CHAPTER
15

Buying Versus Leasing a Car

In This Chapter

• Deciding what kind of car to buy
• Buying versus leasing
• Buying new versus used
• The added expenses of car ownership

The rumor that millennials are turning their backs on owning cars and even driving may be just that—a rumor. There’s been a lot of talk in the past couple years about millennials giving up cars to use public transportation, Uber, or car-sharing services. Recent studies, however, reveal some very different information regarding millennials’ attitudes about owning and driving cars.

In April 2015, global marketing information services firm J.D. Power and Associates reported that millennials accounted for 27 percent of new car sales—more than any group other than baby boomers. And a recent study by MTV found that three quarters of millennials reported they would rather give up social media for a day than their cars. About the same number said they would give up texting for a week rather than their cars for the same amount of time.

So although millennials might be getting driver’s licenses and purchasing vehicles later than their Gen X or baby boomer counterparts, most are, indeed, getting their licenses and driving, and many are buying or leasing cars. By doing so, they join the long-lived American love affair with automobiles.

Car, Truck, or Something Else?

We’ve always taken our cars pretty seriously in this country. For teenagers, getting a car has been a rite of passage—a symbol of emerging adulthood. Many adults, both young and old, need cars to get around.

What vehicles we buy depends on many factors. When oil prices are high and gas rises to $4 a gallon at the pumps, sales of gas-guzzling trucks and SUVs tend to fall off. When gas gets below $2 a gallon, we kind of forget about the pain of expensive fuel and shift back to larger vehicles. An increasing number of environmentally minded drivers are turning to hybrid or electric cars in an effort to reduce their carbon footprint, regardless of the price of fossil fuel.

A car provides you the freedom to go where you want, when you want to, but it might just be that not everybody needs to have one. After all, vehicles are expensive to buy and to maintain. They break down occasionally, and you’ve got to find a place to park them—in some cases paying a lot of money to do so. They require time and attention, and by the time you pay for them, they’re hardly worth the metal they’re made of. Based on the fact that 88 percent of American households own at least one vehicle, however, it seems that most of us still can’t imagine life without our wheels.

The majority of Americans have cars, but plenty of people still get along perfectly fine without a vehicle of their own, especially if they live in a city or a small, walkable town. Some of these folks hitch a ride when they need one, or they walk or ride a bike or scooter. Others use public transportation, including the buses, trains, subways, and trolleys that carry people across town and across the country every day. Others call a cab or a car service like Uber or Lyft, rent a car, or subscribe to a car-sharing service like Zipcar.

Let’s take quick look at some alternatives to having your own vehicle.

Renting a Car

Renting a car makes a lot of sense if you live in a city and want to travel to another city. Sure, you could take a bus from New York City to visit your college roommate in Washington, D.C., but that can be a hassle. Depending on how many stops you make along the way, it can turn a 225-mile, less-than-4-hour car trip into an all-day adventure. And sometimes you’re just not in the mood to chat with the person in the next seat, who is going home to her mother because she just found out her husband is having an affair.

If you use a site like Kayak and are resourceful, you probably can find a rental car for about $20 a day. Sure, you have to pay for gas and maybe some other additional fees, but after you deduct the cost of the bus and consider your time, it probably won’t be a budget-buster.

Sharing a Car

Car-share programs, which started in European cities, are gaining popularity in the United States and achieving an almost cultlike following in some cities, where users love the convenience of having cars available without the hassles and expenses of owning them. These services don’t make economic sense for someone who drives long distances back and forth to work every day, but car sharing can be a great option for someone who needs a car only occasionally.

Car-share programs vary from city to city, so spend a little time researching to see what’s available near you.

Bike-sharing programs are available in some U.S. cities and gaining in popularity.

Owning a Car Costs More Than You Think

The initial purchase of a car is a big expense. Americans paid an average of $33,560 for a new car in 2015 and $15,900 for a used vehicle. Those costs, however, are just the beginning. A car continues to cost money for as long as you own it.

