Carrie Schwab Pomerantz

Dear Carrie: I've been out of school for just under a year and have a nice steady job. I need a new car, but I don't know if I should buy or lease. I'm earning a decent income, but I don't have much saved. Your advice, please? --A Reader

Dear Reader: This is a good question for someone in your situation -- or for anyone looking to buy a car. And actually there are three car-buying choices: buy outright, buy over time or lease. Buying a quality used car outright and driving it for many years is probably the most cost effective over the long run. However, the need for a large amount of cash upfront makes that impractical for many people.

The problem with leasing or buying over time is that you end up financing (that is, paying interest on) a depreciating asset. That said, these two options do give you the chance to get on the road with less of an initial financial commitment. However, there's more to consider than your cash outlay when deciding whether buying or leasing is the better choice.

WHEN A LEASE MAKES SENSE

The biggest advantage to leasing a car is that it will initially cost you less. There are plenty of low- and no-down-payment deals out there. On top of that, monthly payments are usually lower than if you financed the same car. That's because lease payments aren't based on the value of the car, but rather on the depreciation of the car over the time of the lease. So leasing a lower cost car could be quite economical, especially in the short run.

For this reason, a lease might make sense if you think you'll be in a better position to buy in a couple of years. Most leases are for two to four years. At the end of the lease, you simply turn the car back in and either purchase or lease a different one. (This also makes leasing attractive for people who know that they will want a new car every few years.) One caveat is that the car must be kept in excellent condition or you may pay a penalty.

If you use your car for business, there's another plus. You may be able to write most of your lease payments off your taxes.

THE FLIPSIDE

While all this sounds good so far, there are some disadvantages that you should consider. First, leasing is kind of like paying rent. At the end of the lease, you don't own anything. Beyond that, leases are restrictive. There is a mileage limitation, usually 12,000-15,000 miles per year. Drive more and you'll have to pay extra at the end of the lease. Also, you're pretty much locked into the time frame. If your life circumstances change, it can be very costly to get out of a lease early. (On the other hand, though, you will likely be able to extend your lease if you want to keep the car longer.)


Carrie Schwab Pomerantz

Carrie Schwab Pomerantz is a Motley Fool contributor.

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