Lease or Buy in the Crazy Zone

Chrysler is in bankruptcy. General Motors might be headed to the same place. The Saab, Pontiac, Hummer and Saturn brands have been cast adrift. Even sales at Toyota, a former bastion of strength, are down by more than 30 percent this year. All in all it is not a comforting time to endeavor to acquire a car. But the fact is, despite all this tumult, it might actually be one of the best times ever to do just that. The deals are great, the incentives are greater and many dealers would eschew their white belts and shoes just to make a deal with you. So feel free to venture out into the marketplace.

As you wade into this buyers’ market, one question that remains perennial is whether you should buy or lease. Many people think that leasing a vehicle gives them more flexibility than buying a car. At first glance it seems like a lease is analogous to dating, while buying might be analogous to marriage. But they are wrong. In actuality, buying a car gives you more flexibility because you are not limited to a specified number of miles you can drive; you can modify the car at will, and most important of all, you can sell it whenever you want to -- even if you still owe money on your car loan. In contrast, if you lease, you are held to a certain number of miles driven each year or you face a rather stiff per-mile penalty even if the company from which you acquired the car goes out of business. When you lease, you are not allowed to modify the car by adding things like bigger wheels and tires unless you return the car to its original condition before you turn it in. And even if the car’s manufacturer goes belly-up, getting out of a lease can be very difficult.

With all this said, this is actually a pretty good time to consider leasing. Right now, some lease deals are mind-bogglingly good because car companies are desperate to unload vehicle inventory. Leasing also largely removes you from the unprecedented iffiness surrounding used-car values as we move forward in time. In addition, if you like replacing your vehicle with a new one every two or three years, you are certain you will drive your vehicle fewer than 12,000 miles a year, and you find it very unlikely that you would want to switch to a different vehicle before the two or three year lease term is up, then you are a logical candidate to lease a vehicle. So feel free to lease, even if you have questions about the future health of the manufacturer that built your car. 

One thing you should keep in mind, however, is that if you lease, you will build no value in your car. Instead, all payments you make -- both the initial payment and the monthly payments -- are simply expenses. They represent money paid out that you will never see again. If on the other hand, you purchase a vehicle, your down payment and a portion of the monthly payments you make will subsequently buy you “equity,” or ownership in the vehicle. If you make all your payments over the course of the car loan, you will then own a tangible asset -- your car. These days, the future value of any car is a bit cloudy, but you can bet owning a car is better than not owning one. 

A good financial strategy is to “buy and hold.” In other words, choose a vehicle you think you can live with over time (not a bad way to choose a spouse either) and then commit yourself to maintaining that car, paying off the loan and driving it several more years -- monthly payment-free. In fact, if more people had done that with their houses and cars in the past few years, we would probably not be in the financial predicament we now find ourselves.

Save Some Insurance Dollars

In the current economic climate, many people are reexamining their lives to cut spending. Even if your job and business is still intact, the shaky stock market and low-interest savings accounts call for setting money aside for emergencies and future retirement plans. One bill we cannot eliminate for sure is our car insurance. But the good news is that we can reduce it, saving money without sacrificing coverage quality. Here are some insider tips your own insurer probably hasn’t shared with you:

Pay ahead of time Ask if you can save money by paying for six to 12 months of your annual car insurance in advance. If you have a monthly payment plan, you may be paying more, as the insurer needs to spend more to send out monthly bills and collections. Some insurance companies will offer discounts for purchasing longer periods of coverage to ensure that you will continue your coverage with their company.

Cancel before switching If you do decide to switch insurers, make sure you cancel your previous insurer's coverage once the new policy starts. If you just decide to “cancel” your old insurance by not paying the bill, that company can report you to a credit bureau for nonpayment. Your credit score will be affected and future auto insurance premiums will most likely increase, too.

Research ratings Find out how insurers rate a car before you purchase it. Insurers have a rating system based on the risk of liability and damage if you do have accident claims. Some companies, like State Farm, actually publish this information, and you can always ask for a quote before buying, too. Another way to save money is to buy a car model that insurers consider less risky. Various safety features, such as air bags or automatic seat belts, can also give you a deep discount -- as much as 30 percent.

Chip in for maintenance Consider taking care of minor scratches or fender benders yourself, without reporting it to your insurer. Especially for drivers who already have some dings on their driving report, this may really save money in the long run.

Understand how driver assignment works Check how your insurer assigns drivers to cars. If your company assigns your teenage son to the most expensive car, your rates can double or triple. But if your company assigns him to the older family car, his rates may be slightly lower.

Don’t make assumptions Your old insurer may not give you the best rate out of loyalty. Shop around for car insurance quotes every year to make sure your family is getting the best deal.

