In the market for a new set of wheels? There’s more to smart car shopping than checking the chrome trim and tire size on a half-dozen sports utility jobs. A dumb decision could wind up costing you a couple of thousand dollars more than you’d planned.
Should you buy or lease? Leasing’s been the rage in recent years, growing to almost one-third of all new car deals. But car dealers admit that leasing is nothing more than renting with an option to buy. You keep the car for two, three or four years, then you either buy the vehicle or turn in the keys, period.
If you finance, on the other hand, you’re en route to owning the car.
“The biggest mistake is getting a lease that’s too long,” says Larry Sanborn, a 20-year account executive for Mears Motor Leasing in Orlando. “If the lease is for four years or more, and you drive more than 15,000 miles a year, you’re putting yourself in a box.”
Reason: Heavier driving could run the mileage up to 80,000 miles or thereabouts at the end of the four years, about the time the car starts to show wear and tear and mechanical problems. Most lessors allow 15,000 miles per year and charge 12 to 15 cents per mile thereafter. The driver with 80,000 miles on the speedometer would have to cough up $3,000, or even more if the vehicle is in dinged-up condition.
Here’s a tip: If you only drive, say, 10,000 or 12,000 miles a year, ask for a better lease deal. For example, a dealer may normally base the car’s residual value on 57 percent of the manufacturer’s stated retail price. Under a low-miles program, he might boost the residual value to 60 percent of the MSRP, which would reduce your monthly payment.
Watch your timing on a leasing deal. If you’re purchasing an auto, you want to take advantage of “close-out pricing” toward the end of a model year such as in June. But this can boomerang on a lease because the dealer has built a full year’s depreciation–a loss in value–into the first-year cost. Result: Between July and October, when the 1999 models come out, you might be charged that one year of depreciation in three monthly payments.
Depreciation is also the culprit that produces a situation where the consumer could be “upside-down” in the deal–trade talk for owing more on the car than the vehicle is worth. Nearly half of all lease customers don’t complete their lease term, according to the Consumer Bankers Association, yet the biggest depreciation cost is figured into the upfront part of a lease, not the tail end. One rule of thumb is not to try to get out of a lease until you’re more than halfway through the term, such as beyond 24 months on a 48-month deal.
When you talk to Sanborn and other experts, they keep coming back to the central point about leasing and financing: If you plan to keep the car for four years or more, and if you can’t write the car off on your taxes, by all means buy the auto outright. One reason why leasing’s become so popular, according to Sanborn, is that many folks can’t come up with a 20 percent down payment.
Similarly, people with bad credit records are discovering that, thanks to banks’ and finance companies’ new enchantment with “subprime lending”–making higher-rate loans to bad risks–they can walk out of a dealer’s showroom within an hour after filling out a credit application.
For example, one reader just got approved for an $18,000, four-year new-car loan at 13 percent, compared with a national average rate of about 8.75 percent. His monthly payments will be about $37 higher than with a good credit record, but his total interest cost will be $1,700 greater. Had he gotten a home equity loan at 9.5 percent instead, he would have saved $1,473 in interest. And assuming he’s in the 28 percent tax bracket, he could have deducted the interest and in effect reduced his rate to only 6.8 percent.
It’s a great time to buy a new car. Although prices were up 2.8 percent last year versus the previous year, operating costs such as gas and oil have fallen, the Asian turmoil has reduced many interest rates, and auto affordability has increased among average U.S. families.
But the main lesson is that no matter what kind of deal you cut for an auto, it’s the long-range total cost that counts, You must do some fine-print digging and ask a lot of questions before you ever sign on the dotted line.
– Credit tip. It’s not a good idea to have a lot of credit cards even if you don’t use them. With a large credit line available, you may not be approved for a loan.
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Robert K. Heady is the founding publisher of Bank Rate Monitor and is the co-author of the book “The Complete Idiot’s Guide to Managing Your Money.” You can write to him in care of this newspaper or send e-mail to jrnl8888@aol.com.