You’ll need to think about maintenance costs—both routine and nonroutine. You also must have insurance on your car and pay for fuel to keep it running.

Then there are tolls, parking fees, finance charges, inspections, and cleanings. When you add it all up, the average yearly cost of owning and operating a car is $8,698, according to AAA’s 2015 Your Driving Costs study. That comes out to almost $725 a month.

The accepted rule of thumb is that you should spend no more than 20 percent of your monthly income (take home—not gross) on a car payment. Because a car consistently loses value, it’s not a good investment. You can find all sorts of things to do with your money that will result in far greater benefits than car payments.

Bankrate provides a calculator to help you determine how much you should plan to spend on a car. You can access it at bankrate.com/calculators/auto/auto-loan-calculator.aspx.

Buying a Car

Although it might not be necessary for everyone to own a car, most of us do. Buying a car means paying out a lot of money to get one, followed by more money to keep it running.

If you’re in the market for a new car, take your time and consider all the angles before you buy. Maybe you’ve had a good job for a few years and have put some money aside for a down payment on a new car. Or maybe a used car makes more sense for you. And then there’s the big question: should you buy a vehicle or lease it?

One fact is indisputable: cars are expensive. Even if you’re not looking for anything fancy, you’ll pay a lot of money for a new car, despite any manufacturer and dealer specials you get. If you’re going to buy a car, there are a few ways of doing it. You can walk into the dealership, plunk down $33,000, and drive off in your new wheels. Or if you’re like most people, you can finance your car.

Financing Your Car

Most dealerships offer car financing. And it’s tempting to get your loan through the dealer because it’s easy. You can sign up, be approved, and drive your new car off the lot all in the same day. However, unless you can get a special deal like 0 percent financing, be sure to check out the rates on a loan from your bank or credit union before committing to the dealer’s offer.

Dealer financing sometimes is cheaper than a bank, but not always. You should contact your local bank, see what it can do for you, and compare its rates with what the dealer is offering. One thing to remember: if the car dealer controls your loan, a salesman could try to talk you into buying a more expensive car than you intended to by assuring you they’ll give you the extra money you need to cover it.

Even if a dealer offers what sounds like a terrific financing deal, be sure you consider all the facts and know what the actual cost of the car will be when the financing kicks in. And don’t let a dealer persuade you that it’s okay to drive the car off the lot before the financing is approved. Car dealers are out to make money one way or another, whether it’s from the cost of the car or through finance charges.

If you can find a bank-financed car loan that has a lower interest rate than what you can get through the dealer and get preapproved before buying your car, you’ll be in a great position to negotiate on your price. Here’s why: you know how much money you have, and you buy within that amount; the car salesperson knows you’re serious about buying, and he’ll do everything he can to be sure you buy from him; and you’re not at the mercy of the dealership to get your loan. Instead, the dealership has to work on your terms.

Consider the following when looking for and getting a car loan:

Compare interest rates Shop around for interest rates. Often, credit unions offer the best rates on car loans, so be sure you look there as well as at banks and the dealership.

Go for simple Instead of an installment loan, go for a simple interest loan, which lets you pay interest only on the remaining amount of your loan. The bank will figure out the total interest on your loan and set up a plan where you’ll pay the same amount each month for the life of your loan. That’s better than a front-end installment loan, which requires you to pay interest each month on the full amount of the loan.

Make a large down payment Put down as much money as you can. The more you put down toward your car, the lower your interest rate will probably be. Plus, you’ll be financing less, thereby paying less interest overall.

Boost your down payment with rebates Use rebates (money the car manufacturer offers you as an incentive to buy its cars) to make your down payment bigger. If you’re offered a rebate on a new car, by all means take advantage of it. But don’t buy a more expensive car just because you get a rebate.

Keep your loan short Take the shortest loan term you can manage. Don’t pay back a loan over 5 years if you can do it in 3. Even though your monthly payment will be smaller on the 5-year loan, you’ll be paying interest for a longer time and end up paying more in the long run.

