Car buyer, know thyself!
When it comes to deciding whether to finance or lease your next vehicle, there’s no better advice. Examining who you are and how you drive is the best way to determine how you should pay for a new car.
Basically, the question is: Are you in the market for a long-term relationship or a new flame every two or three years?
Don’t shop for deals. Shop for a vehicle that does what you want it to do. Decide how you are going to pay, then find a car. Otherwise, you’ll end up miserable.
Tarry Shebesta, president and CEO, Automobile Consumer Services
Consider Your Timeline
"The only way leasing makes sense is if you know you’re not interested in keeping a car a long time," explained CNNMoney.com automotive journalist Peter Valdes-Dapena. "The rule is, if you’re the type of person who always likes to have a new car, you should lease, because there will be lower payments and you won’t have to sell the car in the end."
Philip Reed, senior consumer advice editor for Edmunds.com, a car-buying information site for consumers, agreed. "If you tend to like to hang onto cars for a long time or modify them, leasing is not good for you and financing is.”
When you lease a car, you agree to drive it for a fixed period of time, usually two or three years. After that time is up, you either return it and look for something new or buy it by paying whatever amount the dealer figures the car is still worth.
Ponder Upsides, Downsides
There are definite upsides to leasing. For example, if you use your car for business, there could be tax incentives, which you should discuss early on with your accountant. Additionally, if you keep vehicles for just a couple of years, you will get a new car at each signing that should be "relatively maintenance-free and have all the latest safety equipment," said Reed.
If you're the sort of person who likes to be seen in the latest and greatest, whether it's clothes or cars, leasing affords you that opportunity.
The downside comes if you develop an attachment to the vehicle and want to keep it once the lease is up, which "would cost you more than it would have cost you to buy the vehicle upfront," said Valdes-Dapena.
When you finance a car, on the other hand, you’re generally shelling out larger monthly payments for a longer period of time than a lease. After your final payment, however, the vehicle is 100 percent yours to drive as long as you like. That’s why four out of five drivers still prefer buying to leasing, although leasing is becoming more popular thanks to the tantalizing low-payment offers car makers are constantly dangling in front of consumers.
Experts, however, caution against going for one of those leases simply because you find a great deal. Stick with task No. 1, they say, which is figuring out your own driving preferences. "It’s not a good deal if you get a car and don’t like it," said Tarry Shebesta, president and CEO of Automobile Consumer Services. "Don’t shop for deals. Shop for a vehicle that does what you want it to do. Decide how you are going to pay, then find a car. Otherwise, you’ll end up miserable."
Valdes-Dapena recommends that after settling on leasing or buying you narrow your choices to three or four models simply by doing research on the Internet. Don’t home in on just one model, because that leaves you nothing to compare.
When you have some idea of what you’re after, then it’s time to check prices and calculate what monthly finance or lease payment best suits your budget. All the major automakers’ websites have tools that allow you to find prices and make your calculations, but impartial sites like Truecar.com, Leasecompare.com and Edmunds.com are often a better way to go, said Valdes-Dapena.
"It can be tricky (on an automaker’s site). Some vehicles you find are stripped-down versions with no features so they can get to a lower price point. But then you realize that any car people would buy will be much more expensive."
Reed warns consumers to "verify that the monthly payment includes all taxes and fees." You might find a deal for $199 a month, but things like title, license and tax costs might not be included.
After getting a sense of how much the car you like will cost you, email the Internet departments at several dealers in your area to see who will offer you the best price, Reed advises. "I’m a big fan of not going to the dealer at all, except for a test drive," he said. "Everything can be done online. Do your research there and it will save you money."
With offers in hand for the car or cars you like and a clear idea of whether you’re going to buy or lease, the next step is to check with your bank or credit union to find out what loan rate you might obtain. You don’t need to commit to anything; this just gives you some leverage when you move on to the final phase: going to several dealers for test drives and negotiations.
Make the Deal
Once you’re in the showroom, according to the experts, there’s one important thing to remember:
"Don’t tip your hand about whether you’re financing or leasing," cautioned Shebesta. "Negotiate the price of the car, and it shouldn’t matter which you’re doing at that point. It's got nothing to do with the price of the car."
No matter which payment path you’re taking, there are a few common variables. First, there’s the price of the car. If you’ve done your homework by checking prices on the Internet, you should already have found the best price possible before even meeting the dealer.
Next, there’s the length of the contract. If you’re financing, it will generally run from four to six years. Leases tend to be for three years, although many car makers are now offering two-year deals. The longer the contract, the smaller the monthly payment but the higher your ultimate cost.
For anyone financing a new car, if you’re happy with all you’ve negotiated, it’s time for the keys. If you’re leasing, though, there’s still one more thing to negotiate: the number of miles allowed. Standard agreements, said Reed, usually allow for 12,000 miles a year. Anything above that and you’ll have to pay an additional fee determined by the dealer. If you think you’ll be going over the limit, you may negotiate for added miles before signing the lease.
That can raise your monthly payment, so Shebesta recommends just paying the mileage penalty at the end of the lease if you go over. "Most of those fees are nontaxable, and you don’t pay interest on them," he said, so it’s ultimately cheaper than adding miles upfront.
Claim Your Prize
Once the mileage is settled, so is the agreement. You may shake hands, get your new set of wheels and drive home to dazzle your friends and family. And whether you’ll own it for the next decade or lease something again in a couple of years, the self-exploration that getting a new car requires is enough to provide anyone a new lease on life.
"“It gets people to think a little about themselves," Shebesta said, "and in the end, you do feel better about yourself."
Avoid Monthly Payments
Deciding how to pay for a new car is a little like deciding which presidential candidate to support. At first, it seems as if you’re limited to two choices. However, at least when it comes to picking out a vehicle, there is a legitimate third option to buying or leasing. What about making no monthly payment at all?
"Leasing is the most expensive way to operate a car. You’re basically renting to own," said financial adviser and radio talk show host Dave Ramsey. "A new car loses 60 percent of its value in the first four years,” Ramsey said.
He suggested saving enough cash and purchasing a 2-year-old or 3-year-old used car outright rather than paying every month for the privilege of driving it.
For most consumers, that payment "is the biggest one they make each month next to their mortgage," Ramsey said. "If you invested the average car payment, which according to the Federal Reserve is $495 per month, from age 25 to 65, you would have $5 million. Hope you like that car!”
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