Cash or Loan? 0% APR or Rebate? Lease or Buy?

new car offersWe frequently see cars being advertised with simultaneous lease and purchase deals.

There might be a cash rebate, a 0% APR loan rate, and a special lease deal being offered at the same time.

You have to choose only one of the offers; you can’t combine them. So which is best?

Let’s examine it from a number of different viewpoints:

- If you know you want to pay cash for your car, accepting a rebate is the obvious choice. Since rebates are funded by the car manufacturer, not the dealer, you should also expect to get some additional discount from the dealer himself. But don’t expect a special discount because you’re paying cash. Dealer’s actually make more money when customers buy with a loan provided by their “captive” finance company. Cash is not king at a car dealer.

- If you’re not sure whether to buy with cash or a 0% loan offer, understand that the total cost of purchase will be exactly the same, either way. Neither has a cost advantage. However, with a 0% APR loan you get to use the car company’s money for free, which means you might want to find better uses for your cash, such as putting it into even a low interest savings account. Sure, you’ll have car payments every month but you’ll also have readily available cash for emergencies or other purposes.

- If you know you want to purchase with a loan, is it better to go with the rebate or 0% APR loan deal? If you need down payment cash, go with the rebate. If the rebate is less than about $2500, you’ll save money with the 0% loan. If the rebate is more than about $2500, go with the rebate. If the 0% loan is only being offered for 36 months or less and the payments are higher than you like, the rebate with a longer loan at standard rates might produce lower payments but with a higher total cost. If you have poor credit, the rebate might be your only choice since you may not qualify for the 0% loan.

- If you’re not sure whether to accept a lease deal or buy with a 0% loan, the lease will always yield lower monthly payments. But don’t lease if you drive more than about 15,000 miles a year. Some lease deals restrict annual mileage to 12,000 or 10,000 miles a year.

- If you often buy your cars with long-term loans and trade long before the loan is paid off, leasing will probably be less expensive and a better option. Paying off car loans early (by selling or trading) increases your effective loan interest rate tremendously, and you’re likely to be “upside down” on the loan balance. Leasing eliminates those problems, assuming you lease for about 36-39 months and don’t end the lease early.

- If you have decided to lease but are not sure whether to accept a special promotional lease deal on a car model that is not exactly your first choice, or go with a standard lease on exactly the car you want, the special lease will nearly always be the better deal, even if the monthly payment is higher. This is because car manufacturers create lease deals by dicounting price, reducing money factor, and increasing residual value, all of which creates low monthly payments. Customers can only negotiate price with a standard lease.

- If you are trying to decide between leasing and buying when there are no special offers on the car you want, leasing will always produce lower monthly payments. However, don’t lease if you like to keep your cars until the wheels fall off, or if you drive more than about 15,000 miles per year, or if you think you might want to end the lease early. If you trade your cars often, leasing may be better. In the short term, leasing is less expensive; in the long term buying is less expensive.

Just a reminder: When car companies offer special leases and loan rates, they are looking for “qualified” customers. That is, customers with good credit scores. You should always know your most recent FICO credit score before visiting a dealer to accept such deals. What’s your FICO score? Find out now when you check your credit report for $1 at Experian.com!

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