Pay off your loan early If you can, it’s beneficial to pay off your loan early. Some lenders let you pay off a loan early, but others will penalize you if you do so. Be sure to find out about that before you sign for the loan. Don’t take out a loan that won’t permit you to pay it off early.

Consider a home-equity loan The interest you pay on a car loan is not tax-deductible, but the interest on a home equity loan is. If you own a home and need to borrow money for a car, look into getting a home-equity loan to use instead of a car loan.

Pay off any credit cards first Finally, don’t put extra money toward a 7 percent car loan if you have an 18 percent credit card bill outstanding. The extra money will go a lot farther if you use it to pay off the credit card bill.

Cash Back Versus 0 Percent Financing

Auto manufacturers want to sell you their cars, and many will make tempting offers to lure you onto the lot. At the beginning of 2016, for example, Mazda was offering 0 percent financing on the popular Mazda3, and Ford would sell you a brand-new Fusion with 0 percent financing for 5 years or more than $2,000 cash back.

If you can’t get an offer for 0 percent interest, it’s likely that you’d be able to find a deal for low financing. Some dealers combine low financing with cash-back offers or deals that start with 0 percent financing and increase over time depending on the length of the loan and other factors.

If you’re offered a choice between free financing and cash back, which should you take? Which option will save you more over the life of your loan?

Cash rebates and 0 percent financing deals will both reduce the monthly payments on your loan. Using the rebate as part or all of your down payment means that you’ll owe less over the life of the loan. Free financing means you’ll pay less because interest charges won’t be added to your monthly bill. You’ll have to make your monthly payments, of course, but they’ll be less than they would be with interest added.

If you do qualify for 0 percent financing and/or a cash rebate, you can find online calculators to help you figure out and compare which will help you to save more. For free, easy-to-use calculators, check out edmunds.com/calculators/incentives-rebates.html or bankrate.com/calculators/auto/car-rebates-calculator.aspx. To use the calculators, you’ll need to know information such as your state’s vehicle sales tax rate, the total cost of the vehicle you’re buying before tax, the amount of the car manufacturer’s rebate, and the amount of your down payment.

Having to choose between 0 percent financing and cash back is a good problem to have. Just take your time to figure out which makes more sense for you.

Leasing a Car

Leasing has been gaining in popularity, and many people—including millennials—are embracing it. In 2015, leasing accounted for 29 percent of all new car purchases among millennials, according to an Edmunds analysis. That’s a 46 percent increase since 2010.

Leasing certainly is an option, but you should take some time to consider whether it makes more sense to lease or to purchase. Basically, when you lease a car, you pay for the estimated depreciation that’s occurring to the car while you’re driving it. You pay only for the part of the car’s value you use, plus interest. However, leasing often can enable you to drive a more expensive car than buying.

When you begin a lease agreement, the dealer estimates what the car’s residual value will be at the end of your lease.

If you have a closed-end lease, you simply come to the end of your lease agreement, turn in your car, and walk away.

If you have an open-end lease, you may not be able to walk away free and clear at the end of the lease; you may owe the difference between the residual value of the car and the actual market value at the end of the lease. This might be the way to go, as long as the street value of the car has remained above the residual value determined by the dealer. You would then be buying the car for less than you could anywhere else. If the dealer overestimated the car’s residual value, however, you’d be paying more for it than you would somewhere else.

See what we mean about leasing being a tricky business?

There are some good reasons to lease a car, but there are some good reasons not to as well. One major consideration is that you’ll never pay less overall for leasing than you do for buying because you’ll always be paying for but never actually own the car. It’s sort of like renting a car for an extended period of time.

Still, many people like leasing for one reason or another. Those who have a special need for a particular vehicle for a limited amount of time, for example, might consider a lease.

Before you decide to lease, consider some of the following pros and cons.

Pros of Leasing

There are some good reasons why people like leasing vehicles:

• Many leases don’t require a down payment, or at least not a very high down payment.
• You probably can lease a more expensive car than you’d be able to buy. The majority of millennial car shoppers surveyed said they would put down no more than $3,000 and pay no more than $300 a month for a new car. That would limit your purchase to a car priced at less than $20,000. For the same money, however, you could lease a car priced as high as $35,000.
• When your lease ends, you don’t have to worry about getting rid of your car; you simply give it back.

