Buying a car is one of the bigger purchases that you make. It’s different from other purchases because it’s a depreciating asset so it decreases in value each year.  The worth of the average car decreases by 20% in the first year of ownership. (This is different than a house that is expected to increase over time.)

So it pays to do some research on the best type of car for you and the price that fits your budget. Make sure to include all the other expenses that go along with car ownership such as maintenance, insurance, taxes, gas, and registration. Some will get better gas mileage, cheaper maintenance, or have lower insurance.

If you don’t mind doing some more legwork, also consider a used car.  I bought my first used car a few years and couldn’t be happier. It can be scary because you’re not exactly sure what you’re getting, but the savings is huge and in the end we got a great car.

Assuming you plan to buy a new car and can’t pay for it in cash straight away, you’ll have to decide whether to lease or finance the car.

In general, if you plan to hold on to the car for the long-term or need flexibility with mileage then it’s more economical to buy the car from the beginning.

On the other hand, if you tend to buy a new car every few years or need the flexibility to upgrade in the near future then leasing is the way to go.

Here are the pros, cons, and tips for leasing a car.

Advantages to Leasing

1. The out-pocket costs are smaller when leasing than financing. The down payment is either small or non-existent.
2. The monthly payments will generally be smaller if you lease a car rather than buying and financing the car. You’ll only be paying for the deprecation of the years you’ll be using the car instead of paying for the entire car when financing.
3. A lease is usually easier to get than a car loan.
4. Leasing a new car every three years will keep maintenance costs to a minimum.
5. You’ll be able to trade in the car every three years and have the latest features and technology.

Disadvantages to Leasing

1. Your insurance will often be higher with a leased vehicle.  Make sure to check this number before leasing the car. Also look for gap insurance coverage that will pay the balance of the car if it’s stolen or totaled.
2. You’ll have mileage restrictions so you’ll need to know how much you’re planning on driving before leasing.  If you go over that amount you’ll have a fee and it can be expensive.
3. The terms for an early termination fee can be expensive if you decide to end your lease early or if the car is in an accident.
4. At the end of a lease, you won’t have a car to show for your payments unless you decide to buy.
5. You’ll have to keep the car in good shape otherwise there will be a cost at the end of the lease.

Tips for Leasing a Car

1. Do your homework before you go in. Look over the jargon that’s used when you lease a car so you can negotiate effectively.
2. Act as if you’re buying the car.  Don’t just look at the monthly cost; look at the residual value. This is the pre-determined estimate of the car’s value and the buyout price. There’s a chance you’ll want to buy the car at the end of the lease so you want to make sure this number is competitive.
3. Be on the lookout for added fees such as acquisition or origination fee and disposition fee. These can often be negotiated down or eliminated.

 Helpful Websites and Articles

1. www.edmonds.com has information on buying used and new cars. Also check out the article on comparing the costs of buying and leasing.
2. A personal take at nytimes.com on what to expect when negotiating a lease.