By John ChauvinWhen 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.
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).
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 this means is 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.
Common leasing objections:
• “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-mile 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 I said that “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. With more and more people moving to Texas from those states, our leasing numbers are increasing.
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
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