The answer is both of them.  Depending on your circumstances and usage of the vehicle, both options can be the better option at different times.  This is probably why there is always an ongoing debate of which is better.  In this article I will share with you some crucial things to know when looking to buy a car, and what to keep in mind when trying to decide whether to lease or buy.

Decide What You Need

This may be the most important step to buying a vehicle.  The worst way to buy a car is to blindly walk on a dealership without first deciding what exactly you and, if applicable, your family need.  Remember, a car is not an investment.  It is an asset draining liability.  For most cases, no logo on the front of your car will change the actual purpose of you buying the car in the first place.  Do your homework.  If this car is for you, sit down and decide why you need it.  Where will you be driving it?  Do you need good storage space or passenger room?  Do you want a more gas economical car?  There are so many options now available that if you do not know what you need in a car, you may end up with a car that doesn’t fit your needs.  Most importantly, decide what your budget allows you to spend on a car, and don’t waiver from that.  Never let your ego get in the way of your needs.  The “appeal” of a nice car fades in time, whereas the ability to satisfy your needs does not.

Know the Language

When looking for cars, it is important to know the language you may come across.  Knowing this shows dealers that you’ve done your homework and you’re not some gullible car buyer who is ready to get ripped off.  Here is some terminology you may need to know:

• MSRP- This is the recommended factory retail price for the car or the “sticker price.”  In almost all cases, this number will be negotiable.
• Capitalized Cost- This is the agreed upon price, which will most likely be lower than the MSRP.
• Lease Term- The number of years the vehicle is leased for.
• Residual Value- This term is used to describe the bank determined expected value of the car at the end of the term.  This value is expressed as a percentage of MSRP.
• Depreciation Charge- This is the value of any charges that exist after the difference of the capitalized cost and residual value.

Shop for Your Car

Once you find out what you need out of a car, begin looking.  Shopping for cars has never been easier.  There are countless amounts of websites that exist where you can get new car quotes (Discounted Internet New Car Price Quote from Web2Carz.com) with just the click of a mouse.  Look on Craigslist, eBay, and local Auto-Trader magazines for comparable prices.  Shop your local dealerships and let dealers know of your needs and ask for recommendations of cars that will accommodate those needs.  In most cases, you will never want to shop at just one dealership.  In time, you will eventually find a car that appeals to you the most.  Now we can get started.

Buy or Lease
Like I said earlier, depending on your needs, buying or leasing could be the better option.  Some pros to buying are that you own the car, regardless of any changes that happen in your life.  It is yours until you sell it again or until it breaks down.  You do not have a mileage limit so you have a lot of flexibility in the use of the car.  The downside is, of course, the upfront costs of buying a vehicle can be very costly.

Some pros for leasing include significantly lower upfront costs, considering you are only paying for depreciation costs and taxes during the period of ownership.   Leasing also gives you much more freedom to switch out cars every few years.  Disadvantages are that there are many hidden fees in leasing.  Also you’re flexibility for what to use the car for is greatly diminished, due to mileage restrictions, which if you go over, could have severe penalty charges.

When deciding which to do, consider these pros and cons.  If you like to buy a car every few years, leasing is probably the better option for you.  If you need to commute long distance for work or school, buying will probably be better.  Whatever the case, whether you buy or lease, you can always negotiate prices and fees.

Negotiate a Price

This is usually the fun part.  I am sure everyone you know that buys a car says that they got it for a steal and that it was the deal of the lifetime.  Well, if that were the case, auto dealerships would be out of business.  Auto sales is set up in a way where almost everything is negotiable.  Remember, no matter where you go, they want YOUR business.  Do not let the salesman dictate the terms.

It is usually smart to start negotiations at the dealer invoice.  Most dealerships will share this document with you and if they don’t, go somewhere else.  Often times, you can buy a car for invoice plus $100-$600, maybe even less.  Consider the fact that the more cars they have on lot of the one you’re looking for, the more they will be willing to negotiate.  Try to avoid the hot selling car of the month, as they are less willing to lower the price on cars that are low in supply.

