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Should you buy or lease your next car?

Paul Mulcahy checks out the rear seat

Paul Mulcahy checks out the rear seat of a new Chrysler car as he shops for a car on the sales lot of the Hollywood Chrysler Jeep dealership on October 27, 2011 in Hollywood, Florida. Credit: Getty

So, you're considering leasing your next vehicle.

Sure, approximately 80 percent of auto consumers either pay cash or finance their purchase with a loan, but you're considering joining the other one-fifth of intrepid consumers willing to forgo ownership for a new set of wheels and the short-term benefits that leasing provides.

Maybe you're self-employed and can write off your leasing payment as a business expense. Or maybe you're trying to get into a luxury model for less upfront cash. Or maybe you demand the latest safety and technology innovations and don't want to be saddled with a 60-month loan term. Or maybe you just like driving a new car every couple years.

"The question you have to ask yourself is, 'Is there a special reason I need a new car every few years? " says Art Spinella, president of CNW Marketing Research in Bandon, Ore. "For most consumers, the answer is no."

But maybe you're in the minority. Maybe your answer is yes.

It's true that leasing has diminished in popularity as automakers have offered low-interest financing and cash-back offers to buyers. Leasing rates dropped from about 29 percent of retail car sales in January 2001 to around 21 percent in 2008.

But as automakers try to stem depreciation caused by falling residuals - the future value of a good - automakers have begun to readjust their leasing programs. Chrysler Financial will discontinue offering new lease products in the United States, effective Aug 1, 2008. GM has also dramatically cut back on its leasing incentives.

Many analysts think this sudden shift has more to do with bad timing than an actual issue with leasing. "This is more about a market segment falling apart," says Tarry Shebesta, president of Automobile Consumer Services. That segment being the large SUV market, which is commonly associated with fuel inefficiency and is extremely unpopular when gasoline is at $4 a gallon or higher.

As residuals are readjusted, so will the cost of leasing a vehicle. "Affordability is clearly [the] key," says Paul Taylor, chief economist for the National Automobile Dealers Association. When interest rates are low, lease payments aren't that much lower than financing. But "when rates start going up, leasing will become more popular again," he says.

Lower payments and higher interest rates aren't the only reasons to lease - leasing also offers purchasing flexibility, according to Michael Kranitz, creator of LeaseWizard.com software and author of "Look Before You Lease: Secrets to Smart Vehicle Leasing." Leasing allows consumers to defer the purchasing decision while they're using the car. "In the meantime, I have a three-year test drive," Kranitz says.

Lessees also don't have to worry about owning a depreciating asset - as the automakers know all to well - or dealing with hefty repair bills. At the end of the lease term - assuming they've kept the car in good condition and stayed within prescribed mileage limits - they can simply turn in the car and walk away.

Of course, those benefits have a price.

"Leasing is convenient, and . . . you're going to pay for that convenience," says George Pipas, manager of sales analysis for Ford Motor Co., which was one of the main proponents of leasing in the 1980s and '90s. "In the first two years, it might be cheaper," he adds. "But then guess what? You're going to have to do something." Namely, buy or lease another car.

Maybe that's the reason approximately 80 percent of consumers buy rather than lease. They also may be trying to build equity, or they simply like the comfort of driving the same car for a number of years. Or they could be trying to avoid leasing's cycle of endless car payments, mileage limits and annoying wear-and-tear considerations.

But that's not you. Not yet, anyway. You don't want to worry about maintenance bills when your payments are up. You drive your car for business. You have good credit. Or you simply love having the latest set of wheels.

It's possible, then, that leasing is for you. And that's fine - just make sure you understand the process.

© 2010, Cars.com

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