This past weekend, one of my colleagues asked me if she should lease or finance their next new car.
She told me that she is currently approaching the end of a 36-month lease contract on an entry-level luxury car.
She also stated that she has gone 1,800 miles over her 12,000 miles-per-year lease agreement. Lastly, she admitted that overall the car is in good shape, but that it had a few small issues: one grocery store shopping cart dent on the passenger door; one broken cup holder; and a couple of scratches on the rear bumper.
She also told me that she anticipates driving even more miles in the coming years for work-related business trips and family vacations.
In all, she was contemplating if she should continue on the leasing route, or take a detour and finance her next car. She wanted my opinion on what she should do.
Normally, when I’m asked the lease vs. buy question, my reply is: “It depends.”
It depends on the buyer’s lifestyle, preferences and personal financial circumstances.
However, in my colleagues case I advised her that she should finance her next car purchase. Why? There are couple of reasons, one being miles.
I advised her that that if she actually knew in advance, that she would be driving more miles than a typical lease contract would allow, then a lease was not the best choice. Additionally, I advised her that dealerships typically penalize for excessive “wear and tear” fees at the end of the lease, for which she could be liable. In fact, leasing companies are notorious for charging hidden service fees, as well as high fees for small dings and scratches; and knowing my colleagues current and future lifestyle, above average wear and tear would likely be the fate for their next car.
Once she heard my opinion, her next concern was the monthly payment.
With her current lease, the monthly payment is about 50% lower than if she had financed. This is one of the great benefits of a lease– low monthly payments for a fairly expensive vehicle. Nevertheless, I suggested that she should consider financing a mid-priced, certified pre-owned vehicle (CPO) with a warranty as her next purchase.
Vehicles are depreciating assets. We all know the minute we drive them off the dealer lot, they decrease in value. So, in my colleagues case, financing a CPO may be her best economic option … and now may be the best time to buy one!
A recent article by NBC News stated that leased cars now comprise nearly 30% of all new car sales. This is a significant number because the majority of the folks leasing these cars are deciding not to buy them at the end of the lease contract. Instead, they are returning the cars to the dealership. This means that the market of low-mileage, used cars is seeing a spike in supply.
As a result, prices for these used vehicles are down, especially for small and midsize vehicles. In all, the article reported that 800,000 more lease vehicle returns will hit the market this year, versus last year; it also stated that this trend of high supply, late model, low-mileage used vehicles may continue through 2018.
Therefore, in today’s market, I advised my colleague to strike a great deal financing a solid CPO, with a low monthly payment, BUT, she needed to do her homework before heading to the dealership.
Now that’s her case. As I previously stated, everyone’s circumstances are different.
If you are in the market for a new vehicle, here are the advantages and disadvantages of leasing vs. buying:
- Driving a new vehicle with the latest safety and technology for less money
- Placing little or no money down, on the lease purchase
- Paying lower monthly car payments than a finance (works well for expensive luxury cars)
- Incurring very low maintenance costs due to the 36-month factory warranty. Also, depending on the automaker, all scheduled maintenance (oil changes, etc.) are free during the lease period
- Driving a brand new car every three years or less
- Paying sales tax on the monthly car payments (the part of the car that’s financed) and not the entire vehicle price
- Benefiting from tax advantages as a business owner, if the lease is used for business purposes
- Always having a monthly payment
- Limited in the amount miles that can be driven per year
- Repairing or paying for any aesthetic damage done to the vehicle before the lease can be returned
- Facing expensive penalties for ending a lease contract pre-maturely
- Any changes or modifications to the vehicle must be removed/reversed before returning it at the end of lease
- At the end of the lease, the vehicle is not yours. It’s not an asset and has built no equity
- Once the car is paid off, you own it and you may sell it at will and pocket the proceeds
- Low to zero percent interest rate loans available for those with a great credit score and high auto-enhanced FICO score
- No restrictions on the number of miles it can be driven
- The car can be modified to your liking
- Higher monthly car payments
- Higher down payment at the time of purchase (in most cases)
- Maintenance and repairs can be expensive after the factory warranty expires (especially for luxury vehicles)
If you are considering financing a car, one of the first things to do is calculate the true cost of owning the vehicle. Edmunds.com offers a helpful tool, which allows users to research the true cost of owning any late model vehicle.
