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Paying for a new car with cash has long been considered the king of cost-cutting options because you avoid finance charges. It's still good advice, depending on your alternatives. (It's not the best choice, for instance, if that money could earn 10 percent in a stock mutual fund.)

But for those shoppers who plan to finance their purchase, the question remains: Which of the many deals available is truly the cheapest?

To find out, we compared various auto-financing options using real prices, incentives, interest rates and leasing quotes as of January 2005. We studied several 2005 models of various sizes, costs and makes, which we assumed our buyer - who wasn't real - would keep for many years.

To establish a benchmark against which other deals could be measured, we calculated the total cost and the monthly payments of each vehicle using a conventional auto loan and our standard advice. This includes:

Focusing on the vehicle price rather than on the monthly payment.

Negotiating up from the Consumer Reports Wholesale Price (our assessment of what the dealer paid for the car, available for a fee at" target = "NEW"> rather than down from the manufacturer's suggested retail price. Auto-pricing information is also available from such Web sites as and

Obtaining prior loan approval at a credit union. Rates there can be lower than those offered at banks or through standard dealer financing. (Ours was 5.22 percent.)

Our analysis found big cost variations. Here are some highlights:

Low-rate dealer financing. This deal typically offers an interest-free or ultra-low-rate loan if you have the credit score to qualify. While the interest-free loans in our study saved 1 percent to 7 percent compared with the benchmark, they're not available for all vehicles or all consumers. Plus, you usually have to give up the cash rebate to get the lower rate. That penalty meant such low-rate loans ended up costing 3 percent to 7 percent more than our credit-union deal. If combined with a full rebate, however, low-rate dealer financing (1.9 percent to 3.9 percent in our study) shaved about 4 percent off the total cost of the car.

Extend the loan term. In this scenario, you stretch your 48-month loan to 60 or 72 months. While that reduced our simulated shopper's monthly payment by 9 to 25 percent, the interest payments over that span significantly raised the total cost of the car. In general, you should avoid this financing sleight of hand, a common tactic for salespeople trying to close a deal.

Balloon loan. Offered by credit unions, banks and finance companies, these loans are also known as "lease look-alikes" because their monthly payments are calculated like a lease, based on the negotiated purchase price minus the vehicle's estimated residual value. There's no down payment, but at the end of the agreement you make a balloon payment equal to the residual value. In our study, this always raised the purchase cost by 1 percent to 2 percent over the benchmark. It can be a good deal, however, if you take the down payment saved and invest it in a high-return stock mutual fund or pay down a high-rate credit card.

When exploring financing options, we suggest you start with a credit union. If you're not a credit union member, and you don't qualify for ultra-low-rate dealer financing, investigate rates at banks. They can be lower than the standard rates dealers charge. For help in navigating the car-buying process, check out "Wheeling & Dealing: Consumer Reports Guide to Smart Car Buying." It's available free at our Web site, Just click on Autos, then on "New cars," then select "Wheeling & Dealing."

By the editors of Consumer Reports at