When most people are in
the market to buy a new car, the words “car buying is fun” rarely rolls off
their lips, (at least at the beginning).
Several will say “that was easy and fun” when the process is over but
what I’ve found, is that those words are typically spoken when you (the
customer), have a well-informed, helpful salesperson that is able to simply and
clearly explain all of your options allowing you to make an informed decision.
The most uncommon and
misunderstood way (in Texas anyway) to pay for a car is leasing. Leasing sometimes has a negative stigma attached
to it for various reasons, some are valid and many are not. The most common, even for those who have
never leased, is that they “heard” from someone who had a bad experience that
this was a “bad idea”. Unfortunately, we
almost never hear both sides of the story so we really don’t know why it was a
“bad idea” for their friend at that time.
For the sake of
simplicity, I’m going to use round
numbers and very close estimates. Let’s
say the vehicle you want to purchase is $30,000. If you finance $30,000 +TT&L (tax, title
& license) at a normal interest rate and a normal term (60 months), your
payment is somewhere around the $550-$600 per month range.
If you were presented a
lease payment of $400 per month on that same $30,000 car, your first question
to yourself or your salesperson might be “what’s the catch”?
Leasing is based off of
what’s called a RESIDUAL VALUE. That is, the guaranteed amount your finance
company will pay at the end of your lease term and it’s always based off a
percent of MSRP. So, if your car is
$30,000 and the residual is 50% for 48 months – you are now essentially paying
for half the car in four years rather than all the car in five years (as I
mentioned in the first regular finance example). This is the reason your payment is cheaper on
this lease example compared to the conventional finance method.
RESIDUAL VALUES differ
from vehicle to vehicle. Lenders who
finance leases know some cars have higher resale values than others and they
base their RESIDUAL VALUE on that future (albeit guessed) value. Sometimes they
win, other times they don’t, but it’s their gamble, not yours. Obviously they also differ when it comes to
length of term. A 24 month lease
residual will be higher than a 36 or 48 month term. Of course, most figure their published
residual based on the driver driving 15,000 miles per year. If you want fewer miles (say, 10,000) they’ll
allow you to add 2% to that published residual.
In my previous lease example, you would now make payments on 48% of the
vehicle rather than the 50% making your payments even less. If you wanted more miles, (20,000 per year or
even more) you deduct percentages depending on the amount of miles you wanted
to contract for making your payments a little higher. All of this only means that a car with 40,000
miles four years later is worth more than a car with 80,000 miles so they
adjust their guaranteed value or RESIDUAL VALUE based on the miles you
selected.
Interest rates are
converted to what’s called a “money factor”.
Most managers at any dealership can convert the money factor to an
interest rate for you, but all lenders will classify a customer’s money factor
based on a tier system that is “risk based” just like they do a regular
interest rate qualification.
Translation: A customer with
great credit, long time job history, stable residence, good income, etc. will have
a better “money factor” than someone with a few hiccups on their credit and is not
as established.
“I
don’t own it” , while
that may be true, if you are trading a three or four year old car that has a
payoff, you don’t own that one either.
“I drive too many miles”, then you need to lease the most! I know that goes against anything you’ve ever
been told but it’s true. If you do a
conventional loan and drive 20,000 miles per year and want to trade in three
years, you now have a 60,000 trade-in that’s only three years old. Chances are you’ll be $7,000 or more upside
down. If you factored in 20k miles per
year on your lease, your payment may be $100 per month higher but my guess is
$100 per month will not change your lifestyle as much as writing a check for
$7,000 when you sell.
“What
if I wreck it”, nothing
different than if you bought it any other way.
Call your insurance company and get it fixed. Leasing companies do not deduct for proper
repairs.
Earlier when I said “the
most uncommon way (in Texas anyway) to pay for a car is leasing”, what I meant
by that was, the states with the highest leasing penetrations are usually on
the East or West coasts. Some are as
high as 85% leasing on all sales. With
more and more people moving to Texas from those states, our leasing numbers in
Texas are increasing greatly.
In summary, there is no
exact way to pay for a car that works for everyone. My suggestion is to ask your salesperson to explain
all the possibilities to you. Once you
are armed with this information, you’ll be better equipped to make an informed
decision. Leasing may not be for you,
but please don’t pass up on a different way to pay for a car simply because you
“heard” it wasn’t a good idea. Ask
questions, get all the information and make the best decision for you and your
family and have fun doing it.
Happy Motoring
John Chauvin – General
Manager
Hewlett Volkswagen
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