As a general rule, there are two primary reasons to do a traditional lease. The first reason is if you like to trade vehicles regularly (2-3 years). A traditional lease provides a set, future floor value for the vehicle and the option to keep any equity above that residual value. This protection is most valuable in the early years of a vehicle’s life when the depreciation varies most. If you’ve been upset with the trade value of a vehicle you own, a traditional lease can cure this issue. The second reason to do a traditional lease is if you have the ability to write off your vehicle for tax purposes. Leasing provides far greater tax advantages for moderate to expensive sedans and other vehicles under 6k pounds GVWR (vehicles over 6k GVWR are probably better served with a purchase or Capital lease). Another minor reason to lease is to lock in future values on hot new model introductions. Leasing also has several “soft” advantages including lower maintenance and repair expenses and headaches (including reducing the likelihood of being stranded) and continually driving a later model vehicle. Some leasing companies promote leasing as a way to buy more car for the same payment. While this is true, it’s not an economical argument for leasing (if so, you could say the same for a seven year loan).
Buying (or leasing with a nominal residual) is the most economical means to pay for a vehicle IF you will drive that car long term (4+ years, the longer the better). Buying is also more flexible than a lease should you want to get out of the vehicle sooner than expected. Early termination of a Traditional lease generally results in more negative equity (lower payments mean a higher payoff) and there is usually a penalty of ½ – 2 payments.
Many people want to purchase so they can have or build equity. This is not necessarily a valid argument; vehicles are an expense, not an investment. The goal is to minimize the expense and having equity in a deteriorating asset does not make it a better asset. Paying cash for a vehicle reduces the negative impact of the deterioration of value by reducing interest expense, but it does not change the direction of asset value from negative to positive. Having equity after, for example, four years when a car loan is involved is less valid, since this equity is primarily a function of the higher payments you’ve made (you’re investing the extra payment into equity). If you trade out in three years (under a five year loan), you probably don’t have any equity anyway.
My recommendation is to focus on the total expense. Ignoring potential tax benefits, there’s no doubt a purchase (or 1-Pay or Amortized lease) will be less expensive than a Traditional lease if you’ll drive the vehicle long term. If you’d like to get a new vehicle on a shorter cycle, consider the Traditional lease. Be realistic with yourself though – many people think they’ll keep a vehicle long term, then trade out frequently, giving up the benefits of both the lease and ownership.