Owning and operating a motor vehicle is an expensive proposition. In addition to the price of the automobile itself, insurance, financing, and the cost of fuel and maintenance makes owning an automobile much more expensive that most people realize.

Depreciation also contributes to the expense of owning a new automobile. Most automobiles begin to lose value the minute they are titled, with some cars losing as much as 25 percent of their value during the first year. So while that expensive luxury model you have been considering may seem like a good idea now, after a few years you may find yourself "upside down," that is, owing more on the car than you could get if you tried to sell it.

Lenders generally insist that your monthly payment for a new car not exceed 15 percent of your monthly after?tax income. In order to meet this figure, many automobile dealers and lenders now offer payment plans that stretch on for five or even six years.

As with most major purchases, it is important to shop around for the best financing available. If you are considering purchasing a particular model of automobile, your bank, savings and loan, or credit union can probably provide valuable information about auto loans before you begin the negotiating process. At most financial institutions, you can pre-qualify for your loan. The lender tells you exactly how much it would be willing to lend you for a particular model of car you're considering. Knowing exactly how much you can afford to spend can help you avoid being talked into a more expensive model.

One recent development in the auto industry is the increase in so-called "one-price" dealerships. At these dealerships, you don't have to go through the song and dance negotiations utilized by traditional dealers. Instead, the dealership gives you a fixed price for the make and model of car you want to purchase. While this may seem like a much less stressful way to buy a car, studies have shown that in most cases the dealers who use this system actually make more on each sale than dealers who negotiate a price with their customers. Even so, some customers are willing to pay a higher price in order to avoid having to haggle with a salesperson and a sales manager.

If you purchase your car from a traditional dealer that negotiates on price, it's important to remember that no matter how friendly your salesman appears, his income depends on obtaining the best possible price for the vehicle you want to purchase. While the salesperson may claim to be working to obtain the best possible price on your behalf, he is an employee of the auto dealership. By being a well?informed consumer, you can avoid paying more than necessary for the car you want, while allowing the dealer to make a fair profit on the sale.

Because automobile dealers negotiate car sales on a daily basis, you need to be armed with as much information as possible before beginning to deal for your new car. Several publications, including Edmund's Used Car Prices, the Kelly Blue Book, and Consumer Reports can provide information about base car prices, as well as the dealer's cost for options such as power steering, sun roofs, air conditioning, and premium sound systems. Consumer Reports is also a good source of information about the reliability and safety of various models of automobiles, as well as recalls and service bulletins (notices sent to new car dealer service departments about common problems with a particular model).

Leasing a Car

With automobile prices rising and interest paid on consumer loans no longer deductible from your federal income tax, more and more consumers are turning to leasing their automobiles rather than purchasing them.

Most automobile dealerships offer today what is known as a "closed end" or "walk?away" lease. Under this kind of agreement, you agree to lease your automobile for a specified period of time with a maximum amount of mileage permitted. At the end of the lease, you have the option of purchasing the car or returning it to the dealer. Your lease payment is based upon the company's prediction of the value of the automobile at the end of the lease period. If the automobile is damaged beyond ordinary wear and tear while in your possession, or if you exceed the specified number of miles, additional charges will be collected from you at the end of the lease.

If you decide to lease a car, be sure that your lease agreement specifies whether you or the company will be responsible for regular maintenance and repairs. Although most leases require very little upfront money, some dealers now want several thousand dollars as a "capital reduction" fee at the outset of the lease. In essence, this is the dealer's way of keeping monthly payments attractive, and a low monthly payment is what attracts many consumers to leasing in the first place. But let's look at what a large capital reduction fee does to that payment.

Suppose a dealer advertises a $250 lease payment for 48 months on a car with a sticker price of $17,000. If there's no capital reduction payment due at the beginning of the lease, you can drive the car for four years for $12,000. But suppose the dealer also wants a capital reduction payment of $2,000. Now you're spending $14,000 for the same four year period, which translates into a monthly payment of over $291. And if you want to buy the car at the end of the lease, you will end up paying thousands of additional dollars to do so, dollars you may have to finance at a relatively high cost, since lenders charge higher interest rates on older cars.

Just a few years ago, most leases allowed you to drive as many as 15,000 miles per year without incurring additional charges. Today, most advertised leases allow you only 12,000 miles per year for the life of the lease, with charges of 20 cents per mile for each additional mile. So if you have a four year lease that allows you to drive a total of 48,000 miles and you actually drive 60,000 miles, you can end up owing an additional $2,400 when your lease is up. You can negotiate a higher mileage allowance, but you can expect to make a higher monthly payment if you do so.

Finally, you should also keep in mind that you are not the owner of an automobile you lease. As a result, lemon law protection which state laws provide to car purchasers may not be available to you.