In addition, Kelley Blue Book has published their 2016 5-Year Cost to Own Awards list. This well researched article highlights the best brands and category winners for 2016.
Lastly, if you are in the market for a vehicle lease, Edmunds.com also features a web page of monthly $199 lease deals that may peak your interest.
Since one of the best car shopping 3-day weekends is quickly approaching, now may be a good time to purchase your new vehicle.
Memorial Day Weekend is not only the kick-off to the summer season, but this is also the time of year auto dealerships make every effort to move out current-year models and make way for next year’s models…which are due to arrive this autumn. Therefore, this weekend through the end of June, should offer great deals for car shoppers.
Before you go, here are eight steps to consider:
Step 1. Know what you can afford. When calculating the affordability of a vehicle, the overall sales price, fuel costs, maintenance, repair and auto insurance expenses need to be examined prior to making a purchase.
A general rule of thumb is that total auto loans for one household should not exceed 20% of the net monthly income. So, if the net monthly income is $3,000 per month for the household, the total monthly car note payments should be $600 or less, whether this amount is allotted to one car or three cars.
Edmunds.com has a helpful calculator that can help you make a good decision. For more information visit: http://www.edmunds.com/calculators/affordability.html
Step 2. Don’t be shocked by insurance premiums. When calculating how much vehicle you can afford, also include the potential annual insurance costs. State Farm has a useful website that compiles extensive claims data and generates annual insurance ratings for specific makes and models of vehicles.
Through their website consumers can see how much a specific make, model and style of car will affect costs. The ratings range from A – E. “A” equals the most savings while “E” means you’ll likely pay a higher premium for this vehicle. For further details visit: https://learningcenter.statefarm.com/auto/vehicle-rating.html
Step 3. Know what others have paid. So, after you have narrowed your sights to one particular make and model, and you’re not sure what price to pay, visit the following websites; they will show either what others have paid for similar vehicles in your area, or what the true market value of the car is before making an offer.
Step 4. Pre-negotiate your price. If you have a membership with AAA, Costco or other organizations, there are opportunities to take advantage of prearranged pricing for new and used vehicles. Please see some of their websites below:
- AAA Auto Buying Program
- AARP Auto Buying Program
- National Education Association Auto Buying Program
- Costco Auto Program
- BJ’s Auto Buying Program ®
- USAA Car Buying Service
Step 5. Shop at the right time. If you’re buying a new vehicle consider visiting the dealership:
- The last day of the month
- The last day of a quarter
- The last month of year
- Early in the week and late in the day
- Also, shopping during major U.S. holidays may produce motivated sales negotiations.
Step 6. Don’t be afraid to walk away. If you’re at the point where you’ve found the car you like, and you’ve made an offer with the salesperson who has quickly rescinded without a counter offer, don’t be afraid to walk away from the negotiating table. It’s likely that they’ll have a change of heart in a day or two, and will call you back with a new offer. If you don’t hear back from them, it’s best to move on to another dealership.
Step 7. Buy a gently used vehicle from a new car dealership. Another way to save on a car purchase is to investigate if a dealer is selling their courtesy customer shuttle vehicle or demonstration car. These types of vehicles are considered “new” because they haven’t been sold (titled) to a buyer. These types of cars usually have low mileage on their odometer of 5 – 7K miles. Because of these miles you may be able to negotiate a far better deal well below the sticker price.
Step 8. Do these tasks for a used vehicle purchase. When buying a a CPO or used vehicle the same tactics employed to make a new car purchase also apply with a few additions.
After contacting and speaking with the selling party (either a dealership or private party), it’s imperative to obtain the historical record on the vehicle. CARFAX is a useful website that will provide a vehicle history report for a fee. You will need the Vehicle Identification Number (VIN) to conduct the search and receive the report.
Once you have the report and all looks okay, then request to spend some time with the vehicle, examine it closely and thoroughly, give it a test drive, and if possible, have the car inspected by a reputable mechanic prior to purchase. If the vehicle passes these steps, then negotiate the best price possible.
Purchasing a vehicle can be a significant financial life event. The experience can be exciting and memorable. I wish you all the best with your future car purchase.
Ms. Dakar is the author of The Busy Person’s Guide to Personal Finance, a primer to help consumers manage their finances so they can build a substantial nest-egg. She also conducts personal finance seminars where she provides concepts to attain overall financial health.