Importance of car financing & leasing: Tenth in a series of financial tools to master

 

Car dealership 

Welcome back!  The topic of car financing and car leasing is our tenth in a series of financial tools to master.  This is undoubtedly one of the most important things to learn as an adult.  For most adults, buying a car is usually the second biggest purchase (besides a home) they’ll make in a lifetime.

As I’ve mentioned many times, there aren’t many places to really learn about financing and leasing cars while in school.  Most of us grow up not knowing much about this stuff until we face it head on...

In this post, I’d like to share my knowledge about this topic. 

A little background...

I sold different cars ranging from Toyotas, Pontiacs, Acuras, Mercedes Benzs, to BMWs for a total of about 5 years.  I got into the business to make a living right out of college.  I always enjoyed cars so it made sense...I learned valuable things about the car business and how to finance or lease without being fleeced!

With that background done, let’s jump right in.  We’ll cover financing a car first, then we’ll cover leasing a car afterwards.

Financing a car

Most of us do not have cash to buy our cars, especially when you’re just starting out.  Financing a car is usually the path forward to acquiring a car.  

Before walking into a dealership, do some preliminary research on the car.  Figure out the following things:

1. How much you can spend per month on a car & other car related things.

You should take into consideration for ALL things related to driving, like gas, insurance, maintenance, registration, tolls.  Most people spend anywhere from 10 to 16% per month on transportation.  Car payment alone is not the entire picture...

If you bring home $3,000 per month, you should aim to spend around $300 to $400 per month.  Now, there’s no rule that says you HAVE to spend that amount!  If you can spend less, then that’ll help your budgeting.  Remember to add all the expenses related to owning and driving a car.  

If you want to spend a total of $300 per month in transportation costs, then your car payment should be at or below $250.  You’ll need that remaining $50 to pay for insurance, gas, maintenance, registration and tolls.  

In this scenario, you should be looking at a car that is no more than $13000 or less.  *This is assuming you’re only paying taxes and fees with no additional down payment.  This is an example using a 60 month or 5 year financing.  Google ‘auto loan calculator’ to figure out different numbers.

What can you get for $13,000?  You can probably get a nice two year old pre-owned compact/subcompact vehicle with around 30,000 miles for this amount.  Or you can stretch your budget to get a brand new Chevy Spark for about $14,000 or so.  

It’s helpful to figure this out before doing any serious car shopping.  I’ve seen too many people walk in to ask about a car but their payment per month is all wrong...You can’t finance a $30,000 SUV and expect to pay $250 per month on a 60 month finance!  *Note:  Typical payment on a $30,000 car with no money down and 72 month finance equals $460 or so with excellent credit.  

Once you figure out the type of car you can afford, then start researching the car, whether it’s a new car or a pre-owned car.  

     2.   Make sure you have good credit history. 

This is a given to ensure you get the lowest available interest rate.  Most of the advertised special financing rates are for people with excellent credit.  If you don’t, expect to pay a higher interest rate.

Build good credit history by borrowing money, then paying back on time.  I built mine up by piggy backing off of my wife’s credit card.  I was then able to open my own credit card.  

     3.   Besides the cost of the vehicle, figure out what insurance costs.

If you live in the most expensive coastal cities like New York City or San Francisco, expect to pay lot more for car insurance.  Car insurance companies look at risk factors including how many people live in your zip code, how many miles you drive, safety of the vehicle, safety of the neighborhood you’re living in, your driving record, and on and on and on...

When I lived in New York City (Queens actually, which is one of the 5 boroughs of NYC), my insurance was high.  I usually ended up buying or leasing American brands like Saturn, Oldsmobile, Pontiac, as these brands tended to cost less than vehicles that were stolen often.  *I needed full coverage insurance as I was leasing my cars.

You may also look into car brands that cost less on insurance.  A good place to get that information is ‘Insurance Institute for Highway Safety’ (IIHS).  Google ‘vehicle loss iihs’.  Search for vehicles by size (small, midsize, large) as well as by type (4 door sedan, SUV, wagon, etc.).  You’ll get a good idea of which vehicle costs less to insure than others.  

There may be hundreds of dollar difference between vehicles due to their loss rate...Research this stuff!

Once your initial research is done, then proceed with the actual buying of the car.  Here are my tips for buying new cars vs used cars:

New Car Buying

• Go to any of the big car websites (Edmunds, KBB, cars.com, etc.) then get multiple quotes from dealers.  You’ll fill out your contact information along with model/equipment/color/etc.  This is the least painful way to buy a car I know.  This way, you won’t need to make multiple trips to multiple dealerships and waste a good weekend car shopping.

Tip:  Pick just one of these websites and not multiple ones!  You’ll just confuse yourself if the quotes come back from same dealership for example.

• If you haven’t driven the car, and you want to, then ask the salesperson for a test drive.  *Note:  I rarely took test drives as I was leasing cars for 3 years, then to return the car, to lease another one.  I was more of a dollars and cents kind of guy.  Money part was more important to me than how the car drove.  Everyone is different.  Do what feels right for you!

• Do some research to figure out if there’s a special finance rate.  Confirm this with the salesperson when that person contacts you with the quote.  A good rule of thumb when getting multiple quotes is this:  Go with the salesperson who is the nicest and easiest to deal with.  Sometimes it’s not about saving $50 off the price of the car compared to another salesperson, but rather with how smooth the process goes…

• Once you’ve made a decision on the salesperson, make an appointment to meet face to face.  Everything should be confirmed before signing then giving a deposit.  Be sure to check the agreed upon price with the correct equipment as well as the finance terms (and interest rate).  If you already know you have excellent credit, then there shouldn’t be any surprises.  If you don’t know that, then check with your credit card company as they will allow you to check your credit score on their website.

