It depends upon your circumstances.

By Jim Gorzelany

With financing rates creeping upward and new-vehicle sales sagging, leasing, rather than buying, a car or truck, is becoming popular again. According to the market research firm J.D. Power and Associates, auto leasing is at a four-year high, with leases accounting for at least 21 percent of all transactions (it's considerably higher among luxury cars, where nearly half are leased). This figure is expected to continue rise by at least another 10 percent through 2007.

The basic allure of leasing is that you don't have to pay for or finance the entire cost of a vehicle, just that part of it which you actually "use" for a specific period, typically two or three years. Monthly payments are usually lower, which enables many motorists to drive a better class of vehicle than they could otherwise afford. Lease payments are based on the difference between the vehicle's negotiated transaction price (its "capitalized cost") and what it's estimated to be worth at the end of the lease term (the "residual value"), financed at a particular rate of interest (which may also be called a "lease rate," "lease charge" or "money factor").

Usually your initial cash outlay will be less than a typical down payment. Some leases require only as little as two months' payments in advance to take delivery. However, lease deals that boast particularly low monthly payments will often require you to put additional funds up front in the form of a "capitalized cost reduction," which can run as high as several thousand dollars. Most leases contain an acquisition fee, which ranges from $250 to $450, and a disposition fee, which runs from $300 to $400.

When you lease you avoid the trouble of having to sell or trade-in the vehicle at a later date. If you've become attached to it you can either buy it at the end of the lease for a predetermined price (which may or may not be a good deal, depending on its resale value at the time) or may even be able to lease it again for an additional term as a used model.

Leasing is especially beneficial to those who can claim their car or truck as a business expense, since most leasing charges attributed to business purposes can be deducted. (Be sure to consult a tax advisor if this is the case.)

Unfortunately, leasing is not without its drawbacks. For starters, since you don't own it, you never build any equity in the vehicle that you can use for a down payment on a subsequent purchase. If you want to lease (or buy) another car or truck, you'll have to come up with the preliminary costs all over again. Though monthly expenditures may be lower, actual long-term ownership costs tend to be a bit higher on leases, again because there's no equity involved.

Leases come with strict mileage limitations, usually 12-to-15,000 miles per year. If you exceed the total allowed miles when you return the vehicle, you'll be assessed a penalty that can be as stiff as 10 or even 25 cents a mile. If you take frequent long trips or commute from a great distance you may find yourself owing hundreds or even thousands of dollars in excess-mileage penalties when the lease is up. However, if you know you'll be putting on additional miles, you can usually add them in advance at a discounted rate.

If you tend to be hard on your car or truck, think twice before leasing one. Leased vehicles must be returned in excellent condition, without dents, deep scratches, window cracks or torn upholstery and with all accessories in good working order; otherwise you'll be assessed costly "excessive wear and tear" fees.

If you're uncertain about your financial future, leasing may not be right for you. Once you enter into a lease it's binding for the entire length of the agreement, and is usually difficult or expensive to terminate. If you decide you want to get out of a lease early, the only other options you may have are to lease another vehicle and have the first lease "bought out" as part of the deal, or at the least, be assessed a prohibitively hefty termination fee.

Finally, keep in mind that when you lease a vehicle, just as when you buy one, the cost is negotiable. The lower the transaction price, the lower your lease payments will be. Also, your costs will be lower if you choose a model that has a higher resale value. (Though automakers' financing operations will sometimes subsidize leases on slow-selling models by setting an artificially high residual value.) Consult with the loan department of your bank or a local leasing company to compare new vehicles' residual values.

 
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