April Topic - "Some fast facts about leasing and buying cars"

01.  Leasing 101
02.  Buying a car 101
03.  Advantages of Leasing & Buying a car and the disadvantages

1. Leasing 101

In your lifetime you will probably purchase or lease many cars. It is a very difficult decision for many. The goal is to find out what is more cost effective. A new car generally costs between $18,000 and $25,0000. Cars are usually the biggest purchase we make other than our homes. Which decision is best for you needs to be based on different factors. For instance, how many miles you generally put on a car, your lifestyle, how long you like to keep a car, and finances. A car is generally not considered an investment. It is often stated that once you drive a new car off the lot you lose 20% of the value. Now you are probably wondering why anyone would buy a new car. There are pros and cons to each side, which will be discussed throughout this newsletter.

What exactly is leasing a car? It is borrowing or renting a car for a specified amount of time. Leasing has gained popularity over the past couple of years. Ten years ago it was very rare to lease a car, but nowadays it accounts for a majority of cars on the roads. When leasing a car you have a buy option when your lease is expired. Generally what this means is you can lease the car for a certain amount of time and then at the end you buy the car at a predetermined price. This is a good option for people who do not have the money immediately to buy or want to make sure this is the car they want to purchase. Leasing is a good option for many, but you must be cautious to be sure you get the best deal. The main thing that you as a leaser want to find out is the residual value.

This is something that they will not disclose unless asked. Residual value to put simply is the money you are not financing to use the car. This is how the dealers make money when leasing cars. Many leasers have no idea what this is and that works to the dealer's benefit because the dealers will frontload their profit. To avoid being taken advantage of make sure you require that they disclose this value.

Simple math will tell you the amount you will be paying on the front side of the lease. For example, the car is worth $10,000 and it has a residual value of 60% you should only be financing 40% or $4,000 of the car's value. At that point you can figure out that your cost of ownership should only be $4,000 for the term of the lease. Often times after the lease has expired the actual value of the car may be higher than the contract residual value of the car therefore you can sell the car for more than the ending lease value of the car or trade for that difference.

Now you are probably wondering how you can sell a car that is leased. Let me explain how this is done. There is always a purchase option at the end of the lease, which is the contracted residual value of the lease. So at that point you would want to buy the car for the stated residual value or you could trade the car for the difference between the residual value and the actual value. The dealers usually do not want to trade so most of the time it is easier to sell the car for the profit.

2.Buying a car 101

Buying a car is when you have ownership of the car. You can finance a new car or buy it cash. If you are like most Americans you will have to finance. Financing is usually better to do it on your own. Although dealers will offer financing incentives it is usually still best to go in prepared.

However, if the dealer is offering a 0% interest rate or under prime financing incentive it is often the best deal. You will save a lot of money since you are buying at cash value. If you are in the market for a new car shop around with credit unions, banks and loans so you can compare rates. First step to buying a car starts at home.

Figure out what kind of car you need and what kind of budget you have. Your car should fit all your needs because when purchasing a car you want to make sure you can keep the car for a couple of years. Think about your overall costs including maintenance, insurance, and gas. Insurance rates often depend on what kind of car you are driving. Get quotes from your company prior to buying the car. Gas rates are extremely important in today's society.

I am sure everyone has noticed that gas is a huge expense. Someone who is driving an SUV generally spends double than someone is driving a compact car. Though the difference may seem minimal each month it adds up over time. The savings over a year can add up to thousands of dollars depending on how much you drive. The best advice that I can give you is to buy a car the last week of the month and always demand an invoice purchase.

The invoice price is the lowest price a car can be sold at. If you are asking for an invoice price be prepared to purchase the car. You should also demand that they disclose all manufacture incentives because these incentives can come off the invoice price. In other words, the dealer is given these manufacture incentives that they are not paying for. By having the dealer disclose this incentive you can actually purchase below invoice.

3. Advantages of Leasing & Buying a car and the disadvantages

Advantages of Leasing a Car:

1. Lease costs less money upfront.

2. You return the car after a specified amount of time so you do not need to worry about selling it.

3. You get to switch to a new car every couple of years.

4. You can drive a more expensive car that you can afford.

Disadvantages of Leasing a Car:

1. You do not own the car.

2. You are not able to make changes to the car. It must be returned in the condition it was given to you in.

3. Usually the maximum insurance is required.

4. You are limited to how many miles you can drive per year. If those miles are gone over there is usually a hefty charge.

Some fast facts about leasing a car

Capital cost is the leasing equivalent of the selling price.

The residual value is the actual value that the lender is given that the car will be worth when your lease expires.

Be sure to find out all extra charges such as mile overage or damage to the inside or outside of the car. Also find out if anything is covered should it break while you are using the car.

Negotiate the price, down payment and mileage.

Avoid leases that extend the warranty.

Purchase gap insurance in case the car is stolen or totaled in an accident.

If you are trading in a car be sure that the dealer has deducted your trade in from the capitalized cost.

If you choose to buy once the lease is over negotiate the price.

Be sure to find out what penalties you are faced with if you decide to terminate the lease early.

Advantages of Buying a Car

1. Car has a residual value if you choose to sell it after time.

2. No restrictions on how many miles you can drive.

3. You are welcome to carry as little as coverage as you would like.

4. Depending on how you buy your car the interest may be tax deductible.

5. You can make changes to the car such as lights, paint, sound systems, etc.

Disadvantages of Buying a Car

1. Monthly loan payment may be higher and you will likely have a large down payment.

2. There are usually no returns on cars that are bought, so if you do not like it you will have to sell it.

3. You may be driving the same car for many years.

Some fast facts about buying a car

Go in prepared already. Figure out how much the cars are worth. This can be looked up on various websites. Print out that information and have it ready to show to get your lowest price.

Figure out how much you can spend prior to going to buy a car. Your car payment should be no more than 20 percent of your gross income.

Be sure if you are trading in a car you are getting a fair value. This can be researched online.

Negotiate up from invoice price, which is what the dealership paid, rather than down from sticker price.

Be wary of the no or low interest rate financing. Often times many people do not qualify for this and end up paying more. It is often best to go through your credit union or bank.

Be cautious about "extras". Remember these dealers will try to sell you anything to make an extra dollar. Be sure to read all the fine print and anything that seems fishy probably is so question it.

Consider buying a model that is 3 or more years old. A car depreciates the most in the first 3 years.

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Got a question? Then contact our Education Team on 561-883-2398 Ex.310 United conducts regular seminars on financial education, including "How to Budget", come along and join us - to reserve your seat contact our Education Team on 561-883-2398 Ex.310

Newsletter 04
Rev.1
April, 2007