Is leasing a good option for your next car?

If you're in the market for a new car, you're probably debating how you'll pay for the vehicle. If you have enough cash set aside, you could just buy the car from the dealer or private seller outright. But if you don't, another consideration is to look at loan or leasing options.

Leasing is a very popular car buying option for many shoppers. In fact, leasing accounted for 21 percent of new car sales in March 2011, according to LeaseTrader.com.

One reason there was such an increase in leasing is because it allows drivers to get a new vehicle every few years. And if you are a person who likes to keep up with the latest automobile trends, then leasing may be a lot less expensive investment overall compared to buying a car outright.

Leasing also can be a cheaper option, with lower monthly payments, and less cash needed up front.

But because you don't own the vehicle, leasing could cause problems. Before you sign a lease agreement, double check the mileage limitations, the length of the lease and what cost taxes and fees will add to the advertised monthly lease price. Make sure you know what kind of mileage you anticipate driving each year, because if you exceed the agreed-upon mileage, you'll probably end up paying hefty fines.

And Edmunds.com strongly recommends not signing a lease agreement longer than three years. The reason for this is because you may be putting maintenance money into a car that might not be covered by a warranty any more, and that you don't actually own.

Also check to make sure the lease agreement comes with some sort of auto insurance coverage. This is to protect you in case the car is totaled or damaged in an accident. Your regular insurance company, or the lease agreement company, could provide you with gap insurance. Gap insurance typically covers you for any remaining costs after your regular insurance money has been accounted for, up to the market value of your vehicle prior to the accident.

Many people who begin leasing a car also review the option to buy the lease out after several years. This means you get to spend two to three years "test driving" the car. While this option might not be the cheapest overall option compared to buying the car outright, it does allow you to spread payments for the vehicle out over many years.