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.