The answer is . . . it depends on your unique circumstances. Sometimes leasing a vehicle makes sense if you are able to write off the lease payments as a business expense, or you want to try a couple of vehicles for a few years before deciding on which one to purchase. Another place it may make sense is if you are retired and have budgeted leasing as a part of your living expenses. It allows you to drive a new car every three years and you have the added comfort of knowing it is less likely to break down. However, these are rare exceptions and from a financial viewpoint, leasing rarely makes sense.

Leasing vs. a car loan - the primary difference is leasing offers lower payments than a car loan because there is no principal payment included in your payment. You are only paying for the use of the car, not a piece of the ownership of it. Therefore, you are typically able to get a nicer car with leasing than you could with a car loan . . . but both allow you to get a nicer car than you can probably afford . . . right now. That is probably why it is estimated that approximately 70% of all automobiles are leased, and the average person keeps an automobile 3-4 years when most automobiles last 10 years. It really is an investment in lifestyle, not a practical financial decision.

From a financial perspective, debt should not be used to purchase a depreciating asset (most automobiles). By the time you make all the payments (let's say 5 years), your automobile is worth 3/4 to 1/2 of its original value. How does that make sense? An example might help. Say you purchase a $20,000 automobile and put $5,000 down. You get a car loan for $15,000 over 5 years at 10%. Your payments would be approximately $320 per month. Seems very affordable. However, consider the cost . . . you will pay in excess of $4,200 in interest! This means you have paid $24,200 for an automobile that is probably worth $12,000 in five years. Note that this does not include the opportunity cost you have lost by not investing in an appreciating asset like a diversified investment portfolio.

My suggestion is to purchase a pre-owned automobile that you can afford right now. As with all financial planning, set your goal on what type of automobile you want, by when, and start saving towards it. When the time comes, there is nothing more comforting than to pay for a car cash, walk away and know it is yours. If you are currently in a auto loan, I recommend you continue to pay it off as soon as possible. When you have finished paying it off, continue making a loan payment . . . into a "next car purchase" account. Commit to keeping your current automobile (within reason, of course) until you have accumulated the necessary funds to purchase your next vehicle outright.