You have decided you want a new car. Should you obtain a loan, lease, or pay cash? There are pros and cons for all three methods. You should be able to make an informed choice about what's best for you based on the initial cash outlay, money and operating costs, equity and ownership, and tax and insurance considerations.

PAYING IN CASH
Only about 10% of all automobile purchases are in cash. If you pay for the entire cost of your car with cash up front, it's all yours and you don't owe anyone anything. However, you also don't have that money available for investing, for other uses or in case of an emergency.

INITIAL COSTS
Leasing almost always has one very powerful advantage over a loan: lower initial cash outlay. With leasing there is normally little initial cash required in order to put yourself "in the car." Generally, the better your credit rating, the less cash required at the start of the lease.

Usually you will be asked to provide a refundable security deposit (similar to the kind asked for when renting an apartment), the first and perhaps last monthly payment, and sometimes, at your discretion, a "capitalized cost reduction," or down payment. As with most terms in a lease, these can be structured to meet your needs.

CONTINUING COSTS
When deciding whether to lease or to buy, continuing costs are another factor that should be considered. Continuing costs are all those costs, which are incurred after the initial costs and before the end-of-the-loan or lease costs. Although the monthly or "periodic payment" is usually the biggest portion of continuing expense, it is not the only item you should consider.

Taxes, insurance, repairs, maintenance and operating costs all these items are part of continuing expense whether you buy or lease.

EQUITY & OWNERSHIP
Basically you are renting a car when you lease it. At the end of the lease, you will have no equity or ownership of the vehicle. When you are gradually building equity as you pay it off. However, you should consider the amount of money that you will have to expand over the total period of the loan in order to acquire title to the asset. Even though you will "own" the car after making all the loan payments, in all likelihood the value of the car will be worth much less than the amount that was spent in order to obtain it. And even though an asset, it is a continually depreciating one, losing more and more of its value with each passing day.

TAXES & INSURANCE
When you buy a car in most states you have to pay the sales tax up front in a lump sum. With leasing, you can generally amortize or spread out the sales and rental or use tax over the term of the lease.

If you lease, you may have to change your insurance coverage and your lease contract requires you to do so. Leasing will requires higher limits for insurance coverage, for both public liability and property damage (collision and comprehensive). Leasing may also require a lower deductible on your policy.

Since tax and insurance obligations do vary by state, know which requirements apply to your situation.

OTHER DIFFERENCES
Because of the way leases are structured, the payments can be lower than loan payments. That way you can generally add more options or upgrade to a more expensive model than you can afford with a loan.

Also consider how often you want to drive a new car. Leases can have shorter terms than loans, so you can drive a new car every two or three years if that is important to you.

Basic Advantages and Disadvantages