Tip:  You can confirm the monthly payment by using any calculator online.  Google ‘auto loan calculator’ then punch in the following:  price of the car, taxes and fees, interest rate, amount of down payment.  The quoted number should be similar to what you come up with.

• When buying a new car, I do not recommend buying an extended warranty.  Why?  Most new cars these days will last well over 5 years without requiring a major repair.  If something will break, it’ll probably happen within the first 3 years...

One of my favorite finance gurus, Dave Ramsey, also agrees.  He thinks you should never buy an extended warranty.  Instead, have money in an emergency fund in case something breaks.  

• Don’t buy anything else the finance & insurance department offers you.  You do not need things like paint sealant, VIN etching, underbody sealant, etc.  These are usually add-ons that are great for the dealer, but not so great for you.

Pre-owned Car Buying

• There are several ways to do this.  You can go to a reputable dealer that also sells pre-owned cars.  You can go a CarMax or AutoNation.  Or, try online companies like Carvana, Truecar, Vroom.

Whichever way you decide, do research online first so you’re not rushed!  Last thing you want is to be rushed onsite when looking for a car.  Take your time looking at different cars online.  Filter by looking up cars by price, by mileage, equipment, and so on.  

Once you find a car you want, then make an inquiry via email or phone.  The same rules apply.  Go with the salesperson that you find is easy to talk to.  Salesperson should listen to you, and not blather all over you.  

Find out about interest rates they offer and take a test drive.  Find out about car’s warranty should something goes wrong.  For pre-owned cars, I do recommend test driving it!  

Many online retailers like Carvana and Vroom allow you to return the vehicle if you don’t like it.  This is a huge benefit!  

Tip:  If buying from a dealer, ask about manufacturer’s certified pre-owned program (CPO).  This program typically adds about a $1000 to the price of the car, but it may well be worth it.  It provides an extended warranty backed by the manufacturer for a year or two years, inspection of the car, and roadside assistance, for example.  If price difference between a regular pre-owned and a certified pre-owned is about a $1000 or even $1200, I would seriously consider looking at the certified pre-owned.  

Leasing a car

Leasing like anything else, has its advantages and disadvantages.  I personally leased most of my cars as an adult because I like driving new cars every three years.  This works for me.  You’ll need to figure out what works for you!

Advantages are:  

1. Drive trouble free car every three years.  No need to replace tires, expensive fluids (transmission, power steering, brake) or do a tuneup.  If something breaks, new car warranty covers it.
2. You drive the latest safety and technology available every three years.
3. GAP coverage is usually free when leasing. *GAP coverage or insurance covers the difference between the actual cash value of your car vs what the insurance company will pay for that car in the event your car is totaled or stolen.  In some cases, this ‘gap’ may be thousands of dollars, which you’ll have to pay.

Disadvantages are:  

1. If you have to end the lease, you’ll be paying the entire remaining payments (or whatever the difference is after car is returned then sold at an auction)
2. If you drive over the miles you initially purchased, you’ll be paying overage charges.  Typically, the allowed miles are 10,000 miles per year.  The more you drive, the higher the lease payment.  
3. There is usually a disposition fee, to return the vehicle at lease end, if you don’t lease another car from the same manufacturer.  This fee is usually around $400.

If considering leasing, follow these tips:

• Do your research, similar to when buying a new car  (research your payment per month, type of car, make sure you have good credit history)
• Go to any of the car websites (Edmunds, KBB, cars.com, etc.) and submit a request for lease quote. Get a quote on a base model or close to it to keep your monthly payment as low as possible.  Without putting money down as a down payment (cap cost reduction), ask for a quote from the salesperson the monthly payment including sales tax and bank fees.  This way, the payment will be easy to compare with other quotes from other dealers.  
• Even a zero ‘money down’ (cap cost reduction) is not really a zero money ‘out of pocket’.  Don’t forget that there are first month payment, security deposit, motor vehicle fees, and taxes.  If your monthly payment is $250, then your money out of pocket will be around $600-$800 depending on your state ($250 first month payment, $250 refundable security deposit, and motor vehicle fees).  
• After you compare dealers’ prices, pick the salesperson you feel most comfortable with.  Remember, it’s not always about the money.  Your sanity is also important!  Few dollars you save per month may not be worth the hassle...*Note:  This is how I operate.  I think a good deal is when both parties do well.  I want my salesperson to make a living.  If I feel the quote is pretty good, then I’ll go with the person who I’m most comfortable with...This salesperson’s quote doesn’t have to be the lowest!
• The rest of the process should be similar to buying a new car.  Confirm the yearly mileage you agreed upon.  Make sure monthly payment includes taxes, bank fees.  Don’t buy extended warranty, or other add-on from the finance & insurance (F & I) department.  

Financing or leasing a car is usually the second biggest purchase most of us will make.  Research and learn about interest rates when financing a car.  Get advice from online car websites mentioned above.  Get help from someone (parents, uncles, mentors, etc.,) who’s done this before, as needed.  

Financing or leasing a car should be a fun experience and not a stressful experience.  Enjoy the experience by researching as much as you can about cars you’re interested in and the equipment.  This will make your purchasing process that much easier.  

Have fun car shopping!

Thank you all for reading!

Jake 

Wandering Money Pig 

*Disclaimer:  The information listed here should be used for informational purposes.  Always do your own research and decide what works for you.  Get help as needed from someone you trust.

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