I’m sure this comes as no surprise, but cars aren’t free! That being the case, what is the smartest way to pay for the new car, truck, or SUV you want? Well, that depends on several factors: how long you plan to keep the vehicle, how many miles you drive in a year, what you want your payment to be, the overall cost of the vehicle, and more. I’ll discuss three options for your vehicle purchase and the benefits of each method: paying cash, financing, and leasing.
Let’s say you’ve picked out the exact car you want to take home. You’ve driven it, you love it, and now you are ready to write a check and get out of the dealership. Paying cash for a car can have some benefits. First, you won’t pay any interest. The price you agreed to pay for the car is all that you’ll pay. Also, there are no checks to write and mail every month, or setting up payments online, and you have the title to your car in hand. These are all good things. However, there are times when paying cash does not work in your favor. For example, if a franchise lender such as Hyundai Motor Finance or American Honda Finance is offering an interest rate of 0%, you are better off financing. You pay no interest over the life of the loan, and the money you would have spent on the car sits in your bank account collecting interest. You actually end up better off than you would have if you paid cash! Another reason to finance is if you qualify for rebates, but you have to finance with their lender to get that rebate. For example, there might be a $500 rebate for financing with Ford Motor Credit, so you save that money off the total price of the car. What some dealers might not tell you, however, is that you can pay the car off after just three months, so if you want to pay cash and get the finance rebate, all you have to do is make those first three payments, and on the fourth payment you can pay your vehicle off completely. Most franchise lenders have no prepayment penalties after that three months, so it won’t cost you anything!
Now, let’s rewind. You’ve picked out your dream car, but you want to finance. As we said before, if the franchise lender is offering incentive rates such as 0%, it is clearly in your best interest to take advantage of that. If there are no incentive rates, you should always check with your bank, credit union, or other financial institution prior to purchasing your vehicle. If you are a member of State Employees Credit Union, they might offer 2.5%, and the dealership lender might only offer 3.0%. With just a little bit of legwork prior to visiting the dealer, you can save hundreds, if not thousands, over the life of a loan just by shopping your finance options. There are a few advantages to financing over paying cash. First, you free up the cash you would have laid out for the car, and as we said earlier, that cash is sitting in your bank collecting interest. Should you need that money for an emergency, it is readily available, as well. Also, with flexible finance terms ranging from 24 months to 84 months, you can set your payments where you are comfortable, and you can pay off your vehicle as quickly or as slowly as you like.
The third option is leasing. There are some good reasons to lease a vehicle, and if you fit into any of the following categories, leasing your vehicle is a fantastic choice. First, if you are a frequent trader, leasing is for you. If you finance or pay cash for your cars, and you trade frequently, you are losing money. Vehicles depreciate, so no matter what, you will not get out of a car what you put into it. If you lease, you are only paying for the portion of the car you use. This can get a little complicated, so I will show you some math. When you lease, the lender will set a residual value. This is the trade value of your vehicle at the end of the lease. If you are leasing a $35,000 vehicle, the residual value might be $20,000 at the end of three years. That means the portion you pay for, or the adjusted capitalized cost, is $15,000 (the total price of $35,000 minus the residual of $20,000 gives us the adjusted capitalized cost of $15,000). That means you are only paying $15,000 over the term of your lease, thus the depreciation is already accounted for. So, if you trade frequently, definitely consider leasing. Also, since you only pay for the portion of the vehicle you use over the lease term, you can often get more expensive vehicles for a lower monthly payment. A $45,000 vehicle might have a finance payment of $700 a month, but if you get into a lease, you might have payments lower than $500 a month. Saving $200 a month is always a wonderful thing! One thing you definitely need to consider when leasing is the miles you drive per year. The reason the lender can put that residual value on your vehicle is they cap the average number of miles you can drive annually, and those caps range from 10,000 miles a year to 20,000 miles a year. With a lower mileage cap comes a lower payment, because the value of your car will be higher at the end of your term. A used car with 30,000 miles is obviously worth more than a car with 45,000 miles.
Car buying can be a stressful process. You want to make sure you get the best deal, and you definitely don’t want to pay too much. The way you pay for your vehicle is just as important as the overall price, so with just a bit of homework, you’ll know the right payment option for you. If you don’t like monthly payments, paying cash is a hassle-free way to buy. If you can get a great rate, want to keep your cash freed up, and you keep your cars a long time, financing might work best. If you like to trade often and you don’t put many miles on your vehicles, or you want a more expensive vehicle for a not-so-expensive payment, leasing could be the way to go. As always, do your research. Don’t let anyone pressure you into a finance situation you don’t understand or are not comfortable with, and you will go home with the right car at the right price and the right payment.
About the author – Rob Poliquin III has been in the car business for over fifteen years and has been a used car pricer for several local Charlotte and national dealerships.