Wednesday | February 08, 2012
To Lease, or Not To Lease
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By
18 June 2008
So you’re ready for new wheels-they could be brand spanking new or just new to you. In either case, you’ve got options, but first you need to decide whether to lease or to buy. Our guide will help you navigate this tricky terrain and figure out which route is right for you.
LEASING
Leasing is for those who are all about the here and now. Those who lease (lessees) want to roll in style today. For lessees, the future is wide open, so they want options when it comes to their ride.
Benefits of leasing
With a lease, you can drive a brand-new vehicle at a relatively lower monthly payment and, traditionally, have very few maintenance costs. For many drivers, lower payments mean that they can afford a more expensive car than if they were to purchase the same car. In some states, you’ll only pay sales tax on the lease price – which can save you up to 70% in taxes over buying. What’s more, you’re building personal credit, which lenders will look upon favorably when/if you apply for a home loan. A lease also offers great flexibility, allowing you to drive a new car as often as every two years if you choose – you have options as opposed to obligations.
How It Works
You pay a low monthly payment, which includes a money factor (similar to an interest rate). You may or may not need to make a down payment. Most dealerships offer leases that allow drivers to rack up to 12,000 to 15,000 miles on the vehicle per year. If you foresee a lot of road trips on the horizon, you can add extra mileage to your lease (for as little as $0.10 per mile, for some cars, or as much as $0.40). You can also customize your lease to run for two to four years. As the lessee, you are responsible for regularly scheduled maintenance and any repairs on the car not covered by the warranty. At the end of the lease, you can return the car and lease another, or you can purchase the car. Depending on your lease plan, you may be able to purchase the vehicle with one lump-sum payment, or you can finance what’s owed on the vehicle with monthly payments.
What to Keep in Mind
Watch out for additional-and costly-charges and fees. Administrative fees, sometimes called "acquisition fees," vary from company to company. Some lease contracts require a security deposit and include a disposition or purchase-option fee and/or wear-and-tear charges. (See the sidebar for more info.) Also, in some states, you only pay taxes on the lease price. But in other states, you pay taxes on the entire value of the vehicle, even if you do not purchase the vehicle at the end of the lease. These extra costs can vary from state to state, so make sure you read the fine print carefully before you sign the dotted line.
BUYING
Buying is for those who like ownership. They have an eye on the future, and see themselves in their cars for more than four years.
Benefits of buying
When you buy a new vehicle, you’re acquiring an asset and building equity. You’re also building credit. Like leasing, financing an automobile demonstrates a high level of personal credit responsibility. Buyers can also look forward to eventually owning a car without having a car payment, and they have the option of customizing their cars with any number of aftermarket accessories.
How It Works
When you buy a new vehicle, chances are you’ll opt for financing (as opposed to paying the entire purchase price up front). Financing is essentially a car loan from a lending institution. With traditional financing, you’ll have relatively higher monthly payments that include interest and tax. And, depending on the terms of your contract, you may make a down payment. This is ownership, so with every payment you make, you build a little more equity in your vehicle. At the end of the contract, when your car is paid off, you’ll receive a paid-in-full title. You can continue to drive the vehicle, sell it, or trade it in for a new car.
What to Keep in Mind
Before you sign, make sure you know the amount of the monthly payments for the entire contract, the amount of total interest on the contract, and the interest rate (also known as the annual percentage rate, or APR). If you’re able to, consider making a large down payment to save on the total interest you’ll owe for financing the vehicle. Also, don’t forget to consider the benefits and costs of an extended warranty, especially if you plan to keep the vehicle past the duration of the manufacturer’s warranty.
The Next Step
Once you’ve decided on leasing or buying, do your homework and shop around. Also, be sure to ask about any special offers or programs dealerships may have for students or recent graduates. You may be able to drive away with a great deal.
Printed with permission from Honda Financial Services (hondafinancialservices.com)
Before You Hit the Dealership, Know Your Lingo
* FICO Score: A credit score used by lenders (including auto financing institutions) to determine the likelihood that a credit user will pay debts in a timely manner. A person’s FICO score reflects his/her credit history, including late payments, the length of established credit, the amount of used credit versus the amount of available credit, and bankruptcies.
* Residual Value: The guaranteed minimum future value of the vehicle at lease end. When buying or leasing a new vehicle, choose a make/model with a high residual value for a greater resell value or to save on the lease price.
* Equity: The amount of debt-free ownership, or the market value of the paid-off portion of a loan.
* Security Deposit: Some leases may require a security deposit up front. This fee, usually in the amount of the monthly payment, is refunded at lease end, less any excess wear and tear or mileage charges or lease-end fees.
* Money Factor: Also known as a lease factor or lease fee, the money factor is the interest rate of a lease contract, expressed as a multiplier to calculate monthly payments. To convert a money factor to an interest percentage rate, multiply it by 2,400.
* Disposition Fee: A fee due at lease end to compensate the lease company for selling or disposing of the vehicle. This fee can cost hundreds of dollars.
* Purchase-Option Fee: An administrative fee added to the lease-end, purchase option price of a leased vehicle.
* Excessive Wear-and-Tear Charges: Charges due at lease end to cover damages to the interior and exterior of a vehicle that are beyond what is considered normal.
* Balloon Contract: A balloon contract combines the benefits of leasing with the advantages of ownership. With this type of contract, monthly payments are relatively low and comparable to a traditional lease, but the driver’s name is put on the title of the vehicle, becoming an asset for the driver. At the end of the contract, the driver has the option of buying the vehicle with one lump-sum (balloon) payment.
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