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# Decision time: buy or lease?

OK, you've got your FICO boosted, researched some cars you like and settled on one as your top choice. Arguments can be made either way on whether it's cheaper to buy or lease. It depends on your individual circumstances.

But one thing's for sure: Leasing makes for lower monthly payments and typically no down payment. The reason is simple. Let's say a new Honda Accord LX costs \$24,000. You make a \$3,000 down payment and buy the car; you have to pay off \$21,000 in 48 months at 2.9 percent interest. Using Bankrate's auto loan calculator, you can see that means a monthly payment of \$463.89.

But if you choose to lease the same vehicle -- with the same interest rate and the same down payment -- you don't have to pay off the \$21,000 over four years -- you only pay off the amount the car depreciates over the four years, plus a leasing fee.

#### Leasing example

Here's how it works: An auto lease payment has two parts -- the depreciation payment and the leasing fee. For the depreciation portion, take the same \$21,000 and subtract the residual value, which is the amount the lender predicts the car will be worth at the end of the four years. Let's say that amount is \$10,000. So, with a lease, you'll have to pay \$11,000 (\$21,000 minus \$10,000) over 48 months. That yields a monthly payment of \$229.16. The leasing fee portion involves what's called the "money factor," a form of interest on the total of the purchase price and the residual value. Take the capitalized cost (minus any down payment), add the residual value and then apply the money factor -- in this case 0.0012, which is the approximate equivalent of 2.9 percent. That computes to a leasing fee of \$39.20. Add the depreciation fee to the leasing fee and you'll arrive at the total monthly lease payment of \$266.36.
Cost of Leasing
 Depreciation \$21,000 - \$10,000 48 months: = \$11,000 Per month: = \$229.16 Leasing fee: + \$39.20 per month Total: \$266.36
 Purchase price: \$24,000 Down payment: - \$3,000 48 months @ 2.9% interest: = \$21,000 Total: \$463.89

That's a huge monthly savings -- \$197.53 less than the monthly purchase cost of \$463.89, or about 40 percent less. But keep in mind that at the end of the lease you own nothing. For an easier time making these calculations, try our leasing cost calculator.

When you buy a new car, the value of the car depreciates dramatically as soon as you drive it off the dealer's lot because it immediately becomes a used car. So, if you buy a new car every few years, you would regularly incur big losses on your investment in new cars. By leasing, you avoid this significant loss of value.

If you're still undecided, our calculator can help.

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 Product Rate Change Last week 60 month used car loan 3.19% --0.00 3.19% 48 month used car loan 3.17% 0.01 3.18% 60 month new car loan 3.41% --0.00 3.41%