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Solving Two New Car Dilemmas: Buy or Lease? Rate or Rebate?

Paper or plastic? Vanilla or chocolate? Some choices are easy, others not so much. 

Many new car shoppers are puzzled when comparing buying and leasing, and even committed buyers find it difficult to know whether to take a dealer’s low financing rate or a cash-back rebate. Let us help you sort it out.

Lease or buy?

Leasing initially looks attractive for two reasons: There’s typically little or no down payment, and the monthly payments are often the same or lower than when buying the same car. However, much of the appeal ends there, and here’s why.

First, though you are financing only the portion of the car’s value that you’re using – that is, its depreciation – the interest rate isn’t disclosed in the dealer’s lease contract. That makes it tough for you as the lessee to know if the rate is higher than the rate you’d pay to finance a purchase instead. What’s more, sales tax is typically added to your monthly payment after the interest rate is applied, so you pay sales tax on the interest.

Second, the projected or “residual” value of the car at the end of the lease, which has a significant impact on the amount of your payment, is a straight percentage of the manufacturer’s suggested retail, or “sticker,” price – not the lease price you negotiated. And who sets the residual value? “It can be the manufacturer, their finance company, or the individual dealer, and it can vary widely depending on who’s doing the estimating,” says Henry Folsom, Millbury Savings Bank’s assistant vice president and retail loan officer. “The higher the residual value, the lower your lease payment will be, but it’s still nothing more than an educated guess.”

Before you lease, visit or for interactive calculators that help you determine your lease rate and monthly payment versus buying.

Rate or rebate?

With 70 percent of all car purchases financed, if you’re not paying cash you’re probably tempted to take the dealer’s financing. Rates of 3.9, 2.9, or even 1.9 percent seem like too good a deal to pass up, right? “Most people don’t realize they’d be better off taking the rebate instead,” says Henry. “That’s especially true if you’re going to add it to your down payment.”

Suppose you’re eyeing a car that costs $20,000. You’ve saved $2,000 or 10 percent of the purchase price for a down payment, and want to finance the balance ($18,000) for 60 months. The dealer’s offering a 3.9 percent financing rate or $2,000 cash back. Your bank’s auto loan rate is 6 percent. Which is the better deal?

Answer: the rebate. If you take the $2,000 cash back and apply it to the down payment, raising your total money down to $4,000, and then finance the remaining $16,000 through your bank at 6 percent for 60 months, you’ll save about $1,200 over financing the $18,000 at 3.9 percent!

What if we sweeten the deal by dropping the dealer’s rate to 2.9 or even 1.9 percent? “In both cases, the rebate still wins,” Henry says. “You’d save between $300 and $750 by adding the rebate to your down payment!”

Of course, your results can differ depending on the price of the car, your down payment, and the rates available at the time of purchase. Both ConsumerReports. org and have free online calculators that let you give your options a financial test drive.

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