Should I Lease or Finance a Car
When You Dream about buying a car, Dream Big!
The Road to Saving For a Car
Navigating the winding road to your next car purchase can be as hard to manage as reading a highway map for the first time. I count very few cities where you can do without a car, making buying a car almost a mandatory expense in our modern lives. However, with a little thought and planning you can save thousands of dollars on your next car purchase. Knowing the route to discerning the cost of leasing (vs) financing your next vehicle can add up to big savings. You will learn what to look for when signing on the dotted line, what to avoid, and what will definitely leave money in your pockets for the important things, like gas money!
Compare Costs of Leasing (vs) Finacing a Car First
FEATURE
| LEASING
| BUYING AND FINACING
|
|---|---|---|
Down Payment
| None or very small
| Usually required up front; the larger the down payment the smaller the monthly payment
|
Monthly Payments
| Continuous, tends to be less than when buying
| End when Loan is paid in full
|
Vehicle Modification
| No Modifications allowed
| You can modify when and what you want. Make sure you don't violate warranty.
|
Mileage Limits
| Unless contract limits say otherwise, 12,000 - 15,000 mls/yr.
| No limits on mileage
|
Wear and Tear
| Penalties apply at end of lease, when over contract limits
| No limits, be careful not to violate warranty.
|
Early Termination
| Fees and penalties apply
| Usually no prepayment penalties, but check contract.
|
End of Term
| Lease again, or buy current leased car; payments continue
| Payments discontinue
|
Ownership
| None
| Ownership equity starts building with each payment. You own the vehicle at the end of payment agreement.
|
The Financing (vs) Leasing Your Car Dilema
Without a doubt, the cheapest way to buy a car is to pay cash for it because you totally avoid finance charges. But, if you're like most people you don't have $15,000 to $30,000 (or more) on hand to spend at one time. This leaves two main options for buying a car: financing and leasing.
FINANCING
Less appeal resides in financing a car loan today because you can no longer fully deduct the interest on your loan from your taxes. But several low-interest options remain for a qualified buyer.
A car loan payment consist of the cost of the vehicle, loan fees, charges for obtaining your credit report, and credit life insurance. This kind of insurance pays off the car loan should you die before the balance is paid. You can save a lot of money monthly by not buying this type of insurance. It is expensive and your regular life insurance should pay your bills if you die prematurely.
When shopping for the best car loan, you want to look at the annual percentage rate (APR); this is the interest rate you will pay every year for the unpaid balance on your car loan. Your credit rating will play a large roll in the amount of interest you pay on your loan, the higher credit score gets the best rates. This is because the high credit score consumers have proven their credit-worthiness and offer a higher probability of being able to pay back the loan. The finance company trust them to a greater extent.
Other than the interest rate, you want to look at the amount of a down payment each lender requires. If you have a trade-in that won't cover the amount of the down payment, they generally ask for 10 to 20 percent of the value of the car you intend to buy, depending on your credit rating. The less you invest up front, the more you will pay in finance costs and monthly payments over the life of the vehicle loan. Most lenders aren't going to lend to you unless you can provide them some kind of collateral: this would be your new car. Don't fool yourself, if you miss a few payments, they will find your car and take repossession of it.
Dealers, Banks, and Credit Unions, "Oh, My"
Many car loan sources exist, including dealers, local banks, and credit unions.
Dealers
Most dealers will offer financing. They have a division dedicated to financing cars— known as the captive finance arm of the automaker. You would expect the GM dealer to refer you to the General Motors Acceptance Corporation (GMAC), a Ford dealer to suggest Ford Credit, and the list goes on. The interest rate available through these captive finance companies is usually higher than if you went to a local bank or credit union. However, if you suffer from a troubled credit score, these companies may be the best source for you to work with. The dealership salesmen are going to try to get you to finance with a captive finance company because they receive money for every loan they can arrange. When times become lean for car salesmen or dealerships, the manufacturer will stimulate buying by providing much better financing deals to the customers. The two arms of the company will work together to keep the overall income of that company healthy.
Car Loan Worksheet
Car Loan Costs
| $ Amount
|
|---|---|
Down payment
| |
Monthly interest costs
| |
Sales tax
| |
License fees
| |
Registration fees
| |
Insurance premiums
| |
Estimated maintenance charges
| |
Trade-in allowances
| |
Total Car Loan Costs
|
- Local banks. Most local banks will offer lower interest rates to consumers than will a dealer. For a pretty detailed listing of low loan rates, check out www.bankrate.com. These guys keep track of car loan rates at almost every bank in the country, and on a weekly basis. (I benefit in no way by giving you their information)
- Credit Unions. Belonging to a credit union can get you a much better car loan. Unlike banks, credit unions are designed to service their members rather than their shareholders. This means they regularly charge lower interest rates with better terms. However, the credit union may require a larger down payment than a finance company or bank.