Remember to factor in additional costs that are not included in your agreed upon price.  After agreeing upon a price, you will have to pay taxes, documentation fees, registration, license renewals, and more.  Leave some room in your budget for these added expenses.

How Will You Pay for It?

I usually try to refrain from auto financing if possible, but if you must, here are things to consider.  First, realize that in most cases, financing terms offered by dealerships will most likely be more expensive than financing that could be found from an outside institution.  Make sure and compare the differences between loan terms.  The main things to look at are down payment, interest rate, loan term, and any extra fees that are charged.  Maintaining a strong credit score is crucial for securing a favorable loan.  This is why financial planning is so crucial and affects so many aspects of your life.

Leasing financing is similar.  Your credit score will dictate how good of terms you receive from the dealership.  Keep in mind that depreciation costs are usually more for newer cars than older ones, thus a lease for a newer car will almost always be more expensive.  Make sure to know your lease term and how it coincides with your warranty.  In some cases, your lease may extend beyond your warranty period.  As a result, it may be smart to get an extended warranty from the dealership or a third party like SmartAutowarranty.com.

Enjoy the Car

Buying a car can be a long, vigorous process.  When it’s done, be sure to enjoy what you just bought!  Avoid buyer’s remorse as almost everyone gets it at one point.  Realize you did a good job researching and you have the best car for your needs.  Try to maintain the car as best you can so that you can get the most car for your money.  Remember, a car is not an investment.  However, it can be a great help in accomplishing your financial goals for financial planning.

Fixed-Rate Mortgages- These are loans with a fixed interest rate for the duration of the loan.  These are the least risky types of loans for consumers, since the bank assumes the risk of rate variability.   However, due to the risk going to the lender, interest rates and monthly payments are usually larger, especially earlier on.

Variable or Adjustable-Rate Mortgages (ARMs)-  ARMs are mortgages that have interest rates that move with a particular index, such as 10 yr Treasuries.  Usually ARMs have lower interest rates, because the risk is given to the consumer.  However, during inflationary times, ARM’s can be very vulnerable to huge increases in interest rate.

Jumbo Loans- These are loans which are over the maximum loan amount set by Fannie Mae and Freddie Mac (which in 2008 was $417,000).  Larger loans are also often referred to as jumbo loans.

Interest-Only Loans- These are loans that are structured where only interest expense is paid off in your monthly payments  in the initial stages of a loan.  These are usually done in order to preserve capital to either pay down more expensive debt or to allocate cash to more profitable vehicles.  Although, the initial payments are much lower, as soon as the “interest-only” term is up (which is usually 5-10 years), the increase in your mortgage payment can be monumental.  So, these can be risky.

Piggyback Loans- These are two separate loans that are split up as one being for 80% of the value of the home and the other being 20%.  The second loan usually bears a significant higher interest rate, because of the risk of the loan.  These are usually used to avoid PMI.

Option Adjustable-Rate Mortgages (Option ARMs)- With these loans, the interest rates adjust monthly and the payments adjust annually.  You then have options on the payment amount, which sometimes can be very low.  However, negative amortization is a big risk for Option ARMs.

Balloon Mortgages- These are loans that at the end of the term of the loan, the principal has not fully been paid off.  There is then a “balloon” payment in order to pay the remaining principal of the loan.  Once again, your monthly payments are usually less, but the balloon payment at the end can be very large.

Negative-Amortization Mortgages (NegAm)- These are when your monthly payments are too small to amortize or fully pay off the loan.  The amount which is not being paid, is then added back on to the principal loan.

Above are many types of mortgage loans that are available to consumers.  One cannot be considered “the best”, as it all depends on your current need for the money and your financial position.  As always, always be cautious when considering debt, as it can be a big hurdle in your goal to financial freedom.

