With
leasing, you only pay for the portion of a vehicle's original value that you
"use up," which is the amount by which it depreciates. For example, if you
lease a car that costs $20,000 that is worth $13,000 after 24 months, you
only pay for the $7,000 difference, plus interest. When you buy, you pay for
the entire car.
This is fundamentally
why leasing offers significantly lower monthly payments than buying.
Loan payments also have
two parts: a principal charge and a finance charge. The principal charge pays
off the vehicle's original purchase price, while the finance charge is interest.
However, since all vehicles depreciate the same amount regardless of whether
they are leased or bought, part of the principal 
payment
should be considered as a depreciation payment, exactly like leasing-it's
money you never get back.
The remainder of the principal
payment goes toward equity. Equity is resale value. It's what remains your
car's original value at the end of the loan after depreciation has taken its
toll.
So, buying a car with
a loan is essentially like putting money into a declining-value savings account-you
never get out as much as you put in. A terrible investment by an measure.
Leasing, then, is almost
like buying, but without the "savings account." You only pay for what you
use. It's true that you own nothing at the end of a lease, but what you don't
own is the same part of the car-the depreciated part-that a buyer too doesn't
own at the end of his loan.
With leasing, you at least
have the option of putting your monthly payment savings into more productive
investments, such as mutual funds or stocks that have the possibility of increasing
in value. In fact, many experts encourage this practice as one of the benefits
of leasing, though most people will typically find other uses for the money
they save by leasing-such as paying the mortgage.
Does this mean that leasing
is always a better way to go? Not necessarily. Read
on.
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