How to Pay for a New Car

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“A New Car!” The only way to properly utter that exclamation is in your best game show host voice. Buying a new car is always exciting, and really, nothing beats that new car smell. Paying for the new addition to your family is another matter entirely — how will you pay for ‘the new baby?’

When it comes to paying for a new car, there are basically three options. You can pay cash, lease, or finance your new ride. Historically, most people finance their cars, about 20 percent lease, and a very few pay cash. How you should pay will ultimately depend on the type of car you’re getting, how long you want to own it, your credit score, and how much cash you have available.

All three of these options involve a certain amount of up front capital, from the full purchase price to a modest down payment. When considering assets to use for these payment options, many people tend to overlook the possibility of selling their old fine jewelry or valuable timepiece. For example, Diamond Estate Jewelry Buyers is one company that has taught thousands of people how to sell a Rolex watch, diamond engagement ring, or expensive estate jewelry to fund everything from a 20% down payment to the full purchase price of a new vehicle. 

Paying Cash for Your New Car

Paying cash for your new car sounds like a great way to go, assuming you have the cash on hand. You can simply write a check and drive your new car off the lot. You’ll have no lien, and no monthly payments. Most importantly, you’ll have no financing charges. Interest rates on car loans can vary greatly, and may add thousands of dollars to the ultimate purchase price.

Paying cash also allows you the flexibility of doing whatever you like with your new car — something that will make people who lease their vehicle green with envy. And you can sell your new car whenever you choose to do so. If the bank holds the title to your car, as they will if you take out a loan, the process of selling your car before it is paid off can get much more complicated than if you own your car outright.

By paying cash for your new car and eliminating monthly payments, you will have more money available in your monthly budget. But you should carefully consider how big a bite paying cash for your new car would take out of your savings. If a rainy day comes, you will be less prepared and could wind up in financial trouble. And you should also remember that your car is an asset that will lose value as it ages. Your cash could be invested in a variety of ways that might make money. Buying a new car is almost never a good investment strategy.

Leasing Your New Car

Leasing is another option for paying for a new car, and perhaps a good one if you are the kind of person who likes to have a new car every few years. The principle with a lease is much like renting an apartment — your monthly payments give you the right to drive the car, just like paying rent gets you a place to live. Auto leasing is available through banks, credit unions, finance companies, and even the automakers themselves. 

Unlike renting an apartment, there is a set time period for how long you will have your car. Most car leases are two or three years, but some can be as long as six. Since the period of the lease is generally short, your new car will most likely be under warranty, so any mechanical problems will be covered. And you will never need to worry about selling or trading your car. At the end of the lease, you simply return the car to the dealer.

Though you will probably have to come up with some cash up front, your down payment and monthly charges are typically lower with a leased vehicle than one you purchase outright. This fact alone explains why more than half of all luxury cars are leased — you can simply get more car for the same amount of money.

Another benefit of leasing is that lease payments can be deducted from your taxes if you use your car for business more than 50 % of the time.

Leasing a new vehicle is not without its drawbacks. The biggest issue is equity: once you return your car, you’ll have to buy or lease another vehicle with nothing to sell or trade in. Often you can pay off the remaining value and keep your leased vehicle, but that can be quite expensive.    

Leases also come with mileage limits, usually 10,000 to 15,000 miles per year. You should know your driving habits before considering leasing a new car. If you exceed the mileage limits of the lease you could be in for a rude awakening. Penalties for additional mileage can be as much as 25 cents per mile.                                

Additionally, lease payment plans allow for basic wear and tear, but any excessive scrapes or damage will be your responsibility when you return the vehicle. If you fail to fix the damage before the end of the lease, you will incur penalties. And most leases forbid any vehicle modifications, so you can’t get that 1,000 watt stereo or fancy 20 inch wheels.

Financing Your New Car

Most people choose to buy new cars through financing. Like leasing, financing is available through banks, credit unions, and automakers. You simply borrow the money and make monthly payments to the lender, and once you’ve made all the payments, you own the car outright.

Of course, borrowing that money comes at a price, and that price can vary greatly, depending on your credit score. Though some dealers advertise zero percent financing, those sweet deals are only available to those with near perfect credit.

Unlike leasing, where down payments can be extremely low, most new car financing requires 10 to 15 percent down payment. And remember that you don’t actually own the car until all the payments are made. Selling your car before you pay it off, especially if you are upside down (meaning you owe more than your car is worth), can be an issue.

Financing your new vehicle typically takes more out of your monthly budget than leasing, but remember that when you are done making payments, you will still have your car. And many lenders offer extended financing options that bring your monthly payment down. The average new car loan is now over 60 months.

Regardless of what option you choose for paying for your new car, consider all your options carefully, and don’t forget to think about all of your assets. That old Rolex Uncle Dave left you might be just the car you’re looking for.

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