The leasing company initially places a value on the car ("capitalised cost"), and also estimates the car's value at the end of the lease ("residual value"). The diference between the two is expected depreciation of the car over the lease term .the lesee is,in effect,loaned the capitalised cost.

Monthly lease payments include interest,plus enough principal to pay the loan down to the residual value "pays off" the loan when the car is returned at the end of lease.

When you understand the inner working of a lease,you see that there are three steps to driving a hard lease bargain:

• Minimize the capitalised cost.
• Maximize the residual value.
• Minimize the interest rate.

Leasing companies often add other charges,such as capitalised cost reduction payments, acquisition fees,disposition fees,etc.If these cannot be avoided,factor them into stated lease payments when evaluating competing deals.Also watch out for excess mileage charges -they can hammer lessees who put many miles on their cars.Finally, expect to be hit with a penalty if your car is returned in substandard condition .

Manufacturers sometimes offer favourable subsidized leases to push certain models You can identify attractive leases by looking at the three factors above,as well as any additional charges.

In terms of monthly payments, leasing actually appears less expensive than buying, because lease payments cover only depreciation plus interest .When you buy a car and take out a loan , payments cover its entire cost plus interest.Of course , in return for those higher payments, you wind up owning the car at the end of the loan term.

If your car will be used for business, you should also evaluate the tax implications of buying versus leasing .

If you buy a car costing $15,300 or less in 1996, you can depreciate it according to the general rules.For cars costing more than $15,300, annual depreciation deductions are limited as follows:

These amounts area reduced proportionately if your car is not used exclusively for business.

If you lease a car, you can deduct the business pecentage of your lease payments. If you enter into a competitive lease for a car costing $15,500 or less, the tax outcome should be roughly the same as if you bought that car and depreciated it. However, for cars worth more than $15,500 when leased in 1996,deductions are reduced by IRS "add-backs" The add-backs increase with the car's value to simulate the depreciation limits on cars that have been purchased.However, variations in lease terms mane the add-backs rarely achieve perfect tax equality between leasing and buying.

The skimpy depreciation allowances for purchased cars can make leasing slightly more attractive for upscale vehicles.Again, you must negotiate a favourable lease, or any slight tax benefit will be washed away by excessive payments.

Leasing doesn't offer inherent advantages over buying.However if you trade in frequently, take care of your cars, don't incur excessive mileage, and want lower monthly payments, leasing might make sense- if you get a good deal.

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