Cons of Leasing

There are, however, some not-so-good aspects of leasing a car:

• The total cost of leasing is almost always more expensive than buying a car with cash and can be more expensive than financing a car.
• When your lease ends, you’re out of a car.
• If you decide to buy the car at the end of the lease, you will owe sales tax.
• Most lease agreements impose mileage limits. If you go over the number of miles allowed, you’ll have to pay a penalty.
• Leasing doesn’t cover insurance or maintenance, so you don’t save these costs.
• You might have to pay for the dealer’s cost of auctioning the car when your lease expires. These fees are called disposition charges.

Before You Lease

If, after considering the pros and cons, you decide to lease a car, do your homework before you sign anything. There are as many lease deals as there are kinds of cars. Check out websites such as Edmunds.com (edmunds.com) or Bankrate (bankrate.com) for more information about leasing.

When you feel you’re sufficiently prepared to negotiate a lease, keep the following tips in mind:

Opt for a closed-end agreement Always get a closed-end agreement. This enables you to turn in your car and say adios. If you fall in love with your leased vehicle, you can negotiate for it, but you won’t be obligated to buy it.

Understand repair requirements You’re still responsible for repairs when you lease a car. Be sure you know in what condition you’re expected to return the car.

Also check out the manufacturer’s warranty on the car. This is a good guide as to how long your lease should be. You don’t want to end up paying for costly repairs.

Find out what happens if you lease a lemon. Cars you buy are covered by lemon laws. Be sure there’s a similar provision if you lease.

Push for a higher residual value Negotiate the highest residual value on the vehicle you can. If you decide to buy it, you can renegotiate. If you don’t buy it, you’ll end up paying less for the part of the car’s value you’ve used.

Talk about mileage Be up front with the dealer about how many miles you plan to put on the car each year. If you exceed the dealer’s limit (usually around 15,000 miles a year), you’ll be fined.

If you drive 10,000 miles a year or less, ask whether you qualify for a low-mileage discount. Be persistent if the dealer is reluctant to give it to you.

Get gap insurance Be sure the lease has gap insurance. Ask to have it included in the agreement with no additional charge.

Consider the length of the lease Don’t sign a lease for longer than you’ll want the car. For instance, if there’s a possibility you’ll be transferred to Singapore for work in 2 years, don’t sign a 3-year lease. You’ll be penalized for breaking it.

Finally, don’t let a dealer talk you into a lease agreement that’s shorter than what you want. The dealer is eager to get you back into the showroom to look at another car, and some dealers push for very short leases for that reason. However, it could end up costing you more than necessary.

Lease agreements are notorious for being complicated pieces of confusing legalese, decipherable only by a Harvard Business School PhD. But if you know what to look out for, you can approach the whole process with a lot less aggravation.

The more you know about leasing and lease agreements going into the showroom, the less likely a salesperson will be to take advantage of you and give you something you don’t need or want that will cost extra money. Remember these definitions:

Capitalized cost The price you pay for the car.

Finance charge The interest you pay on the car.

Residual value According to the dealer, the amount the car is worth when the lease is over.

Compare these numbers in every agreement you look at.

Also read up on leasing, be prepared with questions, and don’t be pressured into getting something you don’t want. If you decide to lease and follow those guidelines, you’ll do just fine.

New or Used?

Regardless of whether you decide to buy or lease a car, you need to consider the value of the car you’re getting and what you can realistically afford. Sure, you might be able to borrow $30,000 to buy a new car, but why would you? If you want a new car, look at everything available.

To get a better idea of how much specific cars cost, check out IntelliChoice (intellichoice.com). This site lists the best overall values for cars of various sizes, and its categories are divided into price ranges.

In addition to saving money on your purchase now, you also can save for your future. After all, you’re probably going to buy several cars before you hang up the keys for the last time. Money you save now and invest will buy you more cars and other extras you might want later on.

