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Car Buying 101

So Many Options When Buying a Car - Which way is really BEST?

The answer quite simply... it depends. It's not possible to simply say that one way of purchasing is always better than the other because the answer depends on the specifics of each individual situation; YOUR situation.  Sometimes following the advice of what worked best for a trusted friend or family member, might not be what works best for you or your situation. This is one reason why so many people often end up feeling frustrated with their purchase and why Cochrane Dodge has earned a reputation for being open and upfront with our customers (a large part of why we won the BBB Business Ethics Award last year)! But don't take our word for it, the proof is in what our customers say. Earining one of the highest Customer Satifaction ratings in Canada only comes from being an honest and reliable dealership. So if you're looking for options and a clear explainantion on how each one works and what it means to your bottom line, you've a great place to start. Let's break things down...

Leases and purchase loans are simply two different methods of automobile financing. One finances the use of a vehicle; the other finances the purchase of a vehicle. Each has its own benefits and drawbacks and each will offer several versions.

Is having a new vehicle every two or three years with no major repair risks more important than long-term cost? Or are long term cost savings more important than lower monthly payments? Is having some ownership in your vehicle more important than low up-front costs and no down payment? Is it important to you to pay off your vehicle and be debt-free for a while, even if it means higher monthly payments for the first few years?

So we find out that making a lease-or-buy decision is not so cut and dry. There are some specific things you need to consider. Let's take a look at some of these things now. 

   


Buying and Leasing are VERY different

When you buy a new vehicle, you pay for the entire cost of a vehicle, regardless of how many miles you drive it. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company, based on your credit history. You make your first payment a month after you sign your contract, just like paying a morgage on a house. Later, you may decide to sell or trade the vehicle for what ever is still owing on it (its depreciated resale value).

When you lease, you pay for only a portion of a vehicle's cost, which is the part that you "use up" during the time you're driving it. You have the option of not making a down payment, you pay sales tax only on your monthly payments (in Alberta), and you pay a financial rate, called money factor, that is similar to the interest on a loan. You may also be required to pay fees and possibly a security deposit (usually refundable) that you don't pay when you buy. You make your first payment at the time you sign your contract - for the month ahead, just like renting a home. At lease-end, you may either return the vehicle, or purchase it for its pre-determined resale value.

With leasing, you may have the option of putting your monthly payment savings into more productive investments, such as mutual funds or stocks that have the possibility of increasing in value. In fact, many experts encourage this practice as one of the benefits of leasing, though most people will typically find other uses for the money they save by leasing - such as paying the mortgage or buying groceries.

To summarize, the real reason a buyer has equity at the end of his loan is that he purchases that equity by making higher monthly payments. Part of each payment funds the equity. Leasing = lower payments, little to no equity. Buying = higher payments, partial equity. This holds true whether you're purchasing new or used.

 

Things You Need to Understand 

      The "60/96" Plan

Though it's common perception that leasing is much more complicated than financing, there is a new purchase plan that buyers need to be on the lookout for. The increasingly popular "60/96" finance plan has become the ultimate "payment bait" for many car dealers today. The goal is to make every product seem affordable by promoting the absolute lowest payment possible for any given vehicle. For many buyers today, our budget rules the roost and no one wants to sacrafice comfort, features or benefits if they don't have to. Manufacturers and dealers KNOW this and it's become necessary for them to keep their products within the buyer's budget.

Now if you're at all familiar with the recent economic conditions of our neighbors to the South, you've seen and possibly felt first hand, the cost of being overextended. The 60/96 was designed to spread your purchase over the longest possible term. Your payments are kept as low as possible, but your cost of borrowing (interest and depreciation) are at their highest... sound familiar? 

Now sometimes this really is the right option (or only option) and that's o.k... as long as your dealer has been completely upfront about how it works and what it costs you as a buyer. NOTE: Dealers should always provide you with a couple of alternatives to consider along with this plan.

Next time you see a really low payment for a for a BRAND NEW car or truck... ASK SOME KEY QUESTIONS: 
           
           1. What does 60/96 mean?
                       A 60/96 means you're financing your vehicle with payments based on a 96 month repayment term. Your payments
                       will be locked in over the first 60 months. After that point, you will return to the lender to re-negotiate a rate to
                       finance the balance of your loan. 
           
           2. What is the amoritization?   
                       This is the BIG one, in the phrase 60/96 - 96 is the amoritization period. Simply put, your rate and payments 
                       are locked in for 60 months (your term), but you're paying down at a rate of 96 months (amoritization). So while
                       you only have a 5 year term you're expected to make payments for 8 years.

           3. What is the payment term?  
                       Bi-weekly terms have been made very popular by lowering payment size (adding 2 more payments to your schedule). 

           4. What's due at signing?       
                       Typically, payments that are advertised are shown without taxes and fees. These may end up being MUCH more than you
                       realize (destination fees alone are in excess of $1000) so be sure the payment you agree on includes all the "extras".
                       Don't be afraid to ask any question!

           5. Is cash down needed?         
                       Cash down is often used to help lower monthly payments but is only necessary if a creditor requests it. Weak 
                       or bad credit, high debt service (owing more than you make) and term may all be factors that determine if and 
                       how much of a deposit is required for fianacing approval.


