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Lease or buy: That's the (car) question

A generation or so ago, options for buying a car were limited.

Consumers either paid cash, took out a loan or, if neither of those worked, opted for a bus pass.

Fast forward to now, when motorists face a new decision: whether to buy or to lease a new car.

The popularity of leasing has rebounded over the past several years. The number of leases in 2014 was the highest in more than a decade, accounting for roughly a quarter of auto-sales activity, according to Kelley Blue Book, the automotive research company.

Whether to buy or lease boils down to individual circumstances and preferences —does a new car every few years meet your financial and personal needs or does the traditional arrangement of buying with the option of keeping the car long term feel more comfortable?

“Leasing isn’t necessarily a bad deal,” said Eric Evarts, senior associate autos editor at Consumer Reports. “But remember — you simply don’t own the car.”

A rebound in leasing

For those who may have never considered it, leasing a car essentially involves paying for use of the vehicle rather than buying it outright.

The formula for what a consumer pays in a lease — which can be rather complicated — depends on how much the vehicle drops in value during the lease period, which generally runs several years. Other factors play into the overall financial commitment of leasing, including money down at the outset of the lease and mileage restrictions.

One reason for the uptick in car leasing is a strong used-car market, said Kelley spokesperson Brenna Robinson. That has boosted automotive residual values — what a car is worth when returned at the end of a lease — reducing consumer leasing costs.

But there are other attractions. With interest rates at historically low levels, many car manufacturers are offering cut-rate leases. As of early March, the Chevrolet Malibu, Ford Taurus and Mazda6 were all available for less than $200 per month.

Rather than slashing monthly rates, other carmakers are dangling leases that require no money down at signing (by contrast, the sub-$200 monthly Ford Taurus lease mandates $3,000-plus upfront, depending on the specific model.)

Then there’s always the traditional allure of leasing — being behind the wheel of the latest model vehicles.

“You’re always driving a new car with the newest features and crash protection safety,” said Joe Wiesenfelder, executive editor of Cars.com. “And you’re driving a car that’s always under warranty.”

To lease or not to lease

With those advantages, why buy?

The reality of leasing is that you’re paying for something that you don’t own, unless you opt to buy the vehicle at the end of the lease period.

“With buying, you’re recouping costs as you drive,” Wiesenfelder said. “When you pay off the loan, you’re essentially driving a car for free.”

Mileage limits are another caveat. Many leases restrict the number of miles you can accumulate during the lease period — often as low as 9,000 a year. Go beyond that and you’re financially liable for every extra mile. Fees can be 25 cents per mile and even more for certain luxury cars.

Credit scores also factor into the situation. The higher your credit score, the easier it is to latch on to some of the sweetest leasing deals. On the other hand, a low score may jeopardize your chances of getting any sort of lease at all.

Generally, a credit score in the neighborhood of 700 and above will command the choicest leases; mid-600s, and you may have some problems. Anything below that makes landing any sort of lease a dicey proposition at best.

Then there’s the potential for a major cash outlay every few years, noted Evarts at Consumer Reports: “To get another car, you have to come up with another few thousand dollars at the beginning of the new lease.”

Some may also feel constrained from a cosmetic standpoint. While minor changes to the car that can be reversed before you turn it in are probably permissible —such as tires — forget about making major alterations to bodywork or the interior.

How to choose

On one level, deciding between buying and leasing comes down to a relatively easy answer. If you tend to hold on to a car for long time — more than just a few years — go with buying a vehicle outright. That gives you the option of simply driving it into the ground or trying to sell it while it’s still worth something.

“The obvious advantage to financing a car is you will be its only owner,” said Alishan Patel of the website Global Cars Brands. “You’ll do whatever you want with it and, therefore, you’ll be able to sell it after you’ve finished paying for it.”

Buying is a smart call if you rack up the miles. That means a car owner who commutes 50 miles a day doesn’t have to fret about watching money tick away once the mileage limitations of leasing kick in.

“Buying makes sense if you’re a bit rough on a car and aren’t afraid of repairs and maintenance,” added Wiesenfelder.

But that doesn’t make buying a slam dunk. Leasing can be ideal for drivers whose profession benefits from an attractive, up-to-date car, such as a real estate agent who ferries clients around town. That can mean not only a shiny new ride every few years but also tax-deductible lease payments if the cost is directly related to business.

Leasing may also be the answer for drivers with little or no upfront money. While lenders may require upward of 20 percent down on a purchase price, leasing no longer necessarily mandates the significant financial commitment at the outset that it once did. Additionally, high-mileage drivers may be able to dicker for more liberal mileage limits prior to signing the lease.

Leasing may also cost less in the long run. When you buy a car outright, you’re paying the full price. Leasing calculates a percentage of a car’s value — what it’s worth at the beginning of the lease and its residual value when you turn it back in. That may prove less expensive than a purchase arrangement, not to mention a better deal than a car that’s bought and paid for in full but the value of which drops more than the owner expected.

“When you buy a car, you have a predictable series of payments and an overall cost,” Wiesenfelder said. “But the X factor is the true depreciation of the value of the car.”

Jeff Wuorio lives in Southern Maine, where he covers personal finance and entrepreneurship. He may be reached at jwuorio@yahoo.com, and his website is at jeffwuorio.com.