Exploring your insurance options is one of the best -- and fastest -- ways to reduce your premiums while maintaining the best coverage. But remember: Insurance premiums change often, so a good deal now may be overpriced next year. Do your research annually, and you’ll know for sure whether you’re getting the best deal.

Government Bounty on Old Cars a Good Idea?

When you see a sputtering old car in front of you with its bumper askew, paint peeling off and blue smoke wheezing out of the tailpipe, you no doubt think to yourself, “I wish we could get that clunker off the road.” Now, forces in Washington are marshalling behind this clarion call, seeking to offer government cash for down-at-the-heels older vehicles, all in the name of the environment and in an effort to spur the faltering new-vehicle market. But is a government bounty on old vehicles really a good idea? Will it do any of the good things that it is purported to do?

The auto aftermarket industry, auto parts manufacturers and auto hobbyists certainly don’t think so. And if they consider the issue with any rationality, most low-income families might not think so either. Why? Because a “Cash for Clunkers” program would prematurely destroy vehicles and their valuable components, denying more affordable used vehicles and used parts to millions of low- and middle-income families unable to purchase a new car even with a $3,000 to $5,000 government voucher helping grease the path. 

“For families that cannot afford the price of a new vehicle even with a government voucher, the Cash for Clunkers program would limit their access to affordable transportation, a must for most working Americans,” said Aaron Lowe, vice president of government affairs for the Automotive Aftermarket Industry Association. “Cash for Clunkers may sound good at first, but when you take a closer look, it is clear that the Cash for Clunkers proposal will negatively impact car owners, wasting billions of taxpayer dollars.”

Certainly you can see why the auto repair and modification industry would line up against the Cash for Clunkers plan. Many make their living by providing the goods and services to help consumers fix and improve their vehicles, while others sell used parts “harvested” from vehicles that have seen their last days on the road. Balling up these vehicles that still have value seems like a colossal waste to them, seemingly the antithesis of the desired effects of a proposal designed to curb pollution. Some new-vehicle manufacturers and new-car dealers, on the other hand, support some of the “Cash for Clunkers” proposals. But would such a program actually boost the sale of new cars and trucks? Steven Levitt, a University of Chicago professor of economics and author of the best seller Freakonomics, believes that is doubtful. 

“It also seems to me that any effect on the demand for new cars would be extremely limited,” he recently wrote in his New York Times blog entitled “Freakonomics”. “People who drive clunkers are generally not in the market for new cars. Presumably their replacement car will be a used car. The increased demand for used cars will lead to higher prices for used cars, which will push some buyers towards a new car, but the likely impact on new cars would be small.”

The U.S. Congress and individual states have considered Cash for Clunkers proposals in the past, and in most instances, the old-car hobbyists and parts suppliers have rallied against them and sent them to defeat. Oddly, many politicians and activists who consider themselves advocates of poor and middle-class families, though, are pushing for the passage of such a bill even though the unintended consequences would hit their constituents the hardest. With government money seemingly free-flowing these days, no matter the cost, we’ll just have to see where this one goes.

Cost of Driving Goes Sideways

So you thought that the recession and reduced fuel costs would lower your transportation costs overall? Not so, according to the AAA’s report 2009 Your Driving Costs. It shows that the average cost of owning and operating a new car in the U.S. has remained relatively unchanged year after year, despite lower gasoline prices. The average cost of a new sedan driven 15,000 miles per year is 54 cents per mile, representing a drop of only 0.1 cent versus the costs reported in 2008.

“While motorists are experiencing relief at the pump, those savings have been countered by revised Environmental Protection Agency fuel economy estimates and increases in vehicle ownership costs, such as insurance premiums, depreciation, finance charges, and other fees and taxes,” said AAA Automotive Vice President Marshall L. Doney.

AAA estimates that the cost to own and operate a typical new sedan driven 15,000 miles yearly is $8,095, which puts just $26 in your pocket. (Last year’s estimated cost was $8,121.) Small sedan costs were unchanged at 42.1 cents per mile, or $6,312 annually. Midsize sedan costs dropped by 1.1 cents since last year -- to 54 cents per mile, or $8,105 per year -- thanks to maintenance cost savings and lower depreciation. However, the cost of large sedans rose by 0.7 cents -- to 65.8 cents per mile, or $9,870 yearly -- due largely to increased depreciation.

