Buy or Lease? Depends on How Long You'll Keep the Car

You're at the peak of your career, you smile at your mutual fund statement, and you've begun wondering why you're still driving the car you liked so much when you bought it. Eight years ago.

You want to buy a car.... Or do you?

Buying a car is not your only option these days. It used to be that only businesses gained from auto leasing, but now many individuals, including more and more women, are getting in on the deal.

Carmakers see that incomes haven't kept up with car prices, making it harder to lure buyers to drive new cars off the lot.

So to boost demand and get your return business, manufacturers and dealers are making a lease as appealing as a purchase.

But know this: Leasing a car is like leasing an apartment. When the term ends, you turn over the keys and walk away owing nothing ... and owning nothing.

Whether you should buy or lease your next vehicle depends, ultimately, on you.

How long do you usually keep a car? If the answer is until it falls out from under you, better to buy. But if you get bored with it as soon as the next issue of Road & Track comes out, leasing might be right for you.

Ted Orme of the National Automobile Dealers Association says that if you usually trade in a vehicle every two to three years, and thus are always making car payments, you may find leasing easier on your pocket.

The down payment, the largest initial cost when purchasing a car, is more modest when leasing (your first and last month's payments plus an optional capital reduction, a one-time payment that reduces your monthly payments).

Likewise, loan payments are generally a bigger drain on your monthly cash flow than lease payments.

Tip: Opt for a closed-end lease, where you can walk away from the car at the end of the lease term with no obligation to guaranty its residual (end-of-term) value.

How many miles do you put on your car? That affects a car's value, so the mileage allowance is a key provision. Most leases allow for 12,000 to 15,000 miles a year. If you exceed that, you pay 12 to 15 cents for each extra mile.

That's why you need to evaluate your driving habits. Mr. Orme says if you expect to drive fewer than 10,000 to 12,000 miles a year, you can negotiate a lower allowance in exchange for a lower monthly payment and higher residual value.

Familiarize yourself with lease jargon, such as capitalized cost (purchase price) and money factor (interest charged). Get this information by shopping around.

Tip: Find out the invoice cost of the car before you negotiate your lease payment. Don't tell the dealer initially that you plan to lease; negotiate a car price first.

Then, when you talk leasing, don't lose sight of that total price - even if the monthly payments are low. You could find yourself in a four to five year lease, missing out on the many benefits of leasing, including the chance to turn in the car before the warranty expires.

* Christy Heady is the author of 'The Complete Idiot's Guide to Making Money on Wall Street.'