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|> About Money 101

investing 101

  Buy or lease?
Those low lease payments look great, but there's no such thing as a free lunch.

In those new-car ads on TV, lease payments look awfully low. And they are, compared with loan payments for buying the car. But leasing is not for everyone.

Leasing is the easiest way to get a new car every few years while letting the dealer or leasing company worry about disposing of the old one. But leases have some major disadvantages. One of the biggest drawbacks -- especially if you are not accustomed to leasing -- is that you are forced to make a major financial decision when your lease expires. You must either turn that car or truck back and buy or lease a new one, or decide to exercise your option to buy the vehicle at the lease-end price. (Typically, the value of your car or truck at the end of the lease is set in advance.)

On the other hand, if you buy a car or truck, you can postpone any decision about replacing it at least until mechanical trouble forces your hand. And some people just like knowing that they own the car once the final payment is made. If you don't mind driving an older car, the best decision on purely economic grounds usually is to buy a new car and keep on driving it long after your loan payments have stopped.

So which is right for you? If you typically trade for a new car every four years or less, want to avoid the loan down payment of 10% to 20%, drive close to but not more than the 15,000 miles a year allowed in most leases and typically keep your vehicle in good condition to avoid end-of-lease penalties, you might be happy leasing.

Even so, before you opt for a lease, keep in mind that there is a reason why those low payments look so attractive: Instead of paying for the entire car, you're only paying the estimated depreciation over the time you are leasing it. So to get a really good lease deal, you need to look further than just the payments. You need to understand how leasing works, do your homework and negotiate as hard as if you were buying the car. Here is a step-by-step guide:

Master the jargon. You can't successfully negotiate a lease without becoming fluent in the industry's terms. Here's what you need to know before you enter discussions. The capitalized cost is the equivalent of the selling price, which you want to get down as low as possible. The residual value is the estimated worth of the car at the end of your lease. Your monthly payments are determined by the difference between these two figures, plus an interest charge known as the money factor. Thus, raising the residual value or lowering either the capitalized cost or the money factor will lower your payments.

Look for a manufacturer-subsidized lease. These deals, often promoted in splashy ads in newspaper auto sections, are likely to be the cheapest available. To identify a generous subsidy, look in the ads' fine print for a residual value that's two percentage points or more above that published by Automotive Lease Guide, an independent research firm. To check the ALG value for a car, go to Carwizard.com, pick your model, and then select "Residuals and Factors."

Set a target and negotiate hard. You can find out the so-called dealer's invoice cost for any car or truck by checking Websites such as Edmunds.com, run by the publisher of auto price information, or Microsoft's Carpoint.msn.com. Set a target price about 2% above the dealer's cost ($400 on a $20,000 car, for instance). Start bidding below your actual target and plan to wind up near that figure.

Shopping for money

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