Financing

Financing vs. Leasing

Should you consider leasing your next new vehicle or should you purchase the vehicle using traditional financing methods? This can sometimes be a very tough decision and there is no universal answer. Review some of the featured resources and determine what is best for you. Remember, it is our goal to make sure how you decide to pay for your vehicle best suites your situation. We would love to work with you in determining all of your options; simply contact us with your questions.

"Five Myths on Leasing a Car"

You can negotiate a smart car lease: here's how.

By Mark Solheim, Senior Editor, Kiplinger's Personal Finance

Leasing often gets a bad rap, and no wonder: Its confusing argot sounds like fodder for a course in high finance, and dealers have been known to slip bad deals past confused car buyers who simply wanted low monthly payments.

About 20% of new-car transactions are leases, but I'm convinced that more people should be leasing. As interest rates rose, carmakers shifted incentives from rebates and low-interest financing to leases. If you know what you're looking for and negotiate smart — and get over the five myths below — leasing can be a good deal.

1. Buying is cheaper than leasing. If you keep a car well past the day the loan is paid off (or you paid cash to begin with), you save money by buying. But if you trade in your car before the loan is paid off, the value of the trade-in is unlikely to cover the remaining balance on the loan.

For example, if you leased a new Chevrolet Malibu LTZ for three years, your monthly payments would be $489. When you turned in the car at the end of the lease, you'd pay a "turn-in" fee of $395 and then walk away. If, however, you bought the Malibu with a five-year loan at 7.9%, your monthly payments would be $546, and after five years you'd own the car free and clear.

But say you want another car after three years. To match the residual value written into a three-year lease, you'd probably have to sell the Malibu on your own rather than trade it in. Then you'd have to pay off the loan. Buying would leave you about $1,600 poorer.

2. It's nearly impossible to negotiate a good buy. However, leases are negotiable. But first you need a tour of the jargon:

Capitalized cost.The vehicle price is called the capitalized cost. You should haggle over this just as hard as you would haggle over the price if you were buying.

Money factor. Another crucial term is the money factor. The lower this number, the better (multiply it by 2,400 to get an estimate of the interest rate). Dealers are sometimes reluctant to reveal the money factor, so be persistent.

Residual value. Finally, the residual value is the value of the car or truck at the end of the lease.

An inflated residual value lowers your monthly payments, but it can also hand-cuff you.

A more realistic residual value will make it easier to sell the lease, trade your vehicle mid lease or buy the vehicle at the end of the lease, says Tarry Shebesta, president of Automobile Consumer Services, a leasing service in Cincinnati.

Ask the dealer to show you deals from several banks, focusing on the money factor and the residual value. You can also go to LeaseCompare.com to comparison shop and apply for a lease. Or check out LeaseWise. For $335, the service will shop five dealers in your area.

3. Only businesses get a tax break. Tax laws allow businesses to deduct the monthly payments as an expense.

But individuals get a tax break, too. In most states, you pay sales tax only on the monthly payments, not the sale price of the vehicle. In the Malibu example above, you'd owe taxes on about $18,000 in payments rather than the $27,000 sale price. (Arkansas, Maryland, Minnesota, Texas and Virginia charge sales tax on the entire sale price.)

4. You may have to pay hefty fees when you turn in the car. The typical annual allotment of 10,000 to 12,000 miles is stingy, and the 18- to 21-cent-per-mile penalty for exceeding the limit seems daunting. But if you buy a car, you're also penalized for higher-than-average mileage when you trade it in.

You can probably negotiate a higher limit in exchange for a higher monthly payment and still save money.

5. If you want out early, you're stuck. Several fee-based Web sites, including LeaseTrader.com and Swapalease, match people who want to get out of a lease early with those who want to assume a short-term lease. At LeaseTrader.com you pay a fee of $80 to post your vehicle and $150 to complete the transfer of the lease.

"To Buy or to Lease" – SmartMoney.com

The Advantages

Low Down Payments — Even though a lot of the advertised lease deals assume a down payment, you can often get the dealer to limit it just by asking. Of course, the more cash you come up with initially, the lower your monthly payments.\

Low Monthly Payments — Since you are only paying off the depreciation on the car — not its full value — your monthly payments are much lower than if you opt to finance the purchase of the entire car over the same period of time.

Easy Turnover — Assuming your car is in good shape, when your two or four years are up, just stroll into the dealer, hand over the keys, and drive out with a brand new car and a new lease arrangement. You don't have to bother with selling the car or haggling with a dealer over trade-in value. That was all taken care of beforehand.

The Disadvantages

No Equity — Similar to paying rent on an apartment, your lease payments don't go towards owning anything. Unlike traditional financing, you can't look forward to the day when the payments will stop and you can drive your own car free and clear.

