by Archie M. Richards, Jr., CFP^®
April 22, 2002

What's the cheapest way to acquire a car: Pay cash, borrow, or lease?

The least expensive method is the one that makes you most aware of your living costs. For most people, this means accumulating the cash first and then buying the car. Paying cash also enables you to negotiate a lower price. If you're just starting a family, amassing a lot of money before buying a car may be impossible. But as soon as you can, use the cash method.

When you've driven a new car out of the dealership, did you hear a thunk? That was the sound of the car's value falling. You can avoid it by buying used cars; they're usually better deals.

Best of all, bypass car dealers and buy used cars from their previous owners. To find them, check newspaper advertisements. Be sure to offer less than the advertised price.

When you're selling your own car, don't trade it in. Trade-ins are often treated as afterthoughts. Instead, advertise for a buyer or take the car to a dealer separately. Concentrate on one transaction at a time and negotiate the best deal on each one.

Okay, you want buy a car from a dealer for cash. Visit several dealers, choose the cars you'd like, but don't buy them. Consult consumerreports.org, autotrader.com, edmunds.com, and kbb.com to educate yourself about values. Then make cash offers substantially less than the posted prices.

Don't allow yourself to feel a strong emotional tug for a car you want. Stay cool. If your low offer isn't accepted initially, stand up and walk out. If you know your values, you're unlikely to make it to the door before the salesman calls out, "Wait a minute!" If he doesn't call out, keep walking and study those values again.

Borrowing is the second best way to acquire a car. A loan against your stock investments provides the lowest interest. But this I don't recommend. No monthly payments are required. You could grow accustomed to this easy source of money and end up borrowing to buy additional stocks. This would put you on the path to big-time losses in the next down market, if not sooner.

Better to borrow money by taking out a home equity loan. The interest is deductible, which is an advantage. But limit the loan's duration to the three or four years you expect to own the car. If the loan runs longer initially, pay extra each month, so that by the time you sell the car, the loan is repaid. Continuing to pay for a car you no longer own puts you behind the eight ball.

If you want the dealer to arrange financing, tell him initially that you're going to pay cash. (All's fair in love, war, and car buying.) After a favorable deal is struck, say you've changed your mind; you'd like to finance after all. The price could rise, but probably remain lower than if you'd declared your intention to borrow from the beginning. (Unless you can keep a poker face, which I myself cannot do, don't try this ploy.)

Avoid zero-percent financing. You'll pay more for the car and probably forfeit the opportunity to receive a rebate.

Leasing is generally the most expensive way to acquire a car. It's enticing, because the down payment and the monthly payments are both low. But leasing often ends up the most expensive method. You're not buying the car; you're renting it. When the lease is up, you'll be back at the starting gate with no wheels.

On a lease, you're charged origination and disposition fees. Very likely, you're also required to pay extra if you drive more than, say, 14,000 miles a year. If you obtain a new job with a long commute, you could end up paying thousands of extra dollars.

If a lease is essential, the best kind are those that are subsidized by a car manufacturer. You may find a manufacturer-subsidized lease in advertisements that offer a low monthly rate and no money down.

When buying an automobile, you'll save the most money by paying cash and negotiating a low price. Borrowing is second best. Leasing brings up the rear.