When faced with ever-increasing prices that seem to have skyrocketed since your last new vehicle purchase, it may be hard to determine what your monthly budget will permit: a $20,000, $25,000, or $30,000 purchase? Factors like big rebates and zero-percent financing have complicated the decisions, often making it difficult to compare vehicles within a segment. Go for the savings now, or pay more for a vehicle that promises greater resale/residual value?

Just when you are getting discouraged, an attractive lease price grabs your attention in one simple, tidy number: $399 a month. As consumers we are programmed to relate to that quite easily. Some quick calculations reveal that the same vehicle would cost a couple hundred more a month, with an additional year of payments, to purchase. So is leasing a good deal and is it for you?

Advertised leases boast outstanding monthly payments in contrast to traditional purchases because you are only paying for limited use of the vehicle - essentially the depreciation plus finance charges during the term. Consider it an extended rental contract. Typical leases run between 24 and 48 months, enabling you to put a new vehicle in your driveway at regular intervals, while always being protected by a manufacturer warranty. You simply drive the vehicle for a while then drop it off at the dealer when you are done and lease another one, right? That's correct, but beware: This leasing cycle may be hard to break since you will not have a trade-in to apply toward a purchase and never have any equity in the car you drive.

It is true that leasing offers the opportunity to drive a vehicle worth more than you could afford to purchase outright. But because vehicles suffer their greatest depreciation hit over the first two years, leasing is destined to be more expensive than purchasing in the long run.

Leases can be negotiated, and comparing a lease versus financing option is a good way to not only understand the costs involved, but determine what the best choice is for you. Knowing dealer holdback and incentives will arm you with powerful ammunition for haggling a more favorable price under either method.

For example, an advertised lease may be dependent on a down payment (aka cap cost reduction) to deliver the juicy monthly price (and keep in mind that the cost doesn't include tax), but that contradicts a real appeal of leasing: getting into a new vehicle for little out-of-pocket cash. The contract can be rewritten to remove that from the drive-away cost, which will already include the security deposit, disposition fee and first payment. Mileage can be a real problem for lessees because the dealer will exact costly penalties for exceeding the maximum allotment. Prepaying for additional miles at a lower rate can save serious money, and the surplus can be refunded.

The traditional buyer who finances has few tricks to reduce their total cost other than to maximize the down payment (thus minimizing interest) and negotiate aggressively. Term length can be adjusted to achieve a favorable monthly payment, but the overall cost increases with every additional month. For example, let’s say a three year loan has a monthly payment of $725 (and is the same payment as the advertised lease); extending the term to 48 months lowers the monthly payment to a more reasonable $630 per month, though it will add to the total cost of acquisition since you’re financing it for longer, reflecting one more year of interest. Buying the vehicle ultimately means more out-of-pocket, but there would still be an asset sitting in the driveway after three years. (Just be careful—if you have bought a car that doesn’t tend to hold its value well over the long term, you may find yourself upside down on the loan if you think you might want to get rid of it before the 48 months are up. The longer the term, the longer it takes to become net positive with the vehicle being worth more, than the amount you financed.)

Stellar lease deals can be found, usually with manufacturer subvention, but buying will likely be more cost-effective in the long run. Which profile below best describes you? This will give you a strong indication of which finance method would best meet your goals. Again, with some significant incentives being offered from automakers, examine each scenario carefully.