When leasing a car first became popular in the '80s, it was a logical enough proposition with simple pluses and minuses. Just like renting anything else, leasing wasn't the most economical way to own something long-term. Factors such as restrictive mileage limitations (and hefty penalties thereafter) and carefully calculated residual values made buying the car at the end of the lease downright foolish. But it was a way to drive the latest expensive machines for a relatively low monthly payment, which is probably why leasing became standard operating procedure for people who placed more importance on keeping up with the Joneses than they did on economic efficiency or long-term ownership. Bottom line, leasing was great if you were a clean person who rarely drove, but if you were in it for the long haul and not so concerned with having the latest, greatest thing, buying was the best option. But all of that has changed in this unpredictable economy. For the first time in history, it actually might be a better time to lease than to buy.

Pluses and Minuses of Leasing

To the typical lessee, perhaps the best aspect of a lease was that dealers bought the car back at the end of the term, regardless of its current value or demand. Furthermore, dealers realized it was to their benefit to ensure that these rentals were taken good care of, because after all, they'd own the car at the end of the day. In most cases, when you leased a car, you'd get not only the new-car warranty, but also free maintenance for the duration of the term, which is even more likely today.

Despite the obvious pluses, the downside was simple: You paid for the convenience. At the end of the lease term, it almost always would have been cheaper to buy the car outright and use it over more years, taking advantage of decreased depreciation over time and selling it when you were done. You didn't really think the car dealer was trying to help out little old you, did you?

The Basics of Leasing

For the most part, leasing works the same way today. At the end of the day, you don't own anything, just like the movie you rented from Blockbuster on Friday. But it's really only slightly different than financing an auto purchase. You first negotiate the price of the car (called the "capitalized cost" here). Unlike buying, you'll pay tax only on the leased portion of the car (in most states), as opposed to the entire value of the car.

Your lease payments will be subject to a "money factor," which is like an interest rate. Most dealers will try to keep this a secret, but you'll want to figure out the rate before signing on the dotted line, as you would if you were financing.

Unlike buying, the value of the car at the end of your lease term (called the residual value) is calculated in advance. That's what it'll cost to buy the vehicle, or you can simply give it back. Sometimes, you'll be charged a "turn-in fee," which we'd suggest negotiating out before the start of the lease.

Leasing could mean penalties if you drive too much and, more importantly, if you take poor care of the car. But really, those apply when selling a purchased car anyway — nobody wants a high-mile junker.

Discuss: 
Is leasing a car something you would consider?