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Leasing has become more popular lately as a way of financing a new (and sometimes used) vehicle. At it’s simplest level, it’s similar to financing the same vehicle from a bank, but the way the terms are arranged with the dealer and their lending institution is very different. The end result of a lease is that you give back the car after a predetermined period of time (often 2, 3 or 4 years), and you are financing the difference between the price of the new car, and what it is worth when you return it (the value at the end of the lease is referred to as the ‘residual’).
The advantage of leasing is that you can drive away with a car for what ends up being a lower monthly payment (as you are only financing the difference between the full price and the residual, instead of financing the entire amount), so from a budgeting standpoint you can get a nicer car than you could otherwise afford. If you have your own business (or if you are buying the car for corporate use), a lease can also be attractive because many countries/provinces/states allow you to write off a portion of the lease payment as a business expense, so there could be tax benefits to this approach.
The disadvantage to a lease is that more often than not, you end up paying more in the long run for the same vehicle. When you buy a car outright, you do shoulder a higher payment while you own the car, but you still have the vehicle after a few years, and you can sell it to regain the equity you’ve put in. When you lease the car, you’ve paid into it for years, and then having nothing to show at the end of the lease. The way the numbers work, if you purchased the same vehicle and made payments on it for a number of years, then sold it, you would end up ahead financially – the choice is whether you are willing to trade the longer-term financial advantage to have a nicer car in the interim, and if you are in the position to take advantage of the potential tax advantages, this may be the right option for you.
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