Monthly Archives: May 2016

Which one do you like used or lease car

How does the cost of leasing compare to buying the same car new in terms of out-of-pocket costs? Or if you decide to buy a used car, how much more will that save you? And finally, what do those costs look like in the long run?

These are important questions for consumers who want to carefully manage their automotive expenses over the years. It’s hard to give one definitive answer that covers all people and all situations. But here we will divide this question into two parts:

1. An analysis of the cold, hard costs of three different ways to get a midsize family sedan: leasing, buying new and buying used.
2. A discussion of some intangible, non-monetary issues that might affect your decision.

One Car, Three Financing Methods
In this analysis we look at an average car ownership period, which IHS Inc. estimates at almost six years. We then look at Edmunds.com transaction data for the financing information on a midsize sedan such as aToyota Camry or a Honda Accord, like the 2015 vehicle pictured above. For each category (leasing, buying new or buying used), the averages in this article are based on thousands of recent transactions across the United States. These reveal the average cost of the car, interest rate, down payment and monthly payment.

Since most people lease for three years, we compared two lease cycles to one buying cycle for new and used cars. In other words, in the buying comparisons, the person purchased the car, financed it for five years (60 months) and then had one payment-free year of ownership. (We don’t actually recommend financing a used car for 60 months but, for purposes of comparison, we have included those figures here.)

Here’s how we structured the different deals:

Leasing: The average midsize car lease is based on a car that sells for $24,775 with drive-off fees of $1,154. This results in a $294 monthly payment for three years.

Buying New: When buying the same car, the average down payment on a five-year loan is $4,104. The average interest rate is 1.64 percent, resulting in a monthly payment of $400.

Buying Used: The average price of a similar 3-year-old midsize sedan is $15,688. The average interest rate is much higher: 6.04 percent. The average down payment is $2,304. The monthly payment is $301. (Fewer low-interest deals are available for used cars, and the credit scores of people shopping in this category are lower, according to Edmunds data.)

After six years, here are the total out-of-pocket costs of each financing method:

 

Leasing

Buying New

Buying Used

Total out-of-pocket costs

$23,476

$28,104

$20,364

In terms of out-of-pocket expenses, leasing costs $4,628 less over six years than buying a new car, excluding any repair costs the new car might incur. The out-of-pocket cost of buying a used car is $3,112 cheaper than leasing and a whopping $7,740 cheaper than buying a new car. Again, any costs of repair for the used car are excluded here.

Here is something essential to remember about the apparent lower cost of leasing versus buying new: At the end of two leasing cycles, the person who leases doesn’t own the car. He or she has to start a new lease-or-buy cycle. Meanwhile, the person who bought a new car now owns a 6-year-old vehicle worth about $9,687 on the private-party market, according to Edmunds data. The person who bought the used car now owns a nine-year-old car worth about $4,794.

When we deduct the current value of the new and used car from the out-of-pocket costs, the long-term cost picture changes:

Leasing

Buying New

Buying Used

Final costs

$23,476

$18,417

$15,570

In this basic comparison, it appears the person who leased the two midsize sedans paid $5,059 more to drive these cars for six years than did the new-car buyer. Buying a used sedan saved the purchaser $7,906 as compared to leasing during this six-year cycle. Buying used rather than buying new saved $2,847.

Related Expenses
We should point out that the person who leases escapes the repair and maintenance costs — and related hassles — that owners typically encounter with aging cars. It’s true that the person who leases has to pay for routine maintenance, but that is usually just oil changes and tire rotation. (Some people avoid maintenance costs altogether if they lease a new car that has a free maintenance program.)

The car leaser also might have to buy a new set of tires, which could cost about $1,000. Of course, the new-car buyer typically has to pay for maintenance, too, as does the used-car buyer. The used-car buyer might have to foot the bill for some additional repairs as well.

On the other hand, leased cars may require the driver to carry higher levels of insurance, which might offset some of the repair and maintenance costs that car leasing avoids.

Leasing’s Other Advantages
While it is true that the people who lease have no car at the end of the lease, they do have the opportunity to purchase the car at a preset price that is often the current market value of the vehicle. The finance company sets the purchase price for the leased car at the beginning of the lease. This offers the person who leases a car several advantages.