So who says you need a new car? Yeah, you’re taking a chance if you buy a used car out of some guy’s front yard, but many reputable car dealerships offer a good selection of used cars—known these days as certified preowned vehicles—complete with extended warranties and other perks. These cars can be had for a fraction of what they’d cost new, and if you take good care of yours, it should give you years of service.

If you buy a used car for half or two thirds of what a new one costs, you can afford to pay a greater percentage of the cost up front and have to borrow less. Your monthly payments will be less as well, giving you more money for other things.

Sure, you’ll have to factor in some repair and maintenance costs, but if you’re diligent about checking out the quality of the car before you buy it and insist on a good warranty, you’re still likely to come out ahead.

Safety Counts

Regardless of the type or size of car you buy, remember that some vehicles are safer than others. Sure, any car can be safe or unsafe depending on how it’s driven, but some cars hold up better in crashes than others, giving you and your passengers a better chance of surviving. You also can get better insurance rates if you drive a car that’s rated as safe.

How can you find out which cars are safer? One source is Consumer Reports. Each year, it publishes a list of the 25 safest vehicles, based on how well they’re designed to avoid a crash and how they hold up in the event that a crash can’t be avoided. Another place to look is Kelley Blue Book, at kbb.com/best-safety-rated-cars.

Remember, though, that no vehicle is safe if you’re trying to talk on your cell phone, eat your lunch, and fumble for your favorite CD while you’re driving. And that goes double when you start hauling kids with you.

Best Places—Online and Off—to Shop for a Car

Car shopping is a big deal because it involves spending a lot of money, so it’s important to know the best places to shop. The face of car-buying has changed over the past decade or so, due to internet car sales. Cars once were primarily sold at car dealerships, on used car lots, or even on somebody’s front lawn, but you now can buy a car on eBay or craigslist.

If you’re contemplating buying a car from a dealer, be sure to get online at Edmunds.com (edmunds.com) or Kelley Blue Book (kbb.com) to get all the information you need about the car you’re thinking about. At either site, you can compare dealer costs and incentives, contact dealers to determine inventory and bargaining potential, and contrast transaction prices.

Online

Or you can buy your car online, without ever having to leave your home. Check out a site such as CarsDirect (carsdirect.com), where you can order the car you want for a price the site has already negotiated with a dealer. You order the car online, specifying exactly what options you want, the color you like, and other preferences, and the site finds a dealer near you that has it.

If you’re willing to go the extra mile, you might be able to get a great deal on a car that’s for sale on the internet at a site like eBay Motors (ebay.com/motors). But you’ll need to do your homework here and find out the value of the car, whether there are any complaints posted on the site about the person selling the car, and so forth. If the car happens to be located near where you live, it’s easier than if you need to travel to see the car. If you have to buy a plane ticket to check out the car, add the cost of your ticket to the cost of the car.

Helpful Apps

Some car-related apps can give you information so you’ll know exactly what you’re talking about when you begin the process of negotiating a price on a new or used car. Here are a few of them:

Edmunds App (edmunds.com) Edmunds is an authority in the car world and now offers an app. You can look up the fair price of a new or used vehicle, check vehicle reviews, and see what’s available in your area. The app even gives you estimates on what it costs to maintain a particular vehicle.

CarMax (carmax.com) CarMax is the largest seller of used cars in the United States, and its app, tied directly into its website, lets you locate and check the stock of the CarMax closest to you. You get multiple photos of each vehicle along with information about its history, features, warranty, and cost. Price calculators are available to help you figure out how much you’ll pay over time, and the app enables you to contact the CarMax dealership about vehicles you like by email or with your phone.

Kelley Blue Book (kbb.com) Car buyers have depended on the Kelley Blue Book for generations. Its app puts the information you need on your phone or tablet and gives you the specific value of new and used cars, even if the model has been discontinued. It also lets you know about incentives available on new cars and contains video reviews of the latest vehicles.

Regardless of how and where you decide to shop for a car, be sure to do your homework. The more informed you are, the better.