First, a key principal, that if you live by, you will be better off than your peers.  Live Within Your Means. Human nature begets a competitive spirit.  Many times this can result in a “better than your neighbor” mentality.  Some are constantly trying to keep up with their friends by constantly having the nicest and most expensive goods on the market.  Whether it is trying to have the nicest car out of the bunch or the biggest boat.  Whatever the case may be, it is important to try and tune those impulses out and focus on living a way of life you can afford.  By doing so, you will be able to save more money, minimize your debt and make it a lot easier for you to accomplish your long term goals.  Can you give up a Mercedes in your early twenties for your dream house in retirement.  If you were to bypass paying $60,000 for a luxury car when you were 25, and instead put it into a CD yielding 5% amortized interest, at 45 you would gave $162,758 to spend.  This amount is with not even contributing to the account over time or accounting for the additional money saved from maintenance costs and repairs that the vehicle would need.

The point is to try to limit yourself in what you choose to use debt for.  They should be NEEDS, not WANTS.  Now of course, we all get compulsive sometimes and can find ourselves in a spending frenzy.  So what do you do if all of a sudden you realize you’re swimming in a pool of debt.  Don’t panic, just analyze the situation:

Organize your debt

You may find yourself in debt in 10-15 different vehicles.  An auto loan, a credit union, two or three credit cards, a friend, etc.  The point is  to organize all of your debts into one document and find out your total amount owed.

Plan your debt payoff

It can seem like a monumental task when looking at all the money you owe to creditors and thinking of having to pay it all back.  However, it is amazing of how fast debt can be wiped out just by planning to pay it off the right way and deciding who to pay off first.  Organize a debt calender much like the one below to help plan your time line in paying off your debt.  Start with allocating as much money as possible to your higher interest rate debt like credit cards.  By setting up a table you are able to see exactly when you plan to be debt free.  This can be very liberating.

Consolidate your debt

If you find yourself in a sleu of credit card debt, you may want to consider a home equity loan (if you own a house).  A home equity loan is a secured loan, which in turn yields a much lower interest rate.  If you are getting eaten alive with interest payments, you may want to consider receiving an equity loan to payoff your credit card debt.  However, remember, failure to payoff your home equity loan could result in losing your house.  So make sure to change prior spending habits to allow you to payoff this debt.

When times get tough, always seek debt negotiation with your creditors to see if you can alter your terms of your loans.  You may be surprised to see how easy it can be to get a lower interest rate, or smaller monthly payment.  There are loan modification sites that have lists of agencies who can assist you in modifying your loans for your house or other debt.

Bankruptcy

Lastly, you can consider legal action, or bankruptcy.  Bankruptcy has become quite popular in recent times as it can free you from a deep burden to creditors.  However, bankruptcy is on your record for 10 years and can be a huge burden to you and very much restrict you from accomplishing your goals.  Bankruptcy should be considered as an absolute last resort.  Avoid it as much as possible, but if severely needed, bankruptcy can be a help in getting you back on track.

When studying bankruptcy, they find three major trends that influence it the most: Unpaid medical expenses, a loss of primary source of income, and divorce (separation and death).  By trying to avoid these, you can be able to better your chances of avoiding this plague and better your path to financial freedom.  Consider organizing your debt today, as the earlier you start, the earlier it is paid off.

There are two main types of lending institutions, banks (which in a sense are institutions who take deposits) and non-banks (without deposits). Lets first discuss banking institutions:

Banking Institutions

Commercial banks – Usually the most popular source for loans. These are the institutions most know by people such as Wells Fargo, Bank of America, and Washington Mutual. Even though these institutions are the most widely used, usually they do not offer the most competitive rates for deposits and loans.

E-commerce or Internet Banks – Recently introduced to the world as the internet gained in popularity. Internet banks do not have your standard branches and bank locations for deposit. As a result, these institutions save a lot money from the lack of overhead, and in turn, are usually able to offer higher yields on deposits and lower interest rates for loans. Due to new technology, internet banks are still relatively low in popularity due to many consumers being uncomfortable with the new system. However, most are still FDIC insured and are backed by the Federal Reserve. In fact, now there are sites that have FDIC insured internet banks bid for your business. This can really enable you to get the best rate, see more at www.MoneyAisle.com.