        Long Term Financing

When fitting a budget is a big part of your decision to buy, another alternative to the 60/96 (shown above), is long term financing. Using a fixed rate over 72 or 84 months may be something to consider. This option, while slightly more expensive, does offer one significant advantage; a fixed rate for the entire term of the loan. A good financial advisor will tell you that it's crucial to use a fixed rate loan when purchasing a depreciating assest (like a new vehicle). Eventhough this seems like a simple finance option, you'll still want to make sure you go through questions 3-5 above!
 

        Using Your Line of Credit

Another popular option for car buyers recently, has been cashing in on lines of credit. Thanks to so many cash incentives offered by the manufacturers right now, people don't want to sacrafice getting the best cash price, but they rarely have the cash in hand to make a purchase. Many buyers end up turning to their own source of lending; lines of credit or equity lines. There are a couple of considerations you should explore before making a decision to purchase a car this way. Firstly, a line of credit should always be reserved for either a temporary loan or purchase that can be paid back (in full) in less than 4-6 months or secondly, to invest in something that will pay a respectable return on investment (value is intended to increase over time). Using a line of credit to purchase a car (especially in volitile economic state like we're experiencing) can actually end up costing you thousands more in the long run and take away your financial cushion just when you may need it most! Keep your leverage, control the interest (with fixed rates) and the ups and downs of a fluctuating ecomony, won't affect you quite as much.


Leasing can be a little more complicated

Because leasing is somewhat more complicated; with residuals, money factors, etc.; it shouldn't be undertaken quite as casually as you might with a simple loan. There are more opportunities to misunderstand and make mistakes. Therefore, leasing requires that you be more careful and more informed.

This is precisely the reason we've provided a Lease Guide - to make your next purchasing decision as easy as possible.


Your Lease Guide

Some folks lease with the intention of buying their vehicle at the end of the lease, or before the end of the lease. You may have a good reason for this tactic such as benefiting on writes offs or tax deferral but be aware that it may cost more in the long term.

So, is it better to lease, or to buy? As with any question of this type, there are always pros and cons, pluses and minuses, advantages and disadvantages.

Lease vs Loan

Standard lease compared to a 8% loan and a 0% loan. Leasing almost always has lower payments. Does this mean leasing is always better? Not necessarily. Payment is not the only factor that should influence your decision...

  Lease- 12% Loan - 0% Loan - 8%
Car Price $23000 $23000 $23000
Down Payment $1000 $1000 $1000
Interest Rate 12% 0% 8%
Residual $13000 n/a n/a
Months 36 36 36
Payment $588.06 $611.11 $669.28

Let's simplify the answers and summarize them here:

    1. The short-term monthly cost of leasing is almost ALWAYS SIGNIFICANTLY LESS than the cost of buying.
    For the same car, same price, same term, and same down payment, monthly lease payments will typically be 10%-30% lower than loan payments. This is true even when compared to 0% or low-interest loans (see comparison at right).

    2. The medium-term cost of leasing is ABOUT THE SAME as the cost of buying, assuming the buyer sells/trades his vehicle at loan-end and the leasee returns her vehicle at lease-end.
    The overall cost of leasing compared to buying, over the same lease/loan term, is approximately the same, assuming the buyer sells the vehicle at the end of the loan. Comparisons sometimes show buying to cost a little less than leasing due to fewer fees, lower total finance costs, and the assumption that a purchased vehicle will return full market value if it is sold or traded at the end of the loan (often a bad assumption, especially if traded). However, when the benefits of wisely investing monthly lease savings are considered, and sales tax savings (in most states), the net cost of leasing can easily be less than buying.

    3. The long-term cost of leasing is ALWAYS MORE than the cost of buying, IF the buyer keeps his vehicle after loan-end.
    If a buyer keeps his car after the loan has been paid off and drives it for many more years, the cost is spread over a longer term. It doesn't take rocket science to figure out that the cost of buying one car and driving it for ten years is less expensive than leasing or buying five different cars over the same period. Therefore, leasing is almost always more expensive than long-term buying. If long-term financial cost savings were the most important objective in acquiring a new car, it would always be best to buy the car and drive it for as long as it survives - or until the cost of maintenance and repairs begins to exceed the cost of replacing it. However, many automotive consumers have other objectives that reduce the importance of long-term cost savings.


So, which is better, lease or buy?

It depends on what's most important to you. All of us have different lifestyles and priorities - in cars and in finances. Car lease-versus-buy decisions must be made with your own lifestyle and priority attributes in mind. What's right for one person can be totally wrong for another.

LEASE - If you enjoy driving a new car every two, three or four years, can benefit from deferring taxes, like having a car that has the latest safety features and is always under warranty, don't like trading and selling used cars, aren't concerned about long term ownership, have a stable predictable lifestyle, drive a low to average number of miles, like the safety of a guaranteed value (closed ended lease) properly maintain your cars, are willing to pay more over the long haul to get these benefits, and understand how leasing works, then you should probably lease your next vehicle.

BUY - If you don't mind higher monthly payments, prefer to eventually build up trade-in or resale value (equity), like the idea of having ownership, like paying off your loan to be payment-free for a while, don't mind the unexpected cost of repairs after warranty has expired, drive more than average miles, prefer to drive your cars for years to spread out the cost, like to customize your cars, expect lifestyle changes in the near future, and don't like the risk of possible lease-end charges - then you should buy.

But before you make your buy-lease car decision, talk to the experts! Call 403-932-4072 today to book your complimentary consultation and we'll empower you to make a decision you can feel confident with!

                                                                         Don't just buy....  know how and why!