Show #279 Airing: Sunday, January 9, 2005
Does leasing a car sound great? You pay less money, get a bigger car, and can change to a new car every few years. Well, just like any financial decisions, the answer is not simple. Here to drive home the pros and cons of leasing, or buying, is Jim Lineweaver, the “driving” force behind Lineweaver Financial Group.
Question: How exactly does leasing a car work? How would one negotiate a good lease?
Answer: When you lease a car, your payments are based on the difference between the price of the car (its “capitalized cost?”) and what it is worth at the end of the lease (“its “residual value”). If at the end of the lease you wish to buy the “rest” of the car, you can (although this often costs more than the market value of the car). If not, you’re done.
Like when buying a car, it’s important to negotiate the selling price of the car when you lease. The higher the selling price, the higher the monthly payment.
Question: What are some advantages to leasing a car?
Answer:
- Lower monthly payments. You only pay for depreciation during the term, so your monthly payments are 30-60% lower than a purchase loan.
- It’s a great was to establish credit if you’re a first time buyer or if you have bad credit.
- You can have more car, more often. Since monthly payments are lower, you get more car for your money and drive a new car every 2-3 years.
- You have fewer maintenance headaches because, if your leas term coincides with the manufacturer’s warranty, major repairs are always covered.
- Leases require little to no down payment.
- At the end of the lease, you can just walk away.
Question: What are some disadvantages?
Answer:
- The selling price is usually the manufacturer’s suggested retail price, which is high. There are also confusing finance charges.
- Some dealers refuse to itemize your trade-in, and you might not get credited for it.
- There are high insurance costs (must have minimum policies of $300,000), and gap insurance may be necessary.
- There are mileage limits, and high charges if you go over them.
- Excess wear and tear charges when you turn the car in.
- You CANNOT get out of the lease early without paying heavy penalties. Don’t lease the car if you think you won’t be able to make the payments, will have children and need a different car, may move out of state, etc.
Question: If you’re interested in buying a car, how can you proceed to find a good loan?
Answer: Find out your credit score before you go to buy the car. If you’re above 680, you are considered a “prime borrower” and will get a good APR on your loan. If below, you’ll pay a much higher APR. If below 550, a car loan will be difficult.
Clean up your credit: close old accounts, remove any errors, and try to get any “Charge Offs” removed by talking to your creditors.
Go to banks and credit unions for the loan. Use the dealer as the last resort. You may want to take a cash incentive up front and finance at a low rate, or on an equity line of credit.
Question: What are some advantages to buying? Disadvantages?
Answer:
- When you buy a car, your payments are going toward the car’s equity, unlike lease payment, where none of the money goes toward equity.
- There may be tax write-offs if buying an SUV.
- If you have no credit or bad credit, it may be hard to finance a purchase.
- DON’T forget to factor in auto insurance and extended warranties into the price of a car when buying.
Question: Is it better to buy or lease?
Answer: For most people, especially as you get older, it’s better to buy.
- If you put on very few miles, then after a few years the car should be in great condition. In that case it’s better to own.
- If you put on a lot of miles, over the mileage limit for a lease, it’s better to own.
- If you keep a car for a long time, it’s better to own.
- Even if you only hold a car for a few years, it may be better to own because you’ll own the car and can trade it in or sell and buy another. With a lease, you have nothing.
Is leasing not pleasing? Is the price to buy too high? It all depends on your situation. To drive away with the right answer, give Jim Lineweaver a call. He won’t steer you wrong.
Jim Lineweaver is a registered representative of and offers securities through Walnut Street Securities, Inc. (WSS) Member NASD/SIPC.
Branch Office:
9050 Sweet Valley Drive,
Valley View, OH 44125
216-520-1711
WSS does not offer tax or legal advice.
Lineweaver Financial Group is not a subsidiary or affiliate of WSS.
Material discussed is for information purposes only and should not be the basis for any investment decisions.
