ownership period. Also, the insurance premiums are typically lower than if you lease.

As you pay down your car loan, you have the ability to build equity in the vehicle, but this is not always the case. When you purchase a car, your payments reflect the whole cost of the car, usually amortized over a four- to six-year period. But depreciation can take a nasty toll on the value of your car, especially in the first couple of years. As a result, buyers can find themselves in an "upside-down situation," in which the car comes to be worth less than what the buyer stills owes on it at a given time.

For those who have never leased a car, the process can seem confusing and geared more toward business owners, who might deduct the expense, or individuals who simply can't afford car payments. But in reality, there are benefits to leasing a car regardless of your career or income status.

Perhaps the greatest benefit of leasing a car is the lower out-of-pocket costs when acquiring and maintaining the car. Monthly payments are usually lower, and you get the pleasure of owning a new car every few years. With a lease, you are essentially renting the car for a fixed amount of time (typically 36 to 48 months). Therefore, you pay only for the use (depreciation) of the car for that period instead of absorbing the full depreciation cost of the vehicle.

By leasing a car, you always have a car payment because you will never actually own the vehicle. The mileage restrictions of leasing pose another drawback. If you drive a great deal during the year, purchasing a car may be the better choice. Most leases restrict your mile usage to 15,000 miles per year (sometimes 12,000 per year). If you go over your allotted miles, you'll pay anywhere between 10 and 25 cents for every extra mile, depending on your lease agreement and the type of vehicle involved. This penalty can leave you with a fairly large bill to pay at the end of the lease if you rack up a lot of extra miles. Finally, insurers usually charge higher coverage costs for leased vehicles.

Your time horizon is important when considering leasing versus buying; in the short run, leasing is more economical, but in the long run, buying a car is typically better for your wallet. This article will help you make that decision.