Lack of Flexibility — You pay a big penalty if you want out of the lease before the full term. Bailing out early may cost you as much as six extra months of payments, depending on your leasing company.

You May Pay Extra — Most leases charge an extra 12 or 15 cents for each mile you drive over a certain limit. Typically the lease agreement grants 12,000 to 15,000 miles per year. (Drivers average 15,000 miles per year.) Also, you'll have to pay up for any damage to the car beyond normal wear and tear when you turn it in. One way to avoid the mileage charge is to buy more miles at a reduced rate (of around 10 cents) up front.

Insurance May Come Up Short — If you total the car or it gets stolen, your insurance will only reimburse you for the car's market value, which might not cover what you still owe on your lease. You can buy extra "gap coverage" to protect against this, and some lease deals include it automatically.

Seven Questions You Should Ask Yourself

1. Do you need your cash?

If so, leasing makes sense, because usually you will put less money down than if you buy. In many cases, dealers will waive a down payment. You need only come up with $1,000 to $2,000 for fees, the first month's payment, and a refundable security deposit. Sales tax is usually paid monthly as part of the payment. Dealers often will allow you to roll many of the fees into the monthly payment as well by adding them to the price you pay for the car. If you buy a car and finance it, you could easily have to put 10% of the purchase price down as well as 6% to 8% sales tax — perhaps $9,000 on a $50,000 car. You are building up equity, but current cash needs may be more pressing.

2. How often do you want a new car?

Leasing is attractive for people who want new wheels every three years or so. It saves you the hassle of selling your cars, and allows you to move from car to car with relatively steady low monthly outlays and low down payments. But don't lease if you like to buy a new car every year. Ditto if you like to buy one every seven or eight years. A purchase allows you to either buy a new car impulsively when you have a cash windfall or to forestall a purchase, nursing your old car along, if your income drops. With a lease, you lose a good deal of control over those decisions. If you foresee owning the same car for seven years or more, you'll save money by buying. That's because with a lease, you walk away from a car just when depreciation slows and — under long-term financing — equity begins to build.

3. How much do you drive?

Check your odometer. It's been keeping track of your driving habits for you. The ideal lease customer drives 15,000 miles a year and maintains a car in good condition. (Fifteen thousand is the average yearly amount you are allowed in most leases. Anything above that and you have to pay extra.) If you drive substantially less, you may be paying for depreciation you are not causing. You ought to think about buying. If you drive substantially more and still want to lease, you should negotiate the cost of the additional miles up front. After the end of the lease, many leasing companies charge 15 to 20 cents a mile for the additional miles you have driven, compared with 10 cents a mile if you buy them up front.

4. Do you use your car for business purposes?

If you are deducting a portion of your car's depreciation from your taxes, you will be able to deduct substantially more if you lease. Interest paid on loans to purchase a car is not deductible. But when you lease, you can deduct depreciation as well as the implicit financing costs. The IRS does, however, limit depreciation deductions for certain luxury cars.

5. Do you worry about your car's resale value?

If you routinely cart around carpools of kids, a few dogs and lawn maintenance equipment, there's a good chance you will inflict some damage on the car's interior, which you may have to pay for later when you turn it in. So, if you're hard on your car, leasing may not be right for you. Ironically, you should also consider buying if you keep your car in immaculate condition. That way you can build up some equity and take advantage of its spotless interior or any improvements you've made when it comes time to sell. But, keep in mind, one of the advantages of leasing is that you get to lock in a resale value now. All those lease agreements mean lots of used luxury cars will turn over in two years, depressing the market value of all of them. If you worry about your car's resale value, leasing can provide some security.

6. How stable is your life?

If you foresee a move, kids, a divorce or a new job, and you don't have a clear idea where you will be in two or three years, don't lease. The money you save on a low down payment and low monthly outlays could be wiped out if you have to terminate early. When you cancel your lease early you typically owe all remaining payments minus allowances for the depreciation that hasn't happened yet. Basically, you should be almost certain you can stick with the terms of the lease before you sign on the dotted line.

7. Do you trust the company you would be leasing from?

When you buy, you don't have to trust the bank. You just need its money. But leasing means you are entering a complex financial relationship with a company. It's best to lease from an auto maker or a large leasing company with a substantial interest in repeat business. And check to see if your lease includes gap coverage, which protects you if your car is stolen or totaled. Most major leasing companies provide it. Also make sure you have a purchase option at a fixed price. Walk away from leases that don't offer both.

Car Financing: Buying vs Leasing

By Philip Reed, Senior Consumer Advice Editor

Since most people don't have the cash to buy a new car, it often comes down to a decision between leasing and buying with the help of an auto loan. Here is a quick look at the main benefits of each type of car financing.

