As auto prices and financing costs increase, auto leases, rather than purchases, have been more actively advertised and marketed by the auto industry. Leasing a vehicle is not simply a 'different' way to buy a vehicle - leasing a vehicle means that you are renting the vehicle long-term with specific obligations, benefits and liabilities contained in the lease agreement.

Lease terms are advertised because the low down payment and comparatively low monthly payments make new vehicles affordable but not necessarily the best or most cost effective option.

Before you lease a vehicle, you need to determine if leasing is right for you. Before going car shopping, you should talk to various lenders for an explanation of the differences, including the costs and benefits of both leasing and purchasing the vehicle you select.

Costs of Leasing

The initial payment on a lease can be less than the down payment required to buy the same vehicle. When you lease a car, you are really paying rent for its use. However, costs during the time you have the car may turn out to be about the same under a lease as buying on credit.

Know the Difference

The basic difference between leasing and purchase is that at the end of the lease you will not own the vehicle unless you exercise the purchase option. To use the purchase option you will pay an additional amount at the end of the lease which is called the residual value. The residual value can be a very substantial portion of the value of the vehicle.

By law, the residual value, or the method for calculating the amount, must be disclosed before you sign a lease. This residual value for the option to purchase at the end of the lease may be less or more than the total of all the previous lease payments; the residual value may be more or less than the vehicle is worth. If you do not want the vehicle you will not be required to buy it - you just turn it in according to the terms of the lease.