How much can you afford to spend on the car? (Remember to calculate the total cost.)
When you lease, you pay only a portion of a vehicle's total value, which is the part of the value that you "use up" during the time you're driving it and this translates into lower monthly payments than buying a vehicle. You have a choice of not making a down payment— a lot of lease offers spread the down payment across the life of the lease. You also pay sales tax only on your monthly payments in most states. And if you are self-employed, you may be able to write off the lease as a business expense deduction come tax time.
But there can be significant financial advantages to buying the car. If you buy the car in cash or once you pay off the loan, you'll be free from making payments. It's your car and you can drive it as often and as much as you'd like without worrying about penalties and mileage limits. Insurance premiums are also typically lower than leasing.
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If your monthly budget is tight, and you take out a car loan, buying a car may not work out for you. Monthly payments are generally higher for a loan than for a lease. You typically make a down payment of 10 to 20 percent, pay sales tax on the full purchase price and pay an interest rate determined by your loan company, based on your credit score. Also consider the rapid depreciation of the value of the car as well as repair bills over the years.
Calculators at Edmunds.com, KBB.com and ConsumerReports.org can help you figure out what your monthly payments would be and the total net cost. These websites can also help you find compare prices on cars, while Wantalease.com and Swapalease.com can help with finding deals on new leases.
—By Sharon Epperson, CNBC personal finance correspondent