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Lease or own: The right car option

As long car loans become the norm, more are turning to leasing instead. There are risks either way.

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By Peter Valdes-Dapena, CNNMoney.com staff writer

Warning: Bad car financing decisions may catch up sooner than you think.
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NEW YORK (CNNMoney.com) -- The life-span of auto loans is increasing, but customers who don't want to own a car for a long time are turning to a shorter alternative: leasing.

Six- and seven-year loans are becoming more common, according to auto-finance company GMAC. But in just the past six months, leasing has gone from less than 18 percent of new car sales to 22 percent, according to data from J.D. Power and Associates.

Car companies are happy to help either way by offering attractive lease incentives along with low-rate financing incentives. Each option has its pluses and minuses.

"This is probably one of the hardest questions to answer for other people," says Phil Reed, consumer advice editor for automotive Web site Edmunds.com.

It really comes down to knowing your own car-buying habits. The question you have to ask yourself is this: Am I a long-term or short-term car owner?

For customers looking for low monthly payments, who like having a new car all the time, a lease is the smarter choice. For those who don't care about having the latest in automotive technology and styling, financing is the way to go.

With a lease, you never actually own the car. Instead, a bank or finance company buys the vehicle and lets you keep it while you make monthly payments.

Your payments are based on the amount of value the car is expected to lose during the time you have it. That's why the payments are usually much lower than they would be if you financed a purchase. You're only paying for use of the car, not the whole car.

When you take out a long car loan your car will lose value fast while you're paying for it slowly. If you decide you want to trade the car in after a few years, you may find yourself "upside down," owing more money than the car is worth.

But financing offers more flexibility. As long as you make your payments on time, you can do what you want with your car when you want to. And payments will end, after which you will have a fully-paid-for set of wheels.

A lease is much more restrictive. Getting out of one early is tricky - if you can do it at all. And if you fall in love and decide you to keep the car after the lease term is up, you could find yourself paying hundreds or even thousands more than you would if you had simply bought the car to begin with.

If you decide to lease, remember: contracts are negotiable. Try to get the best deal you can with lowest monthly payments and the most miles. Leases are written for a certain number of years and a certain number of miles. Driving more than the allotted number of miles gets costly, fast.

For most car buyers, the best choice is to simply buy a car you can afford to pay off in a relatively short period of time. It may mean forgoing the luxury badge, all-wheel-drive or the high displacement engine. But you'll be minimizing the cost of having a car.

"It's all lost money, anyway" says Reed. To top of page

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