Leasing Vs Buying.

It's a common dilemma: lease vs buy, buy vs lease. Leases and purchase loans are two very different methods of automobile financing. Each has it's own benefits and drawbacks. It's not possible to simply say that one is better than the other because, well, it depends ... You must not only look at financial comparisons but also at your own personal priorities - what's important to you.

Let's look first at just how buying and leasing are different. When you buy, you pay for the entire cost of a vehicle. With leasing, you pay for only a portion of the vehicle's cost, which is the part that you "use up" during the time you're driving it.

For example, if you lease a car that costs $20,000.00 and it's value after 24 months is $13,000.00, you have paid only for the $7,000.00 difference (this is called depreciation), plus finance charges. More importantly you have only paid a portion of the taxes (GST and PST)
When you buy, you pay the entire $20,000.0 plus finance charges and all of the taxes (GST and PST) up front.

Lease payments are made up of two parts: a depreciation charge and a finance charge. The payment compensates the car's owner (the leasing company) for loss in value of its asset, as well as interest on the total amount of money they have tied up in the car while you're driving it.

Loan payments also have two parts: a principal charge and a finance charge. The principal charge pays off the vehicle's full purchase price, while the finance charge is interest. However, since all vehicles depreciate in value by the same amount regardless of whether they are leased or bought, part of the loan principal payment should be considered as a depreciation charge, exactly like with leasing - it's money you never get back, even if you sell the vehicle in the future.

The remainder of the loan principal payment goes toward equity. It's what remains of your car's original value at the end of the loan after depreciation has taken its toll. Equity is resale value - what you get back if you sell the vehicle. The longer you own and drive a vehicle, the less equity you have.

So, buying a car with a loan is essentially like putting money into a declining-value savings account - you never get out as much as you put in. A portion of every payment you make is lost to depreciation. A terrible investment by any measure.
Leasing, then, is similar to buying, but without the "savings account." You only pay for what you use. It's true that you'll own nothing at the end of a lease, but what you don't own is the same part of the car - the depreciated part - that a buyer too doesn't own at the end of his loan.

With leasing, you at least have the option of putting your monthly payment savings into more productive investments, such as mutual funds or stocks that have the possibility of increasing in value. In fact, many experts encourage this practice as one of the benefits of leasing, though most people will typically find other uses for the money they save by leasing - such as paying the rent or buying groceries.
Does this mean that leasing is always a better way to go? Not necessarily.

Which is better?

Every magazine article or book you'll ever read about leasing addresses the question, "Is it better to lease or to buy?". Although the authors of those writings often go into great detail and rigorous financial analysis, often providing lease-buy calculators, the answers always come out the same - though frequently presented with a biased slant that reflects the author's particular viewpoint.

Let's simplify the answers and summarize them here:

1. The monthly cost of leasing is always significantly less than the cost of buying.
For the same car, same price, same term, and same down payment, monthly lease expenses will always be 30%-60% lower than loan payments. That's a fact.

2. The total short-term cost of leasing is about the same as the cost of buying, assuming the buyer sells his vehicle.
The overall cost of leasing compared to buying, over the same lease/loan term, is approximately the same, more or less, assuming the buyer sells his vehicle at the end of the loan. Comparisons sometimes show buying to cost a little less due to fewer fees and the assumption that a purchased vehicle will return full market value if it were sold or traded (often a bad assumption). However, if you factor in the benefits of wisely investing your monthly lease savings, the net cost of leasing can easily be less than buying.

3. The total long-term cost of leasing is always more than the cost of buying, assuming the buyer keeps her vehicle.
If a buyer keeps her car after her loan has been paid off and drives it for many more years, she spreads her cost over a longer term. It doesn't take rocket science to figure out that the cost of leasing five different cars over a period of ten years is greater than the cost of buying one car and keeping it for ten years. If long-term financial benefits were your only interests in acquiring a new car, you would always choose to buy, preferably with hard cash, and keep the car for many years.

So, which is better, lease or buy? It depends on what's most important to you. If you want lower monthly costs and like a driving a new car every two or three years, but are willing to pay more over the long haul to get those benefits, then lease. If you want to be able to pay off your vehicle, be payment-free for a while, and drive it for a long time - but are willing to make higher payments for four or five years - then you should buy.