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March 27, 2013

The pros and cons of leasing a car

If you've paid attention to car commercials on television lately, you may have noticed there are some jaw-dropping deals on auto leases – or so it seems. Some sharp entry-level sedans carry monthly payments as low as $150.

But the first rule of shopping for any kind of car, whether for purchase or for lease, is to forget the monthly payment and instead, focus on the purchase price, interest rate and the length of time you'll be making payments.

“Unfortunately, I think most people define affordability by how much the monthly payment is,” said Mike Sante, managing editor of Interest.com. A lot of people think, if the check doesn't bounce I must be able to afford it.”

Sante and his team conducted a study in February and concluded that most consumers can't afford most new cars. And that's part of the seductive appeal of an auto lease – it looks much cheaper than buying. The monthly payment is lower and so is the down payment.

Paying for just part of the car

That's because, with a lease, you aren't paying for the entire car, just the part that you're using. In a typical lease, you surrender the car at the end of three years. The car still has a lot of its value left, which the lessor recoups when they sell the vehicle on the used-car market. You are only paying for the first three years worth of value.

But are you overpaying? That's the question you must answer before deciding whether leasing a vehicle is right for you. Often, it depends on the kind of vehicle and the price.

Let's look at two different vehicles and approach them from both a lease and sale perspective.

Before going any farther, let's get business leasing out of the way. Many businesses, both large and small, lease their vehicles because they can deduct the entire lease payment from their taxes. We're ignoring that in this discussion, which is intended striclty for consumers.

A pricey ride

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