First of all, leasing protects against unexpected depreciation. If the market value of the car drops due to unforeseen circumstances, such as rising gas prices, this drop in value doesn’t hurt the person leasing the car. Conversely, if the lease car holds its value especially well, the consumer can buy the car at a bargain price, and either keep or resell it. In some cases, people can leverage equity in leased cars.

One other big financial advantage to leasing is that it can offer an attractive tax deduction for someone using the car for business. An accountant is the best resource for more information on this subject.

Tips to Buy Your Leased Car

Just yesterday, or so it seems, I was cruising home from the dealership, satisfied with my lease of a 2010 Mazda Miata MX-5 after weeks of searching, hoping, obsessing and negotiating.

Now, 28,000-plus miles later, the three-year lease deadline was nipping at my heels, and I’d become a very popular customer. My stack of letters and saved voicemails from Mazda and the bank that holds my lease proved that.

The first letter arrived nearly six months before my lease’s expiration date. It offered me $500 in owner-loyalty cash to buy or lease a new car from Mazda, then spelled out my options: Purchase or extend the lease on my current Mazda, replace it or return it.

With plenty of time and a journalist’s deadline mentality (why do anything early?), I did nothing but continue to enjoy driving my car. Soon, though, it was more difficult to ignore the growing pile of letters and the accumulating voicemails:

“Are you ready to schedule your inspection for your lease turn-in?”

“Have you made a decision?”

The pressure was on.

Buy My Leased Car or Go With Something Else?
My gut said: “Buy the car!” It’s beautiful: Copper Red Mica with a blonde-tan top. It’s the Grand Touring trim level with heated leather seats and the Premium package that includes stability control, keyless ignition and entry, xenon HID headlights, Bluetooth and satellite radio. A spin with the top down, however brief, delivers the same punch as a good workout, meditation or an hour in therapy.

Yet I knew I had to factor in practical information. For help, I turned to Philip Reed, senior consumer advice editor at Edmunds.com, and Tarry Shebesta, president of Lease Compare, along with my Mazda dealer, bankers and other number crunchers. Here’s how the decision unfolded. And yes, I made the deadline. By a hair.

Compare Two Very Important Numbers
”The first thing to do is look at the lease contract and find out what the car’s residual value is,” Reed tells me. This is the guaranteed price for which you can buy the car. I got out my contract. My car’s residual value was $15,330.

“Generally speaking, the residual is the estimate of what the car will be worth at the end of the lease,” he says. “Companies have gotten really good at figuring out what a car is worth after three years.” However, leasing companies sometimes get it wrong, he says, because there are unforeseen market conditions, such as the long, deep recession.

That’s why the next important number to find is the car’s current value. Edmunds calls this a vehicle’s True Market Value® (TMV®). You can easily use it to appraise a used car.

Reed tells me to look at the private-party TMV price for a quick snapshot of what the vehicle is worth on the current market. If the residual and private-party TMV numbers are within $500 of each other, Reed says, the lease buyout is a good deal.

Even if the residual is more than the private-party price, buying your lease car offers some advantages. You know the complete history of the car because you’ve driven it since it was new. Also, you don’t have to search for (and negotiate for) another car, which many people dislike doing.

I do the math on the Miata. Good news! With adjustments for accessories and mileage, the private-party price is $18,587: $3,257 more than my residual. That means my residual price is a great deal. It also represents $3,257 worth of equity in the car, and if I’m so inclined, I now have some ways to turn my lease into cash.

More on How To Interpret the Numbers
The comparison of the residual to the car’s market value ”will almost guide you to the path you will take,” Shebesta says. ”If the market value is lower than the purchase option, in most cases you are going to walk away.”

There are exceptions to that rule, however, he says. If you know and like the car, have had it serviced regularly and know it’s in good operating condition, “there is value to that,” Shebesta says.

If the residual value is higher than market value, you have more leverage in negotiating a better buyout price, he says.

“If the residual is higher than the market value, they want you to buy it. If the residual is lower than the market value, they are going to want it back,” he says. “They can sell it for market value and pocket the money.”

That might explain why I’ve gotten so many phone calls, telling me how much I really, really deserve to move on up to a 2013 Mazda.

How, When and What To Negotiate
So, even though the residual value on my car is lower than the market value, is there any room to negotiate an even lower buy-out price? That’s likely to be difficult, my experts warn me.