Lease or Buy? It's Also a Lifestyle Decision

First, it's important to understand that the decision of whether to buy or lease isn't just a dollars-and-cents decision. It depends on the intangible importance you give to owning a new car. If the image of driving the latest model is essential to you, then you'll justify spending more money for this privilege. If you look at a car as merely transportation, then owning the newest car on the block will be lower on your priority list. Give these questions some thought as we move on to the more tangible issues of buying with the help of an auto loan versus car leasing.

When Car Leasing Makes Sense

There are several aspects of car leasing that make it very appealing: Low down payments, low monthly payments, low maintenance costs. However, the main advantage is that a customer (with good credit) can get a car without putting much money down, and the monthly payments will be lower than if you bought the car with the assistance of an auto loan. Furthermore, since most cars are under warranty for three years, the car will be fully covered for mechanical breakdowns during the length of the lease. (Note: Edmunds.com editors recommend three-year leases as making the most financial sense.)

Look at the Big Picture

So far, car leasing sounds almost too good to be true. There is a drawback, however. Once you start leasing, you always have a car payment. When you get to the end of your auto lease, you have to begin leasing again, or buy the car. When you buy the car, you eventually pay the car off and actually own it. At this point, you can continue driving the car as long as it runs. Sometimes this is another five, six or seven years. And for those years, your expenses are minimal.

Simply put, car leasing is more expensive in the long run. The three scenarios are compared in more detail in Your Car's Total Cost of Ownership. However, here is an easy way to look at it.

Buying New or Used or Leasing — The 10-year picture

In the following example, we show you what it costs to buy and own a new or used car or to lease a car for 10 years. In these examples, we assumed that the car was worth $20,000 when new and was financed at a 6 percent interest rate. Also, in each case, a down payment of $1,000 was made. These figures are estimates to give you a comparative feeling for these different car financing scenarios.

If You Buy Your Car: Purchase your car with the help of an auto loan, and you will make higher payments for the first five years, but then you will own it. Over 10 years, this averages $191 a month or a total cost of $22,920, not including insurance, maintenance and the like.

If You Lease Your Car: Purchase your car with the help of an auto loan, and you will lease more than three times, each time making an initial payment of $1,000 and monthly payments of $323. For 10 years, this is a total of $41,760.

If You Buy a Used Car: If — with the help of an auto loan — you buy a four-year-old used car for $8,000, put down $1,000, and pay it off in three years, your average monthly ownership cost will be $63 for a total of $8,632 for a 10-year period. Of course, a used car might require more maintenance, but if you allow an additional $5,000 for repairs, your total is still less than $14,000.

Clearly, car leasing is the most expensive way to go. But those people in favor of leasing will point out that, over that 10-year period, they drove three different new cars while the people in the other two scenarios drove the same car. Furthermore, those driving the older cars probably made at least one major repair as the vehicle aged.

LEASING and FINANCING BENEFITS

Honda Financial Services understands your needs. Choosing between leasing and financing is as important as choosing the right model. Below are some benefits of both leasing and financing through your selected dealer and Honda Financial Services. The following should help you decide how to purchase a new Honda:

LEASING

In a lease, you do not purchase an automobile. You contract to use it for the first, and best, period of its life. Following are some additional benefits to leasing a Honda.

Less Cash Up Front - One of the biggest advantages of a lease is that it does not usually require a substantial down payment. In many states, you can even pay the sales taxes as part of your monthly lease payment, rather than in a lump sum.

Lower Monthly Payment - If the finance period is the same, your monthly payments will be lower when leasing (vs. financing) because your payments will be based on the vehicle's estimated depreciation. (You are contracting to use a portion of the car's value, rather than buying the entire car.)

A New Car More Often - Your taste and preference may change, and a short-term lease makes it easy to drive a new car more frequently. Additionally, you may have needs for a larger or smaller car in a few years, and a lease makes it easy to plan for such changes.

Guaranteed Future Value - You don't have to worry about resale value. If your car depreciates more than the estimated residual value in your lease contract at full term, you can turn it in at the end of your lease term. But if it's worth more, you can buy it and keep it or resell it. A lease gives you an option.

FINANCING

If you typically keep your vehicle for five to ten years, then financing may be your best option. Honda Financial Services may be your best choice in financing your new vehicle, with competitive rates and terms designed to meet your needs.

Pride of Ownership - Ownership can instill a sense of pride. It can also build equity. Payment by payment, an owner's equity may increase.

No Restrictions on Mileage - This is important to consider if you drive more than 12,000 to 15,000 miles per year.

Make Changes to Car's Appearance - You can alter the interior or exterior to suit your taste (though your choices may affect the resale value.)

In some cases, if your Estimated Trade-in Value or down payment is too high relative to the Estimated Selling Price of the new Honda, you may not be able to choose leasing as an option. Please see your selected dealer for further details.

Hagerstown Honda

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