SUV owners, whose vehicles typically get lower fuel economy, benefitted most from the drop in fuel prices. Their estimated operating costs dipped by 1.3 cents -- to 68.4 cents per mile, or $10,259 per year -- despite a relatively large increase in depreciation and insurance premiums. Meanwhile, minivan costs jumped by 1.2 cents -- to 58.8 cents per mile, or $8,815 yearly. The growth, which includes the largest rise in depreciation of any vehicle class, is due to cost increases in every area except fuel.

AAA’s 2009 edition of Your Driving Costs uses the U.S. Environmental Protection Agency’s revised fuel economy estimates; they are intended to better reflect “real world” results. This is expected to result in more accurate predictions of annual vehicle costs now and in the future.

“AAA was a strong advocate for updating the EPA’s guidelines for calculating fuel economy so new car buyers could have a realistic estimate of a vehicle’s miles per gallon before their purchase,” Doney said. “The ability to use EPA estimates more closely based on ‘real world’ conditions in our calculations has made Your Driving Costs an even more valuable tool for consumers.”

AAA’s calculations are based on both operating and ownership costs. The operating costs include fuel, maintenance and tires, while ownership costs include insurance, license fees, registration fees, taxes, depreciation and financing. The costs are based on typical use of a vehicle for personal transportation over five years and 75,000 miles of ownership. Fuel costs are based on $2.30 per gallon. The driving costs in each category are based on the average expenses for five top-selling models selected by AAA.

Is the Worst Over in Auto Loans?

If you watch the news, you might think you can’t possibly get an auto loan or a lease, and you might get the impression that consumers are defaulting on auto loans right and left. But if you take a look at the actual statistics (now why would television reporters do that?!), you’ll find that the reality is certainly unhealthy but not catastrophic. Some buyers are in trouble and may default on their auto loans, but the vast majority are making their payments. At the same time, lenders are being choosier about whom they lend money to, which means they are in a less risky position than they were last year.

According to credit-reporting service TransUnion, more drivers went 60 days or more “past due” on their loans in the fourth quarter of 2008 than in the third quarter, but average auto debt actually went down in the same period -- one sign that lenders are well on their way to cleaning up the mess they helped create. The information for the TransUnion analysis was culled from approximately 27 million anonymous, individual credit files, which means the service provides a real-life perspective on how U.S. consumers are managing their credit health.

A quick reading of that report card suggests that most consumers are doing a good job of maintaining their credit, while those on the fringe are running into difficulties in this sour economy. The national 60-day auto delinquency rate (the ratio of auto loan borrowers who are 60 or more days past due) edged upward between the third and fourth quarter of 2008 from 0.8 percent to 0.86 percent, which means that fewer than 1 percent of auto loan borrowers were delinquent for 60 days. While that might be reassuring, there is no doubt that delinquencies grew in the final quarter of 2008. The year-over-year delinquency rate increased by 8.86 percent in the fourth quarter.

One interesting bit of data that gives more perspective to the analysis is this: In addition to seasonality dependencies, the fourth quarter 60-day auto delinquency rate reflected the much stricter lending environment that the country experienced late last year versus the easier credit of 2007. Both the relative unavailability of funding in the market for auto loans and tighter lending standards significantly decreased the number of auto loans in the market, and this was a key factor in higher delinquency rates as a ratio of all auto loans, TransUnion said. In other words, because there were so many fewer auto loans, the percentage of those loans in delinquency rose, but it does not mean, as the TV news might suggest, that delinquencies “went through the roof.” For example, 14 states experienced a drop in their year-over-year delinquency rates compared to the 8.86 percent increase seen nationally, and 11 states experienced a decrease in the 60-day auto delinquency from the third quarter of 2008.

While this tempers the highly negative news that has circulated about car loans recently, there is still cause for concern. And there is little doubt that this recession cuts deeper than the previous, most recent recession.

“How does the rise in auto delinquency compare to the 2001 recession?” asked Peter Turek, automotive vice president in TransUnion’s financial services group. “Although that recession was short by most standards (beginning in March of 2001 and ending in November of the same year), the auto delinquency ratio increased by almost 10 percent. In contrast, in our current recession that began in December of 2007, we see that the auto delinquency rate has already increased by 25 percent -- more than double what occurred in the last recession, with an endgame that is still uncertain.”

The prognosis offered by TransUnion isn’t very positive, but it does not seem apocalyptic either. “Our current forecasting models indicate that the national 60-day auto delinquency rate will rise from a value of 0.86 percent in the fourth quarter of 2008 to over 1 percent by the end of this year,” Turek said. “The overall economy, weak labor market and lower disposable income levels continue to negatively impact the consumer.”

For the average consumer, the takeaway is that while requirements have tightened a bit, credit for car loans is still widely available, and the financial institutions are making some progress in ridding themselves of bad loans that cost both them and all consumers who borrow money.