Still, I try. Twice. No luck. “The residual is the residual,” I’m told.

Scanning the lease agreement, I see a ”purchase option” fee of $150. I’m stunned that I’m expected to pay for the privilege of exercising my option to buy the car. It’s one of those anomalies of the car-buying and car-selling world, says Reed. “Where else would a merchant charge you for buying something?”

But, as Reed says, a lease comes with record keeping and paperwork, not to mention the hours spent contacting end-of-lease foot draggers like me. I could make my purchase offer contingent on waiving that fee, but it’s likely to be a losing battle, Reed says.

I tried, twice, to persuade the bank to drop that fee, but was turned down flat. So much for appreciating customer loyalty.

Although I couldn’t negotiate down the residual value of my Mazda, some leasing companies will haggle, Reed says. In most cases, captive finance companies (lenders who only make auto loans for a particular brand) will not negotiate. If a bank or credit union has written the lease, they might negotiate.

“A tipoff is if the leasing company calls and offers to sell the car to you,” Reed says. “This seems to indicate a willingness to negotiate which you can exploit” by asking for an even lower price.

How to get cheap lease car

Signing a car lease contract is a little like getting married: If you suddenly decide you want out, it could cost you big money in early termination fees and penalties. Your car dealer may try to soften the blow by suggesting you trade in your leased car for a new one. But even that could involve adding penalties to the cost of your new vehicle.

So, are you stuck in what may be a bad car-driver marriage? There is some possibility that you have equity in your leased vehicle and you can get out early and even pocket some money. Your other option is to use a lease-trading Web site.

The concept of these businesses is simple: “Sellers” (lease holders) list their cars and payment details online; “buyers” (people who want to assume a lease) search for listings that match their needs. The sites connect the two parties and facilitate the process of legally transferring the lease. Swapalease and LeaseTrader.com are the leaders in online lease assumption.

Why Would Someone Want My Car Lease?
There are many reasons your current leased car might be attractive to other people:

  • They might need a car for just a short time period and don’t want the commitment of a longer lease term.
  • They might be trying to avoid hefty down payments.
  • A life situation has changed and the shopper needs an extra car or a different type of vehicle.
  • Some people like lease swapping because they can drive a different car every year or two.
  • A new leaseholder might want to buy the car at the end of the lease for a preset price.

Even if your current monthly lease payments are higher than average for your vehicle, you can make your car an attractive candidate for a new owner. Perhaps the car has low mileage or you can sweeten the deal by offering an up-front cash incentive, which lowers the monthly payment.

What’s the Cost?
Of course, these lease sites charge a fee. Additionally, leasing companies charge a range of fees for the lease transfer. The person assuming the lease bears the bulk of the costs. Despite these expenses, the total cost is much less than early termination penalties.
Take for example Keith Begin of St. Petersburg , Florida. On LeaseTrader, he found a large SUV with 19,000 miles and 19 months left on the lease for only $322 per month. It cost him a total of about $750 to assume ownership of the car, which was located just three hours away. He felt it was a great deal.

“Somebody else had to put down the $2,000-$3,000 [in down payment],” Begin said, “and my commitment was a lot less than it would have been if I’d gone through a dealer.”

Sharon Covington of Long Beach, California, was only five months into a three-year lease on a Chevy Tahoe when her circumstances suddenly changed and she needed to get out of her lease. She tried to trade in the vehicle.

“It was outrageous what I would have had to pay: $10,000-15,000 just to pay off the lease,” she said. Covington discovered LeaseTrader.com and within days, found someone to take over her $550 monthly payments. The whole transaction cost her $250.

“It was completely seamless for me,” she said. “I was shocked beyond belief.”

Can Everyone Swap Leases?
According to Swapalease’s executive vice president, Scot Hall, it is possible to transfer about 80 percent of leases with no strings attached. But even after a person transfers the lease, approximately 20 percent of leasing companies require the original leaseholder to retain some “post-transfer liability ” for the vehicle, said Hall. This means that the name of the person who originated the lease remains on the contract and the original lease holder can be held financially responsible for unpaid balances. These could result from excess mileage charges or lease-end fees.

The person who signed the original lease is essentially a co-signer on a loan, Hall noted. If the second person defaults, the bank will try to recover the money from anyone else named on the contract.

