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Your Ride: Finance First, Pimp Later

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Weighing buying and leasing options.

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New car shoppers face a basic decision: Buy or lease?

The short answer: It depends.

There are advantages and disadvantages to both, so your decision depends on your finances, needs and preferences.

If you like having a new car every two or three years, and if you want low initial cost but can accept high long-term cost, take a look at leasing. The websites of major auto companies offer solid information on leasing, including Ford (F), General Motors (GM), Toyota (TM) and Honda (HMC).

However, if you plan to hold on to the car for five or ten years, and if the thought of no payments after squaring the loan is attractive, buying is a better choice.

If you buy a car, you own it when the loan's paid off, giving you trade-in value on your next vehicle purchase. But if you lease, you're contracting to use a car for a specified period and have nothing to show for it once the lease expires. Keep in mind that a car depreciates, and you take the hit for its declining value either through the lease or in lower trade-in value.

Warning: In most cases, lease to buy is more expensive than buying outright. It extends the payments on the vehicle so, buy the time you own it, you're left with an older car that's worth less as a trade-in.

Leasing appeals to many because it offers a low down payment, low monthly payments and generally low maintenance costs. A good deal will have the car under warranty for the period of the lease. This is important because you're responsible for routine maintenance and must return the car in good shape or pay a hefty fee. Likewise, expect to pay a steep penalty if you want to terminate the lease early.

Before you lease, determine how you'll use the car. Many leases limit the total mileage and charge a large fee for each mile driven in excess of the limit. This is likely to become an issue if you plan to drive the car to work five days a week and on weekends, or if you live in the West and routinely drive long distances. Remember that the best lease deals go to those with the best credit history.

The two most common types of leases are closed-end and open-end.

A closed-end lease includes an annual mileage limit, sometimes as low as 12,000 miles. Expect to pay eight to 15 cents or more for each mile driven in excess of the limit each year.

An open-end lease offers unlimited mileage, but with a catch: If the resale value of the car is less than an agreed upon amount when you turn the car in, you must pay the difference – and mileage is a key factor in determining resale value.

Leases on some luxury cars offer a single payment that can save you money over the term of the lease. The initial payment eliminates the dealer's default risk and the cost of processing monthly payments. Most lessors will pass the savings on to you. But the large upfront payment defeats the purpose of leasing for many drivers – a low down payment. It also takes a bite out of your bank account and means the money is unavailable to you for other uses, including savings or retirement.

If you use a car every day -- and if it doesn't have to be a new car -- leasing is expensive over the long term and probably isn't right for you.

If you plan to use the car around town, take a look at a used car. Consumer Reports magazine provides solid buying tips and repair history of different models and years. A used car means a lower initial down payment, lower monthly payments and lower insurance premiums, but is likely to require more maintenance because it's older. But if you do your homework, you can avoid buying someone else's problems. Many dealers offer extended warranties and service agreements. Read the fine print so you know what's covered and what's not.

The decision to buy or lease a car depends on your preferences and wallet.
If you want a cool new ride every two or three years and are willing to pay for it, leasing makes sense. If you just want a car to get you there and back, buying a car and driving it for at least five years will save you money.

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