Leases and loans are simply two different methods of automobile financing. One finances the use of a vehicle; the other finances the purchase of a vehicle. Each has its own benefits and drawbacks.

It's not possible to simply say that one is always better than the other because it depends on your own particular situation and preferences.

You must not only look at the financial comparisons but also at your own personal priorities what's important to you.

Is having a new vehicle every two or three years with no major repair risk more important than long-term cost? Are long term cost savings more important than lower monthly payments? Is ownership more important than low up-front costs and no down payment?

So, making the lease or buy decision is not quite cut and dry. There are some things you need to consider first.

When you buy, you pay for the entire cost of a vehicle, regardless of how many miles you drive it. You typically make a down payment, pay sales tax in cash or roll them into your loan, and pay an interest rate determined by your loan company. You make your first payment a month after you sign your contract.

When you lease, you pay for only a portion of the vehicle's cost, which is the part that you "use up" (depreciation) during the time you're driving it. You have the option of not making a down payment, you pay sales tax only on your monthly payments (in most states), and pay a money factor that is similar to the interest rate on a loan. With leases, you may also pay extra fees and possibly a security deposit that you don't pay when you buy. You make your first payment at the time you sign your contract.

As an example, if you lease a car that costs $20,000, that will have an estimated value of $13,000 after 24 months, you pay for the $7000 difference (depreciation), plus finance charges, plus fees.

When you buy, you pay the entire $20,000, plus finance charges, plus fees.

This is fundamentally why leasing offers significantly lower monthly payments than buying.