Leasing Nets More Car for Monthly Dollar

Should I lease or buy isn’t as age-old a question as which came first, the chicken or the egg, but it undoubtedly has more application to your everyday life.  As vehicles get more sophisticated, complicated and expensive, leasing is increasingly seen as the right solution by those acquiring a new car.  These days one of every three vehicles is leased, and the key reason is very simple – leasing a vehicle enables you “to drive more car” for your monthly expenditure. 

The divide between the monthly payment on a vehicle lease compared to the monthly payment when financing a vehicle continues to widen, particularly as manufacturer’s suggested retail prices (MSRPs) and transaction prices continue to grow.  The contrast is most stark in case where the carmaker puts the vehicle on sale by offering a promotional lease that it subsidizes.  These “subvented” leases are the offers you usually see advertised on TV and online.  Choosing a vehicle with a low-cost lease is the best way to reap the advantages of today’s heavily competitive marketplace.

Swapalease.com, the nation’s largest online lease marketplace, analyzed monthly payment terms on some of today’s most popular leased vehicles and compared them to the monthly payments in a 60- and 72-month finance programs.  The 60-month loans carried a 3.50% interest rate and the 72-month loans were at 3.75%. The payment analysis reflects average down payment terms already baked into the deals for both the lease and finance offers.

The results are pretty stark and offer compelling evidence as to why so many consumers are opting to lease rather than buy.  For example, if you leased a Volkswagen Passat 1.8TS you'd pay $149 per month for 36 months. However, if you bought that same car and financed it for 60 months, your cost would be $360.94 each month.  If you financed it over a longer period of 72 months you'd still pay $308.16 each month.

The Volkswagen Passat is just one of more than a dozen vehicles Swapalease.com analyzed to point out the current monthly cost advantages of leasing instead of buying.  Among luxury cars, the monthly price differential is equally telling.  A Mercedes-Benz E300 4MATIC, a truly amazing luxury sedan, will cost $902.40/month over the course of a five-year (60-month) loan or $770.44/month over 72-months, but in a special 27-month, low-mileage (10,000 mile/year) lease, the monthly payment is just (?) $589.00.

The reliable Toyota Corolla is now being offered at $199/month on a 36-month, 12,000 mile-per-year lease. That same car is financed over 60 months would cost 301.36/month and over 72 months would cost $257.30. 

Looking for a luxury SUV?  The Acura MDX is currently being promoted with a 36-month, 10,000-mile-per-year lease with a monthly payment of $409.  Should you buy that same front-drive vehicle it would cost you $741.60 over 60 months or $633.16 over 72 months.

While the monthly payments are startlingly lower in the lease scenarios, it should be noted that leases bring with them no equity for the payer.  At the conclusion of the finance process (e.g. 60-months) the driver owns the vehicle.  That is why obtaining a vehicle with a promotional lease deal is especially valuable to people who like to drive a new car every three years or less.

The Trade Off with Long Car Loans

You have just test-driven a brand-new car, and you’re convinced that it is just the car for you.  You’re all ready to make it your own.  Your credit is pretty good, and your monthly income is steady and seems secure.  But then you hear that the monthly payment for a conventional $25,000 four-year loan will be $550 at a 3.5% interest rate.  You gulp and tell the salesman your budget can’t quite accommodate a monthly payment that big.

“Don’t worry,” he says. “What can you fit in your budget?  How about $380 a month?  Is that okay?”

You gulp again, but this time you do some mental figuring and decide yeah, I can pay $380 a month.  “It’ll be a stretch,” your inner voice tells you, “but it’ll be worth it.”

So how did the $550 payment drop to $380?  It wasn’t magic.  The salesperson simply moved you to a 72-month loan instead of a 48-month loan.  In other words he added two years of monthly payments to your overall cost.  By taking the 72-month loan, you’ll end up paying $2,349 in interest instead of the $1,561 you would’ve paid over the course of the four-year loan.  That’s almost $800 more.

Now, you might say getting the new car you otherwise would not have gotten is worth the $800.  Maybe it is.  That’s a value judgment, and we’re not here to judge you, just to advise you.  Because there’s another potential issue here, too.

What are we talking about?  We’re talking about being “under water” or “upside down.”  The longer the loan the more likely this is to happen as you move toward the middle of the loan period.  Being upside-down means you owe more on the car loan than the car is actually worth.  In other words, you can’t pay off the car loan from the proceeds of selling or trading in the car.

That’s just a minor footnote not even worth mentioning if you keep the car through the entire length of the loan and pay it off.  But if circumstances change and you decide you need a different car, you’ll have to pay the difference to retire your car loan and get a new one.  And that difference could be hundreds of dollars.  Many people “solve” that problem by adding that “gap” or dollar difference to their next new-car loan, but you can see the implications of that – you’re borrowing more money and paying a larger monthly payment not just based on the new car you are getting but also on the previous car you are trading in.  Suffice it to say, Warren Buffett wouldn’t do it that way.

