Should I Buy or Lease a Car? Or Pay Cash?

By Colin Bird

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. Should I buy or lease a car? 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.

Accord­ing to ALG, 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.

Cash Pay­ment

  • 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.

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.
  • 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.
  • 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.

Financ­ing

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

Col­in Bird is an intern with Cars.com. Vis­it the for more help with cus­tomer financ­ing issues. Read the here.

 

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