Q: I am considering the purchase of a new car and I would like suggestions regarding whether it's better to borrow, lease or simply pay cash for the vehicle. What are the general rules of thumb? — Joe, Santa Barbara

A: As you mentioned in your question, the three options you have when purchasing a car are to pay cash, borrow the funds or lease. At http://www.edmunds.com, calculators are available by going to the site's directory and then clicking on calculators to help with this decision.

It's important to keep in mind that it is not about how much you can afford to pay on a monthly basis. First, make sure that the total purchase makes financial sense for your situation. You will get the best deal if you do your homework, are not in need of a car immediately, have good credit and the financial means to choose whatever purchase option available — cash, borrow or lease.

Paying "cash" is obviously the simplest, and it can also sometimes be the best method. Most people dread the negotiation process, and if you can avoid complicating the numbers with leasing and financing options, it is clear what the "total" true costs are at the time you drive off the lot. People who buy a car outright are generally those who hold on to cars for a long time, don't use them for business purposes, drive more than 15,000 miles per year, and hate to make payments or have debt.

Borrowing the money from a bank, credit union or the car company itself is the next simplest option. If this is your choice, then negotiate for the best price you can get and simply finance it, typically with a two-, three-, four- or five-year payment plan. Like leasing, this option may allow you to purchase a more expensive car than you might be able to afford if you had to pay cash. But make sure that you are not biting off more than you can realistically handle.

It will behoove you to know your financial credit scores before you go to the dealership. Shop for loan rates beforehand because the dealership may not offer the best rates. If you don't, you could find yourself negotiating the price to a "fair" level, only to have all the numbers change if you run into a financing problem.

With interest rates dropping, car loans can be fairly cheap, so the decision to borrow or pay cash can simply come down to arbitrage. If the car loan is 5.5 percent, for example, and you think that you can earn more than that after taxes on your investments, then borrowing probably makes sense. If you are pulling the money from excess savings that are earning less than the loan rate, then it may make sense to pay cash. But don't let your car purchase come from your emergency reserves unless you are going to replenish them immediately.

Leasing is by far the most complicated. From a financial perspective, unless you plan on purchasing the car at the end of the term, this form of financing is basically renting.

In theory, your payments are generally estimated to cover only the depreciation and, at the end of the term, there is no equity. A lease will allow a person to drive the most expensive car with the least amount of monthly payments, but that does not mean that it costs the least.

Unlike paying outright with cash or borrowing, at the end of the lease term, you in theory, have no accumulated value in the car.

You need to understand the jargon of leases to fully understand if this is the best option for you. Unlike a loan where the interest rate is clear, in a lease, it is called the money factor. The money factor is usually quoted as a very small number such as 0.0025. This does you and me no good until you understand that you need to multiply that number by 2,400 to have it equate to a regular interest rate that we can all understand.

Look at the monthly payments, time frames and residual values, the purchase price of the car at the end of the lease, to do some present value (PV) calculations. Figure out if you can follow all of the leasing rules, such as mileage limitations, excess wear and tear, and early disposal. Substantial fees may be assessed at the time of the car's return.

Negotiating the best purchase price will help lower the payments and, again, your credit scores will greatly determine the financing.

It goes without saying that you need to have the proper amount of insurance to cover the vehicle and your potential liabilities. If leasing, make sure that you understand the "gap insurance" rules as they pertain to the transaction.

— Brad Stark and Seth Streeter are founders of Mission Wealth Management LLC in Santa Barbara. They can be reached at 882-2360. Submit inquiries to asksb@missionwealth.com.