So as to the pluses and minuses of long car loans, the obvious and perhaps only plus is that they can result in lower monthly payments.  On the minus side, you will pay longer and you will pay more in interest even if the interest rate for the longer loan is the same as for the shorter one.  Additionally, with a longer loan you run more risk of being “under water,” which means it will be expensive to switch from your current vehicle to another one during the course of the loan. Whatever you decide, we suggest you take a few minutes to think about it.  Why make a split-second decision that could cost you $1,000?

Are You Drowning in Car Loans?

Are you underwater in your car loan? If you’re in the middle of a five-year, six-year or longer-term loan, that could be the case. The terms “underwater” and “upside down” refer to the instance when you owe more money on your vehicle loan than what the vehicle is worth. It has gained a lot of currency in the home-mortgage arena as housing prices have tumbled, but it is also an issue with car loans. Most consumers find themselves underwater for a simple reason: the pursuit of the lowest monthly payment possible. There was a time when the standard auto loan was just 24 months. But as cars grew more expensive, loan terms stretched to three years, and then to four years. Now, industry data indicates that the average car loan term is more than 60 months.

Because the long-term loans are often accompanied by relatively small down payments, a vast majority of buyers have less equity (real ownership) in their cars than they might believe. Though you’ve religiously made three years of payments on your five-year loan, the financial institution might own more of the car than you do. Plus, the vehicle’s value is less than what you owe the financial institution to complete the loan.

Consumers with a 60-month loan will frequently walk into a dealership after three or four years with the goal of buying a new car, and that is where being underwater can hit home with a vengeance. Before they can even consider buying a new car, the first hurdle is to get clear of that old debt, which can run into the thousands of dollars. This is where some prospective buyers decide that getting a new car isn’t the right move, but that isn’t something the typical dealer wants to hear. So, dealers typically say they will “work with you” to solve the debt problem. Their usual solution, however, isn’t all that financially palatable. It consists of rolling the accumulated debt from the old vehicle into the loan on the new vehicle.

Here’s an example. A Texas dealer signed a customer to a $47,000 96-month (8-year) loan on a big SUV, a loan that was for some $15,000 more than the value of the vehicle the customer was buying. The customer got his new vehicle, but he guaranteed himself that he would be underwater -- and making huge monthly payments -- for many years to come.

While it might seem fine to accept more debt to buy a new car, the result of all this is that individual consumers keep falling deeper and deeper into debt. Some have now found that filing for bankruptcy is a better solution than continuing to live with the huge debts they’ve accumulated. Over the past several years, we have seen a number of financial institutions get burned from this merry-go-round of escalating debt. Seven years ago, we predicted that this would be a problem. Now, increasingly, this problem is coming home to roost.

Time to Refinance Your Car?

If you haven’t noticed lately, the American economy is in doldrums. That’s not considered good news for consumers, but there are some silver linings in the cloud, and one of them is lower interest rates. The federal government and the central bank are trying to give the economy a boost by keeping interest rates at historically low levels. That means you can borrow money cheaply, and many people are taking advantage of that by refinancing their home mortgage. In fact, some folks have actually refinanced their home loans a couple of times in the last few years as interest rates have continued to fall to unheard-of levels. But did you know you can also refinance your auto loan. Sure, a car loan seems trivial in both length of term and monthly payment compared to a mortgage. That doesn’t mean, however, that you should not investigate the opportunity, because it could be a big money-saver or help you get through a period of lower income.

Experts say that refinancing presents a solid opportunity to save money, particularly if you’ve owned your car for a year or more. Lowering the interest rate on your auto loan by even a percentage point or two can make a big difference. It will lower your monthly payments and save hundreds of dollars in interest over the life of the loan. Of course, those with long loans at high interest rates will benefit the most from the process.

So is vehicle refinancing right for you? Well, as with any financial decision, it really depends on your individual goals. If your goal is to reduce the amount you are paying in interest, you should consider an auto loan with a term (length) that is the same as, or shorter than, that of your existing loan. If your goal is to have a smaller payment, you may want to consider getting a new loan that has a longer term than that of your existing loan. You should keep in mind, though, that this will likely result in you paying more interest in total.

A big question many people have about auto loan refinancing revolves around the fees involved. They’re accustomed to home loans that are accompanied by a variety of fees. The good news is that the fees that are associated with car loan refinancing are much easier to swallow. Typically, the only fees associated with an auto loan are fairly standard transfer of lien holder fees (usually $5 to $10) and state re-registration fees ($5 to $75). These estimated fees may vary by lender and the state in which you live, but they won’t break the bank. It is very important, however, to check with your existing lender to see if your current auto loan has any prepayment fees. This could turn a good deal into a no-go. Prepayment penalties can quickly eat up the savings that might otherwise be gained by getting a new, lower-interest loan.

How much you will save by doing an auto re-fi depends entirely on things like the remaining balance of your existing loan, the difference between your old interest rate and the new interest rate, and the term of your new loan. Examine each of these factors carefully to make certain the refinance of your car loan works in your particular circumstances.