Saving and Loan Associations – These institutions are very similar to commercial banks, but differ in ownership structure and procedure. Usually you are able to get more competitive rates for loans and deposits with saving and loan associations than with commercial banks.

Non-Banking Institutions

Brokerage Firms – Not only can you make stock trades from your brokerage account, but for most of them, you can issue checks, receive a debit card, and other activities that are done in a normal bank. Be careful, because some investment accounts are not FDIC insured for deposits. Your bank can notify you of their account policies. Zecco.com is an example of an online brokerage account, where they will actually give you free stock trades every month just for your business.

Mutual Fund Companies – Much like brokerage accounts, you can also use your mutual fund much like a normal bank. You can write checks, use a debit card, and make loans against your mutual fund account.

Due to the recent financial troubling times, new creative processes have been created to try and continue the flow of money. As it becomes more and more difficult for banks to lend, more business is done through what is called Peer to Peer lending or P2P lending. This is where consumers lend to each other. This can be a win win as the consumer lending usually gets higher than usual returns on their money (can be 10%+ returns) and consumers are able to get loans who wouldn’t otherwise be able to. These can be risky, but also can be rewarding. An example of a site that does this well is Lending Club.

In recent years, most banks have made banking much more easy with the use of online banking. Now you can get real time updates of your account balance, pending transactions or transfers, or transfer money to another customer or bank. This is not to say you can throw out that old balance book for your checking account, but it does provide a great resource for you to help you stay organized.

It is important for you to evaluate what your lending needs are and weigh them against the different institutions. You will be surprised at the differences of quotes you will get from each institution, depending on the asset you are buying. It is important to incorporate your goals when making this decision, as you should be comfortable with the risk, returns, bank support, liquidity and other factors when dealing with these institutions. Doing so will help make these decisions very successful for you and will get you that much closer to financial freedom.

Fixed-rate loans – Most consumer loans are fixed-rate loans. These loans keep the same interest rate throughout the duration of the loan period. As a result, in most cases the interest rates are a bit higher, as to protect the lender from future changing market rates.

Installment loans – These loans are those that are paid off during a set timetable, usually monthly. During each payment period, a portion of interest and principal is paid off. Every new month pays more and more of the principal amount off. Most likely a loan on your house or car is your standard installment loan.

Single-payment loans – These terms are short term loans (usually under a year) that are usually referred to as Balloon loans. They can also be known as Bridge Loans. Usually these balances are paid off all during one period, hence the balloon payment. Many times these are used as a temporary loan until better financing can be found.

Unsecured loans – These are loans that do not require any collateral. These loans are usually reserved for those with a special expertise or with a high credit score. As a result, interest rates for unsecured loans can be very, very high.

Secured loans – These are loans that are backed up by a large assets as collateral in case of non performance on the loan. A home equity loan is an example of a secured loan as your house would be used as collateral. If you refused to pay the loan, the lender is then entitled to take your house as a result for not paying the rest of the loan.  Interest rates are usually quite good for these loans.

Convertible loans – These loans incorporate the changing of the structure of the interest rate type. For example you may have the first five years with a fixed interest rate, with the last five years changing to a variable interest rate, or vice versa.

Variable-rate loans – These are loans in which the interest rates are subject to move based on a moving index that the loan uses as a benchmark, such as prime or the Treasury Bill. These usually have caps or ceilings on how high they can move in a given period. The rate can change multiple times during the year.

Most people will eventually resort to a consumer loan as it can be a vehicle to buy things of bigger value.  However, these should be used with caution and with a lot of though process.  During tough financial times, people can become strapped to their debt and if you choose to live a highly leveraged life and live outside your means, you can become vulnerable to the risk of bankruptcy and maybe end up worse than how you started.  By understanding the definition of these loans, you can see what better fits your lifestyle and your goals.