Nissan , Infiniti and BMW are manufacturers that require post-transfer liability, Hall said. Acura and Hondasometimes require it depending on the state in which you live. However, Hall said that the trend in the secondary leasing market is moving away from post-transfer liability.

A small percentage of leasing companies don’t permit transfers at all. These are usually banks such as Chase Auto Finance and Huntington Bank Leasing, or credit unions . Before signing a new lease, consider this important factor. If your leasing company allows transfers, you will have more flexibility if you need to end the lease early.

How to Lease a Used Car

Most car deals made at new car dealerships can be neatly lumped into one of three categories: new car purchases, used car purchases and new car leases. However, there is an often overlooked fourth category: used car leases.

Used car leases are a bit of a secret in the franchised car dealership world. Not all dealerships offer them, and it’s unlikely you’ll see them advertised on television, on a dealership website or in the Sunday paper.

You can get a used car lease, although it takes legwork. If you put in the time to find a franchised car dealer that can execute a used car lease, you’ll likely be rewarded with a significantly lower monthly payment than that of a new car lease.

How Does Used Car Leasing Work?
Used cars available for lease from franchised car dealerships will, as a rule, be certified pre-owned (CPO) vehicles less than four years old, with fewer than 48,000 miles on the odometer.

Used car leases follow the same basic structure as new car leases. The lender writing the lease will determine the vehicle’s residual value, and the lease payments will be determined by the difference between the vehicle’s sale price and its residual value. In most cases, the lender will be an automaker’s “captive” financing company. Think Toyota Financial at a Toyota dealership.

The lender writing the lease will assign a money factor (interest rate) to the deal, just as in a new car lease. And just as interest rates tend to be higher on used car loans, a used car’s money factor will likely be higher than the money factor for a new car lease. Even so, the higher money factor is coupled with the used car’s lower sale price and lower rate of depreciation, usually resulting in a lower overall payment. Shoppers who lease used cars are able to buy out the vehicle at the end of lease, just as they can with new leased cars.

During my 12 years selling and leasing cars, I saw buyers shave anywhere from $40-$125 per month from their monthly payments by opting to lease used instead of new.

A note of caution: This story only deals with used car leases done by franchised dealerships, which are the only ones that can offer true CPO cars. You may hear about used car leases from independent “Buy Here, Pay Here” dealerships. Such leases frequently come with a lot of strings attached and you should scrutinize the terms very carefully.

How To Do a Used Car Lease, Step by Step
Pick a brand that does used car leases: According to Edmunds data, these automakers’ captives financed used car lease deals in 2015: Acura, Audi, BMW, Chrysler (which includes financing for vehicles from Dodge, Fiat, Jeep, Ram and SRT), Ferrari, Honda, Hyundai, Infiniti, Kia, Lexus, Lincoln, Mazda, Mercedes-Benz,Mini, Mitsubishi, Nissan, Porsche, Toyota, Volkswagen and Volvo.

The exceptions are Ford Credit and  GM Financial, which finances vehicles from Buick, Chevrolet, Cadillac and GMC, according to spokespeople from those captive finance companies.

Have a point of comparison: To effectively judge if a used car lease is a good enough value to bypass a new car lease, you have to have something to compare it to. If you don’t already have a lease quote for a new version of the car you want, get one. With that benchmark in hand, you can start shopping.

Find the car: Edmunds.com has plenty of tools to help you find the right used car. Search for the model you’re most interested in and remember to home in on CPO vehicles. Because you are shopping in the used market, you may not readily find your preferred color combination or mix of features. Be flexible. Select a few cars from different dealers. That way, if the first dealership you talk to isn’t able to help with a used car lease, you’ll have other choices.

Find a dealer who’ll do the deal: Since used car leasing is not the norm in the car business, finding a dealership that can help you will likely take some time and patience. You may have to call a few dealerships to find one that is set up to lease used cars.

Reach out to a dealership that has a vehicle you like and speak with an Internet manager or sales manager. Tell the manager you’ve found a CPO car in the dealership’s inventory and you’d like to know if the dealership is set up to lease used cars. If you get a quick, automatic “No,” don’t be afraid to ask the manager to check with a higher-up at the dealership to confirm. Since used car leasing is still relatively rare, the person you talk to may not know that it’s an option. Don’t be surprised if the manager says that he’ll need to call you back.