Should I Pay Cash, Lease or Finance My New Car?


You've found the right car for your needs and your budget; now it's time to find the right way to pay for it. Historically, most people finance their cars, some lease (about 20 percent) and a very few pay with cash.

Each method has advantages and disadvantages, but ultimately choosing the right way to pay for your car depends on the type of car you're getting, how long you want to own it, how much cash you have and your credit score.

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Cash Payment

Paying cash eliminates your interest costs and finance fees, which for typical shoppers can add thousands of dollars to a car's purchase price. When you purchase a car with cash, you can do whatever you like with it for as long as you'd like — something that'll make lessees envious.

Paying cash can make it easier to sell your car if and when you choose to do so. When you get a car loan, the bank holds the title, which can complicate the selling process if you want to change cars before you've finished paying it off.

Paying cash also means you won't have to make payments, which takes it off of your monthly budget. Still, paying cash can lead to other issues.

If you pay cash, you may take a big bite out of your savings, and if a rainy day comes along, you could wind up in financial trouble. Remember also that you're using your hard-earned cash on an asset that will lose value as it ages. Buying a car is hardly ever a great example of wise investing.

Leasing
If you're someone who likes a new car every few years, leasing might be for you.

If you're someone who likes a new car every few years, leasing might be for you.

If you're someone who likes a new car every few years, leasing might be for you.

Leasing is like renting an apartment: Your monthly payments give you rights to drive the car, just as rent gets you a place to live. Unlike an apartment, there's a set time period for how long you'll have use of the car. Auto leasing is available through banks, credit unions, finance companies and even automakers themselves.

With a lease, your car will likely always be under warranty, so any nasty mechanical problems should be covered. Also, monthly lease payments are typically cheaper than monthly payments for a car that you're buying outright.

In addition, lease payments can be deducted from your taxes if you use your car for business more than 50 percent of the time; check with your accountant for details. There are also tax deductions for financing a business vehicle, but they're not as great as lease deductions, especially for more expensive vehicles. That's because you can deduct a certain percentage of your lease payments no matter how high those payments are. Deductions for a financed car have limits.

Experts say that people who lease typically drive away without making a down payment, whereas financing typically requires a 10 percent to 15 percent down payment.

Also, you won't ever have to worry about selling or trading in the car when you're done: Just return it to your dealer.

On the downside, once you return the car you've got no equity left, and you'll have to start over, leasing or buying a new one. Frequently, if you liked your leased vehicle, you can pay off its remaining value, but that can cost a lot.

Leasing companies set your lease payments based on the car's residual value, which is the value that the firm believes your car will have when the lease ends. Those are often higher than what the car is actually worth on the market, experts say, so you should beware.

For many leases, the annual mileage allotment on a leased vehicle is typically limited to a range of 10,000 to 15,000 miles a year, so make sure you know your driving habits before committing. Exceeding the limit typically results in stiff fines, so if you drive more than 15,000 miles a year leasing probably won't make economic sense.

Additionally, a lease agreement may also require you to carry more than basic car insurance; lessors (like finance companies) usually want you to have a comprehensive policy.

Lease payments allow for basic wear and tear, but if there are any scrapes or excessive wear on your leased vehicle, you'll have to pay for those fixes yourself. If you fail to do so before the lease ends, penalties await you. Leases usually forbid any sort of vehicle modification, so if you're dead set on installing fancy 20-inch wheels or a 1,000-watt stereo, leasing isn't a good option for you.

Financing

Most Americans choose to pay for their car through financing, or making monthly payments for a set number of months. Like leasing, financing is available through credit unions, automakers, banks and financial companies.

The great thing about financing is that you're using someone else's money to pay for your car, freeing up your cash for whatever other needs (or desires) you may have. Unlike a lease, once you've made all of the payments, you own the car for good.

There are even some zero-percent loan deals out there, typically from automakers and their financing arms, that can make financing almost the same as paying with cash.

Of course, the availability of attractive loans depends on your credit rating; the better your score, the higher your chances of getting the best financing terms from a lender. If you have too low a score, typically below 600, you may find it hard to get a loan on terms that you find acceptable.

If you want to buy a new car before you've paid off your old one, your options may be limited, especially if you're upside down on your existing car loan (meaning you owe more than the car is worth). Check with potential lenders to see what's feasible before you search for a car.

Once you've been approved for financing, you should realize that you won't actually own the car until you're done making your payments. If you decide to sell your car while someone else still holds the title, the process can be difficult and will require your creditor's involvement.

Unlike lease deals, where it's common to make no down payment, financing deals often require a substantial down payment: Creditors often ask for 10 percent to 15 percent down.

Financing typically takes more per month out of your budget than leasing does. Remember, though, that unlike a lease you'll still have your car at the end of a financing deal, which is the big, sweet carrot that comes after years of being hit with that awful payment stick. Many lenders are offering longer loan periods as a way to bring monthly payments down; the average new-car loan now exceeds 60 months.

Because any car purchase is a big investment, remember you need to shop around for that perfect payment plan with the right terms.

© Cars.com 5/13/13
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