Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Leasing vs. buying a car

Dear Dr. Don,
I am car shopping and car dealers have been suggesting that I lease instead of buy my new car. Which is best, buying or leasing?
Please advise,
Lilia Lease

Dear Lilia,
There's not one answer. Like most financial decisions, you need to figure out what's best for you . Bankrate's Should you lease or buy? is a question-driven calculator that helps you sort through some of the issues in making this decision. I've added some details on why these questions are important below :

Are you strapped for cash?

Leasing can require fewer upfront costs than buying. Although some leases require "capital cost reductions" you can get a lease with no down payment, you can capitalize the sales tax over the lease term, plus sales tax (in most states) is only due on that portion of the car's value that you use.

Because you're only paying for the estimated depreciation on the leased vehicle your monthly payments are lower than they would be with an auto loan where you pay off the negotiated price of the car.

Do you "need" a new car every two-three years?

If you find it necessary to get a new car every few years then leasing can make more sense. You pay retail and the residual should be based on an estimate of the car's retail value at lease end. That's an advantage over paying retail and getting wholesale when you trade in a car that you own.

How many miles per year do you drive?

A high mileage lease reduces the residual value of the car, raising your lease payment. Getting a low mileage lease and paying for additional miles just postpones the cost.

Do you keep your car clean?

Normal wear and tear is acceptable when you turn in your leased vehicle, but the leasing company gets to decide what's normal. You may end up losing your security deposit if the car shows excessive wear.

If you've narrowed down what cars you're considering to a few models, get a sense from the dealer how other buyers are financing the car. If 90 percent of them are leasing the vehicle then the dynamics of the used car market for the model will be different than if most were buying the car. The overhang in the used car market when this year and model comes off lease can negatively impact your car's resale value. You're likely to get a better price with the car's residual value coming off lease than you would in trying to sell the car.

Whether you buy or you lease, you're paying for the depreciation on the use of the car for the years and miles spent in the car. Leasing takes some of the guesswork out of what the car will be worth at lease end, but has its own set of headaches in this area. Disposition fees, charges for wear and tear, plus having adequate tread on matching tires can leave you with some unexpected costs at lease end. Here are some other lease considerations:

• Your leased car may have higher insurance requirements than you would normally carry on a vehicle that you own.
• Lessees should carry gap insurance, which pays the difference between what insurance covers and what you owe on your vehicle if your vehicle is either totaled or stolen and not recovered.
• The sales tax paid on a lease in some states is based on full purchase price of car vs. a usage tax based on the sales price minus the residual value.

Where most lessees drop the ball is in not negotiating the purchase price of the car along with the car's residual value. That could be why the dealers are steering you toward a lease. The lease payment is based on the difference between the capitalized cost of the leased vehicle, the residual value, the lease term and the money factor.

Don't agree to a deal without knowing all four variables and running the numbers yourself on a lease calculator. If you can't make the numbers add up then the dealer has some explaining to do. Bankrate has an auto lease payment calculator that can help you figure out the monthly payment based on these costs.

Most consumers would be better off buying a car than leasing it. Most consumers buy their cars rather than lease them. One of the key advantages of leasing is that it allows you to drive a more expensive car than you could otherwise afford to buy. You have to decide if that means that you're living beyond your means or if it's just a lifestyle decision.