[CamB]

What Purry said: "Basically your lease payments cover three things; depreciation over the term of lease, interest burden on the undepreciated (lease-end value) and interest burden on the declining depreciation amount."

This is exactly how I understand it. Alternatively, you could ask yourself - "what am comparing the lease to". It is like borrowing the money to buy the car, and making payments which amortise the principal down to the sale price of the car at the end of the lease. You then sell the car at the end of the period and pay back this amount (still owing).

Leasing is therefore a good idea if:

- the sale price is lower under the lease than for a cash purchase (unlikely)
- the interest rate payable under the lease is lower than what you can borrow at from some other source (or if you can't borrow!)
- the lease end price is higher than what you could sell (or trade) the car for privately (also unlikely)

However, there are a couple of other important considerations:

- some leases include maintenance (usually only used by businesses)
- tax considerations --> depends on local laws, basically

The way I look at it, in New Zealand you can't tax deduct any portion of the lease payment as a private individual. I have to assume that the purchase price and the end of lease sale price are the same whether leasing or buying --> therefore the interest rate becomes my only consideration. Therefore, if you are paying an interest rate of 7% under the lease (I dunno what it actually is) and by taking that lease leave yourself with money in the bank (the purchase price of the car) - that money in the bank needs to earn 7% grossed up for tax (say 10%) to get you ahead. You might as well buy the car...

If you have a mortgage, it is an even easier choice - which has the lower interest rate --> the car lease or the mortgage.