Buying a car is an expensive decision and too often a time of anxiety, particularly if it's the first time you've done it. Deciding on the best type of financing can save money and stress. Paying in cash, taking out a loan, and leasing the car are ways of buying the car that suit the different needs of different customers. Cash avoids the necessity of paying interest, loans allow you to spread out the cost, and leases are easy to manipulate for exchanges.
For Some, Cash Is King
Paying for the entire cost of your car up front using cash is a good choice if you're the type of consumer who wants to own his car outright and wants to avoid paying interest. While the cash payment will be a large lump sum, it will still be less money, in total, than a lease or loan eventually would cost you. The car belongs to you fully from the beginning, with no need for a bank to act as an intermediary.
Loans Can Be Handy
Taking out a loan means that instead of paying for the car all at once, you can spread the pain out in installments. You'll have to pay interest on the loan, so it will cost you more in the long run. Once you've paid the loan off fully, the car is truly yours, just as if you had paid with cash. Until then, however, the bank or other financial services firm that extended you credit has title to the car and can take it back if for some reason you fail to make your payments.
Leasing's Flexibility Serves
Think of a lease as something between a rental agreement and a loan. You make monthly payments for a set time period, but at the end, you return the car to the dealer instead of keeping it. This is a good option for people who want to change cars often, but do not need to own one long term. If you use the leased car for business, the payments may be tax deductible. Your lease agreement may limit the number of miles you can drive without making additional payments at the end of the lease, so it pays to know how much you drive. The dealer generally takes on the costs of maintaining the car. You usually have the option of buying the car at the end of the lease, but this can be expensive.
Choosing the Right Deal
While sometimes there will be special deals that override initial preferences, like zero-interest loans, in general most car customers will be suited to each category of financing based on their goals. If you hate paying interest or just prefer to own your auto outright, paying in cash is probably the way to go. If you need a car now but don't have a large sum of money lying around with which to pay for it, you're probably best suited to a loan. Leases will appeal most to small business owners or other self-employed individuals who can claim their car payments as deductions on their taxes, or who like to get a new car every few years.
Andrew Gellert is a graduate student who has written science, business, finance and economics articles for four years. He was also the editor of his own section of his college's newspaper, "The Cowl," and has published in his undergraduate economics department's newsletter.