The lowdown on leasing.

Leasing is in. With auto lease rates at about the lowest they have ever been, people who never dreamed of doing so are leasing, rather than buying, cars in unprecedented numbers.

What makes leasing so hot now is that auto dealers and manufacturers, anxious to get out of the recession doldrums, are granting bigger discounts on leases.

For the most part, the decision whether to lease or buy is based on the bottom line: Is it cheaper to buy or to lease? The answer depends on several factors, not the least of which are whether the vehicle is to be used exclusively for business and whether it will be owned by an individual or a business. Here are strategies to follow when shopping for a lease and some potholes to avoid in the process. (See "Taxwise Driving: Deducting Auto Expenses," page 52.)

First, some financial facts: If you plan to keep your old buggy for more than five years, it's almost always cheaper to buy than to lease. But for those who trade in after three or four years, a little figuring is necessary to quantify the difference. The calculations are a bit complicated, but there is software that does the job quickly and effectively--for example, Expert Lease, which is published by Chart Software and available at most software retailers.

On a typical four-year lease, expect to pay between 22% and 28% of the car's retail value a year. For a three-year lease, jack that up to between 26% and 31%. The spread represents differences in a car's depreciation rate. Because older cars depreciate slower and depreciation constitutes a major leasing cost, the longer the lease, the lower the rate will be. In theory, then--not including discounts--the price of a lease equals the price of a purchase (after calculating the money recouped after a trade-in).

Translated into monthly payments, a three-year lease typically comes to 2.3% of a car's retail price; with a four-year lease it also comes to about 2.3%.

Keep in mind that a lease's terms, like a car's sticker price, are negotiable. Most dealers seek a 15% markup over a car's sticker price, but hard bargaining can whittle that figure down to as low as 2%. Knowing a car's real cost to the dealer gives you effective negotiating leverage. You can get data on dealer costs from Consumer Reports, which maintains an auto price database.

In addition, wise shoppers enter into negotiations with data on the selected model's resale value. Such information is available from several sources: Kelley Blue Book, the Black Book Lease Guide and the National Automobile Dealers Association's Official Used Car Guide.

Lease types. There are two basic kinds of leases: closed-end and open-end. A closed-end lease frequently is called a walk-away lease because the customer often has the option of returning the car after the lease runs out, owing nothing. The customer also can elect to buy the car for a price set when the lease is signed.

An open-end lease usually is slightly less costly than the closed-end lease. The customer always has the option of either buying or returning the car.

The down-payment conundrum: When comparing prices, be aware that when dealers advertise a low monthly lease price, they may be conveniently omitting down-payment requirements. In any case, a down payment always is factored into the monthly payments.

Be aware, too, that as a lessor you are responsible for the maintenance of the car. If you damage it or drive more miles than the amount agreed to in the lease, you will be charged from $.07 to $.10 a mile in penalties.

As a general rule, it's almost always less expensive to arrange your own car insurance than to let the dealer do so. But you should inquire about "gap" insurance, which covers you if the vehicle is stolen or totaled. The policy pays the difference between the car's market value and the amount you otherwise would owe the dealer. (For more information on gap insurance, see "Auto Insurance: The Three Cs," page 42.)

Whether you buy or lease, wear your seat belt.