Leasing will allow you smaller monthly payments. In this, you could drive a car that is more expensive than you could afford to buy. This is also how you could save the most money. If you invest every dollar you save monthly by leasing, or even better, use it to pay off higher interest rate debt such as credit cards and personal loans, you will save money over buying. If you are not so financially disciplined (and be realistic in your self-assessment!) then leasing is more expensive in the long run.
When you lease a car, it is not yours. Of course, when you finance, it's still not yours until you've paid off the loan. In a lease, the dealer sells the car to the lessor, who may be a bank, and independent leasing company or finance company. The price to the lessor is called the "capitalized cost" or "gross cap cost". You, in turn, pay the lessor for the right to drive the vehicle during the term of your lease. Your payments are based on the difference between the gross cap value and what it is worth at the end of the lease, or its "residual value". You are still responsible for obtaining insurance and all routine maintenance during the term of your lease.
For example, if you lease a car for that has a residual value of 35%, your payments are calculated based on 65% of the value of the car. In other words, you are paying for the 65% of the car value that depreciates over this time. Cars depreciate the most in the first few years they are on the road. In a lease, you are paying for this depreciation on a car that will not even be yours at the end of this time period. You also pay interest on the entire amount for the lease term. The interest rate is called the 'money factor' because calling it an interest rate would be too easy to understand. If at the end of the lease you wish to buy the car, it will cost you the remaining 35%. If you don't wish to buy it, you simply walk away. Of course, you have to walk away because you no longer have a car to drive.
