The Money Question: Buying or Leasing a Car

The Money Question: Buying or Leasing a Car

Answer: The answer mostly, but not entirely, boils down to how long you're planning to keep your new car. I've had my Pontiac Sunfire convertible for 17 years -- and have actually held on to it for open-air weekend drives even though I bought a new sedan a few months ago. Since a lease lasts only a few years, buying made more sense for a car-keeper like me. But here's how to figure out what's best for you.

With a purchase you generally make a down payment (typically around 11 percent of the car price) and then take a four- to six-year loan to pay the remainder. In a report by the car-review website Edmunds.com, a $29,500 car bought with a five-year loan at 4.4 percent interest will likely cost you $52,361 over the span of the loan. That includes a $3,260 down payment, $544 per month in loan payments, $9,641 total for insurance, $4,288 in maintenance and repairs, and $3,076 in taxes and registration fees.

With leasing you typically make a smaller down payment as well as smaller monthly payments for the life of the lease (usually two to three years). For the same $29,500 car, your total five-year costs, based on the two consecutive leases you'd need to cover five years and an interest rate of 2.85 percent (interest is lower on leases), would run $48,838. That includes two $1,364 down payments, monthly payments of $433 on a three-year lease and $476 on a two-year lease, $13,629 total insurance costs (because the cars are new, rates are higher), $2,068 for maintenance and repairs, and $4,310 for taxes and registration fees.

In this example, leasing would save you nearly $2,000 in drive-off costs, thanks to the lower initial down payment, and more than $3,500 over five years. But when a lease ends, the dealership takes the car back (and could potentially hit you with extra fees for wear and tear). If you buy a car, you own the vehicle after the loan is paid, and it's probably still worth about $14,000. You could safely and reliably drive the car for several more years -- without payments -- and then trade it in toward a replacement. So that's a roughly $10,000 net benefit from buying versus leasing.

So why would anyone ever lease? For starters, the up-front costs are low and monthly payments are sometimes as little as half of what you'd spend to buy the same car new, especially if you don't insist on a specific make or model. The competition among auto-leasing companies is fierce and many have special programs that eliminate the down payment altogether, making it extraordinarily affordable to drive a brand-new car off the lot.

Leasing, in other words, is tailor-made for the cash-strapped driver. But there can be other reasons to do it -- if you're going to need the car for just a few years, for example, or because you like to trade in your vehicles every few years to avoid maintenance hassles. And if you're self-employed and drive as part of your job, leasing may offer a significant tax advantage. The per-mile write-off, 56.5 cents in 2013, is the same for a purchase or a lease, but leasing lets you deduct a potentially large portion of the lease payment, whereas with a purchase you write off a lower depreciation amount set by the IRS. (If you clock more than 15,000 miles a year, get a high-mileage lease. It'll raise your monthly payments but it's cheaper than paying the overage fees on a standard-mileage lease.)

If you do decide to lease, the Web is full of suggestions about haggling over the many variables that determine the monthly lease price, such as "capitalized cost" (the price of the car), "cap cost reduction" (usually the amount of the down payment plus the trade-in), "residual value" (the car value at the lease's end), and "APR" (the built-in interest rate). Personally, I think it's unrealistic to try to parse out all these factors, so I recommend a different tack, whether leasing or buying: Ask for an itemized list of all out-of-pocket costs and fees for the exact model and options you want, and then comparison shop at a few local dealers, telling each that you're doing so. You can even do some of that legwork by email, which pits the dealers against one another instead of you. You'll end up getting a good deal without a lot of contentious and stressful negotiation.

Certified financial planner Lynn Ballou is a managing partner at Ballou Plum Wealth Advisors, in Lafayette, California. Her work has appeared in SmartMoney, The New York Times and The Wall Street Journal.