If you purchase a car for cash you take outright title to the car. You do not have any further payments. If you finance the car, you still buy the car but the financing company has title until you make all the required payments and then you own the car. If you lease a car, you are basically renting the car. You have an obligation to make all the lease payments and then return the car to the "owner" of the car who is not you. So far, so good?

In the following analysis, we assume the continual costs of maintenance including tags, inspections, fuel and repairs are not a factor. Even if you lease a car you are still responsible for all these items. (Who are we kidding, would you care for a leased car as well as one you own?) We also assume that if you lease a car, there are two alternatives to consider. The first is that you purchase the leased vehicle at the end of the lease term for the residual value. The second is that if you do not purchase the leased vehicle, you continue to lease another vehicle at the same lease payment up until a period equal to when you would have to purchase a new car had you purchased in the first place. (Wow, my grammar checker just flagged that sentence.) Think about it. If you compared buying a car to just the lease payments, the lease will always be better because there is an assumed residual value where you bear no risk. (In theory.) Also, assuming the lease term equaled the financing term of a purchased vehicle, you could go to work at the end of the financing term because you own the car. You would not if you leased because you would give up the car. Therefore, in order to compare "apples to apples" you have to assume you lease a car for a term equal to the time you would keep a purchased car.

The analysis includes an earnings rate. This is your opportunity cost rate. We assume that this rate would equal your financing rate and financing is equal to paying cash. However, for leasing, in theory you could do better things with your money rather than tying the cash up in a car. You could invest it or blow it. Either way, you have an opportunity cost. This rate, when applied to the analysis, discounts all the numbers to the present so you compare all three alternatives. The alternative with the lowest present value is the "best" alternative.

We would be interested in finding out what you conclude. We seem to find that if you would "normally" keep a car eight years and use an earnings rate of 8%, all options are pretty equal. (You really do not think the car dealers are giving you a good deal, do you?) We are not including any intrinsic benefit of leasing such as the fact that you get a new car every two to three years. This is purely a financial analysis.