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Should I pay cash, lease or finance my new car?

Joseph Howard and his wife Brenda checking a

Joseph Howard and his wife Brenda checking a 2012 Jaguar XJ-L model cars at the Jaguar Galpin Motors car dealership in Los Angeles. (Nov. 10, 2011) Photo Credit: AP

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. According to CNW Marketing Research, 70.5 percent of people finance their cars; the rest lease (18.5 percent) or pay up front with cash (11 percent).

Each method has advantages and disadvantages, and the recent financial turmoil on Wall Street has complicated things. Ultimately, though, 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.

Cash payment

"There's nothing that feels better than not paying a car payment every month," said John Ulzheimer, president of Consumer Education for Credit.com.

Paying in cash eliminates the costs of interest and finance fees, said LendingTree.com spokeswoman Allison Vail. 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.

Michael Rubin, financial expert and author of the book "Beyond Paycheck to Paycheck," said paying cash will 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 yours off.

Rubin also pointed out that having no payments to make means no impact on your monthly budget. There are, however, issues with a cash buyout.

"If you pay in cash, make sure you don't totally clean out your savings," Vail said. "You should leave yourself extra money in case of an emergency."

Remember, too, that you're using your hard-earned cash on an asset that will lose value as it ages, Ulzheimer said.

"There's a million other uses for that cash that could make you money," he said.

Leasing

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. Vehicle leasing is available through banks, credit unions, finance companies and automakers.

"Leasing makes sense for people who like to get a new car every few years," Vail said.

With a lease, your car will likely always be under warranty, so any nasty mechanical problems will be covered. Also, according to the Federal Reserve Board, monthly lease payments are usually cheaper than financing.

"You can definitely get into a nicer car for your money," Ulzheimer said.

In addition, lease payments can be deducted from your taxes if you use your car for business more than 50 percent of the time, according to Allstate Leasing. 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, according to Allstate Leasing. Financing deductions have set limits.

According to credit agency Experian, 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, Rubin said: "You just drop off the car at the dealership at the end of the lease" and that's it.

On the downside, once you return the car you've got nothing to show for it and you'll have to start over, leasing or buying a new one. If you liked your leased vehicle, you can pay off its remaining value, but that'll often cost you a lot.

"Residual values on leases are often set higher than what the car is actually worth, so it's not really a good idea," Ulzheimer said. That fact works in the lessee's favor, though, as a lower value at the end of a lease would mean there had been more depreciation, which is what the lessee pays for.

Yearly mileage on a leased vehicle is typically limited to a range of 10,000-15,000 miles a year, so make sure you know your driving habits before committing to lease terms. Exceeding the limit typically results in stiff fines, so if you drive more than 15,000 miles a year leasing doesn't make much economic sense.

According to the Association of Consumer Vehicle Lessors, a lease agreement may also require more than basic car insurance; lessors usually want a comprehensive policy, although that's true for buyers who finance their cars, as well.

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 want to install fancy 20-inch wheels or a 1,000-watt stereo, leasing isn't a good option for you.

Even if you're OK with all the restrictions inherent in leasing, you may have a hard time finding a lease. Many banks and even some car-financing companies have cut back on or eliminated their leasing programs, according to Automotive News.

According to Automotive Lease Guide, if your credit score is fair to poor you may find it "difficult if not impossible" to find a lease. In the past few years, leasing has become a smaller part of the financial landscape; according to Automotive News, at the start of 2008 leasing comprised 31.2 percent of luxury vehicle sales and 18.7 percent of non-luxury sales. By the end of the year it made up only 18.5 percent of luxury vehicle sales and 9.2 percent of non-luxury sales. In 2010, leasing started to pick up again as credit markets have loosened.

Financing

Most Americans choose to pay for their car through financing. Like leasing, financing is available through credit unions, automakers, banks and financial companies.

Ulzheimer said the great thing about financing is that you're using some else's money to pay for your car, freeing up liquidity to buy other big-ticket items. Unlike a lease, once your loan agreement matures, you own the car for good.

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

"Zero percent APR and no-money-down financing is impressive and can't be found anywhere else in the retail marketplace," Rubin said.

Of course, the availability of attractive loans depends on your credit rating; according to CNW Marketing Research, today's average borrower has a credit score of 710, which is relatively high.

Lending to subprime borrowers has fallen off markedly, as lenders have tightened requirements. According to Automotive News, if your credit score is less than 600 you'll probably be offered a shorter loan term at a higher interest rate -- if you get approved at all.

If you want to buy a new car before paying off your old one, in what's called rollover financing, your options will also be limited, especially if you're upside down on your existing car loan, meaning you owe more than the car is worth. Rollover and no-money-down deals are coming to an end, Ulzheimer said.

"Rollovers are essentially unsecured loans with secured loan terms," he said, and given the current financial climate, creditors are no longer taking such risks. If you're interested in upgrading your car often so as to always have the latest models, financing isn't a good option.

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 usually requires your creditor's involvement.

Unlike lease deals, where it's common to make no down payment, financing deals often require a substantial down payment. If you can't qualify for a no-money-down deal, creditors often ask for 15 percent down, said Art Spinella, general manager of CNW Marketing Research.

Financing typically costs more per month than leasing, Rubin said, so financing will have a greater impact on your monthly budget than will leasing or a cash purchase. Remember, though, that unlike a lease you'll still have your car at the end of a financing deal. Because of the scarcity of lease deals these days, many lenders are offering longer loan periods as a way to bring monthly payments down to amounts customers have experienced with leases.

"Unlike minor purchases, any expense that leads to a series of monthly payments requires your careful consideration," Rubin said, so remember to shop around for that perfect payment plan with the right terms and rate.

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