How To Talk To a Car Salesperson (1 min. 30 sec. video)
The Test Drive (1 min. 23 sec. vedeo)
Car-Buying Services and Information Web Sites
- Consumer Reports: Expert product reviews and product Ratings from our test labs
Product reviews and Ratings on cars, appliances, electronics and more from Consumer Reports. - AutoVantage
The complete car club. - New Cars, Used Cars, Car Reviews and Pricing - Edmunds.com
Edmunds car buying guide lists new car prices, used car prices, car comparisons, car buying advice, car ratings, car values - New Cars, Car Reviews & Prices, Used Cars for Sale, & Auto Shows at Motor Trend Magazine
Official Motor Trend magazine web site features used cars, road tests, new cars, concept cars, auto shows, and much more car buying information and help. - Home | National Highway Traffic Safety Administration (NHTSA)
National Highway Traffic Safety Administration - Automobile Consumer Services, Inc.
Buyers agent negotiates vehicle sales price, secures the vehicle, handles paperwork and arranges delivery.
About the Car Lease
LEASING
Sometimes leasing a car can save you money compared to financing a car. These leases can get tricky, but you can end up ahead of the game if you lease a car every 3 years or so. This is why some folks lease their cars rather than financing them.
Two types of leases exist— closed-end and open-end.
When Leasing Your Car Remember No Modifications are allowed!
Closed-end lease
The closed-end lease allows you to walk away at the end of the agreement, so it is often referred to as a walk-away lease . You have no more responsibility towards the sale or up-keep of that car. You will be required to return the car in good condition and within the constrains of the mileage allowed and normal wear and tear written into the lease. If you end up outside of the contract agreement, i.e. you go 1,000 miles over the allowable 15,000 miles written into the contract, you could have to pay .35¢ for every mile you exceeded (in this case $350!). When you sign the lease be sure to account for a realistic number of miles you would normally drive, don't get maneuvered into fewer than you feel you are apt to travel. Because the closed-end lease releases you of all responsibility for the cars worth, your monthly payments are likely to be higher.
The dates are old, but the idea is still fresh! (1 min. 25 sec. video)
If you decline to purchase the car you have been leasing in a closed-end lease, the leasing company will usually have the right to sell the car. Because of this, you should make certain that a provision is written into the lease agreement that you have the right to refuse the sales price. With most leases, if the amount the car is sold for is less than the amount of the cars worth when the lease is up, you have to pay the difference. Be reassured that most car agencies won't hold you to this agreement if you are going to lease another car. They are going to want to keep you happy. If you don't plan on leasing another car, you will be very happy you included the right to approve the sales price in the original agreement.
Leasing Cost Worksheet
leasing costs
| $ Amount
|
|---|---|
Security Deposit
| |
First lease payment
| |
Last lease payment
| |
Monthly lease payment
| |
Down payment
| |
Sales tax
| |
Registration fees
| |
License fees
| |
Insurance premiums
| |
Dealer-provided maint. cost
| |
Default charges
| |
Excess mileage charges
| |
excess wear-and-tear charges
| |
Final disposition charges
| |
Balloon payment
| |
Total leasing costs
|
Open-end lease
The open-end lease works best for those who want the thrill of a good gamble. Because this lease says that you are betting that the worth of the car is going to be a particular amount when the lease is over. Upon returning the car to the leasing company, it is appraised to determine its current value. If you disagree with the appraisal you usually have the right to get an independent appraisal of your own. When you and the car company come to an agreement as to the current value of the car, this value is compared to the residual value assumed in the lease contract. If the vehicles value is equal or more than the appraised value, you owe nothing. You may even get lucky and get a few bucks back, depending on the contract and how great that difference is. The bad news is, if that appraised value is less than the residual value of the car, you may have to make up most or all of the value in cash.
Example
If your contract assumes the car will have a residual value of $13,000, but the appraisal says it's only worth $9,000 at the end of your lease, you owe the car company $4,000. You may recognize this difference in value being referred to as a balloon payment. In some lease agreements you have the right to purchase the car for the residual value—these are known as lease-purchase contracts.
