Need Wheels? Now's The Time To Buy

(CBS)  Lease or buy? Deciding which makes the most financial sense is always a matter of debate when getting a new car.

However, in today's market, there's no question. Buy, buy, buy, says The Early Show financial advisor Ray Martin, who explains that a confluence of events have made this possibly the best time ever to purchase a vehicle.

Just a few years ago, leasing was hot. Low monthly payments allowed people who otherwise couldn't afford a new car to drive one off the lot. However, as these leases began running out and drivers began returning their cars to dealerships, leasing companies discovered they were losing big money.

Assuming the cars would be worth a substantial amount when returned at lease end, companies had offered buyers low monthly payments. This was a mistake. Car values plummeted, leaving the automaker or finance company holding the loans to absorb the difference in the estimated value and real value. This cost automakers an estimated $10 billion last year, according to CNW Marketing Research.

As a result, leasing companies are having to raise monthly payments, and, they are cutting back on the number of leases they offer.

At the same time, automakers have been reaching out to consumers with unheard-of incentives on new cars. GM led the charge following Sept. 11, offering zero percent financing (loans with no interest payments) - in other words, free money. The other American companies quickly followed suit. In order to remain competitive, the manufacturers have maintained these incentives.

The upshot of all of this: the difference in monthly payments to buy a car instead of lease it are small; consumers can pay just a little more each month and eventually wind up with something they own.

The big incentives right now are zero percent financing, often accompanied by no required payments for six months, and $3,000 rebates. The rebates vary based on the car. Even people who don't qualify for zero percent financing or decide they can't stomach the required monthly payment are being offered low interest loans.

When you begin your shopping, keep the following in mind.

Reconsider That Rebate
Most incentives allow you to choose between the "free loan" or the one-time rebate. Your gut reaction may be to choose the zero percent, but is this wise?

"If you have a choice of either a cash rebate or low or no interest financing, compare the total costs carefully before deciding," Martin says. He gives the following example:

Your car cost $20,000, paid over 36 months. If you take the $3,000 rebate, you pay an interest rate of 5 percent. That five percent equals $1,580 over the life of the loan. However, that leaves you over $1,400 from the rebate. That's $1,400 you would not have had if you had chosen zero percent financing. So, the rebate winds up being a better deal.

Stay Away From Six Years
In another effort to woo customers, many vehicles now come with the option of a six-year loan. Monthly payments on a six-year loan can be $50 to $80 lower than on similar five-year loans.

According to Dealer Magazine, 21 percent of new car and truck sales are now financed by six-year loans. While choosing this options sounds like a no-brainer, Martin doesn't recommend it. As a matter of fact, he doesn't particularly like the more common five-year loan.

"I advise limiting the repayment term to no longer than the new car warranty," he says. "Keep in mind that most cars will lose value faster than you can pay off a five-year loan. This will put you in a position where you will owe more (in loans) than the car is worth."

Being in a position where you owe more on a car than the car's value is called being "upside down."

Avoid Stacking Loans
Dealers in some regions report that 75 percent of people turning in their current car and buying a new one are upside down. They are "stacking" their loans - folding their old debt into payments on their new cars. Although these folks may see it as basically re-financing their current loan, it's a bad idea. Think of it this way - by stacking loans, you essentially have taken out a loan for 120 percent or more of the new car's value. If you wind up needing to sell the car before paying off the loan, you "will feel financial pain," Martin says.

Remember To Negotiate
This sounds crazy, but many dealers report customers so dazzled by incentives, they fail to negotiate on the car's price.

The Los Angeles Daily News says, "While financing charges are being cut by car companies, gross profits at some car dealerships are going up because incentives make some consumer less aggressive in trying to get a lower sale price, said Bob Kurilko, vice president of product development and marketing at Edmunds.com, a third-party automotive information company. 'The Ford F150 is selling for $700 more than before zero percent financing,' he said. 'The GM Chevy Tahoe is selling for $1300 more.'"

What's the best advice Martin can give on this subject? His answer may come as a bit of a surprise - buy a used car. The same incentives keeping new car prices relatively low also serve to suppress the price of used cars. And since new vehicles lose a lot of value the minute they leave the lot, you may get a great deal and avoid this rapid depreciation.

According to the St. Petersburg Times, Jan. 19, 2003, "More than half of new-car sales are accompanied by trade-ins. And the many consumers who signed three or four-year lease agreements in the late '90s continue to return their vehicles to dealers. These factors, along with a drop in business travel that has prompted rental-car companies to pare their fleets, has resulted in a flood of vehicles into the used-car market."

Another helpful piece of advice: Kurilko from Edmunds.com suggests that consumers keep their eyes on new-car incentives because a fresh incentive on a new car can instantly lower the value of the previous year's model.