Drivers have flocked to dealerships to take advantage of the government's "Cash for Clunkers" program, which provides up to $4,500 for buyers who turn in gas guzzlers for vehicles that are more fuel efficient.
As good a deal as this is, though, it still leaves the buyer to come up with thousands more, typically $15,000 to $25,000, since the rebate is only to buy or lease a new vehicle, not a used one.
Unless one has a pile of cash socked away, the first issue is whether to buy or lease. Those who choose to buy must then decide whether to take out a loan for three, four, five or six years. In the end, it might be best to skip the clunker program and buy a good used vehicle.
In making these decisions, many drivers simply hunt for the lowest monthly payment they can get. But fixating on that can increase the cost of ownership in the long term.
Leasing typically provides the lowest payment but the largest long-term costs. That's because the lease payment is primarily to cover the vehicle's depreciation, or loss in value over the term of the lease, rather than the total cost of actually buying the vehicle over that period.
But because depreciation is highest during a vehicle's first few years, drivers who lease one car after another actually face a bigger expense, even if the monthly payment is lower than it would be to buy. That's because the lease payments never end, while the buyer can get free of payments by keeping a vehicle longer than the loan term.
The Lease vs. Buy Calculator can help with the decision. Keep in mind, though, that in order to make apples-to-apples comparisons it assumes you will replace your new vehicle after a given period, while you might opt to keep a vehicle you buy longer, usually making purchasing more economical.
If you buy, monthly payments can be minimized by taking loans with longer terms. The average three-year new-car loan charges 6.984% according to the BankingMyWay.com survey, while the six-year loan charges 7.006%. On a $20,000 loan, payments would be $617 for the three-year and $341 for the six-year deals, according to the Auto Loans Calculator.
But the total payments over six years would be $24,552, versus $22,212 on the three-year loan. That's because you'd pay interest for four additional years. Use the car-loan survey to get the cheapest loan.
If money is tight, it might make sense to skip the clunkers program. Keeping an older car going for another year or two and avoiding lease or loan payments could easily save you more than the $4,500 you might get through the program.
Since you can't get both the rebate and the trade-in value of your clunker, the program saves you only the difference between the rebate an the trade-in or sale amount.
If the car could fetch $2,500, the maximum rebate would be worth just $2,000. So, if your alternative is lease or loan payments of $300 a month, you'd come out ahead if you kept the car going for at least another seven months. During that period, the car probably would not depreciate very much, since depreciation is much slower for older vehicles.
What if your clunker is really on its last legs? Then the most economical option is to buy a used car. If you can find a four- or five-year-old car at, say, $12,000, rather than a new one at $25,000, the difference will more than make up for missing the clunker rebate. For drivers who value economizing the most, the used-car route is definitely the best. The Cash for Clunkers program pays only if you really must have a new car, and can junk an old one worth substantially less than you can get from the rebate.
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