If your first priority is to keep your monthly car payments within a tight budget, leasing may be the better option.
"Lease payments are typically less costly than buying a car," says Scott Michalek, a senior financial adviser with Wescott Financial Advisory Group in Philadelphia. "Your monthly payments will be cheaper, but when you walk away at the end of the lease, you won't have anything to show for it."
Michalek says leasing makes sense for someone on a very tight budget, but he warns that breaking a lease can be extremely expensive.
"If you can't afford to make your lease payments or you want to end your lease early because you are relocating, you'll pay a hefty penalty," Michalek says.
Michalek says a lease contract typically will state that all remaining lease payments are due. So, if your lease payment is $300 per month and you want to return the car six months early, you will owe the remaining $1,800 of lease payments. You'll also be charged an early termination fee, typically $200.
Some dealers may be willing to work with you on reducing these costs, but don't count on it. If you need to terminate your lease, you may want to consider transferring your lease to someone else who's looking for a short-term lease. LeaseTrader.com and Swapalease.com facilitate these types of lease transfers.