BUYING & LEASING CARS Presented by Cheryl Hardison SOM Office of Financial Aid March 11, 2010 1 BUYING A CAR IN TODAY’S ECONOMY These days, “great deals” are being offered on big big--ticket items all over the country. If you have both the NEED and the MONEY to afford such items in today’s market, you may want to go for it. 2 1 BUYING A CAR IN TODAY’S ECONOMY con’t. You should weigh the pros and cons of different types of cars. How much can I afford monthly? Should I buy new or used? Should I lease or buy? Do I need GAP Insurance? What kind of incentives & rebates are available? These are a few of the many important questions you need to answer before making this big decision. Here are some 3 guidelines to help you in the process. STEPS TO FINDING THE RIGHT CAR FOR YOU 1 What kind of car do you need? 1. Take a moment to think about what you use your car for. How many people do you need to transport? How long is your commute? Is it important to get good gas mileage? Will the car easily fit into your garage or parking space? 4 2 STEPS TO FINDING THE RIGHT CAR FOR YOU con’t. 2. How much can you afford? Regardless of whether you decide to buy or lease, establishing a realistic monthly payment that fits your budget is crucial. Rule of thumb, your total monthly car payment shouldn’t exceed 20% of your monthly take home pay. Check the Edmunds.com Affordability Calculator to estimate what your monthly payment will be based on purchase price, interest rate, etc. 5 STEPS TO FINDING THE RIGHT CAR FOR YOU con’t. 3. Have you considered all of the costs of ownership? Here is an often overlooked fact of car ownership: One car may be cheaper to buy, but more expensive to own. Why? Even if two cars cost about the same to buy, one can depreciate d i t att a diff differentt rate t or costt significantly more to insure or maintain. Go to Edmunds.com and use the True Cost to Own information table before deciding which car is right for you. 6 3 STEPS TO FINDING THE RIGHT CAR FOR YOU con’t. 4. Research your options. In the past, car buyers have been trained to visit local dealerships to find the car they want. In the internet age, this is a waste of time & money. You can quickly cover more ground by shopping online. 5. Schedule an appointment for a test drive. It’s a good idea to make contact with a dealership by phone or e e--mail before going there in person. This can give you a sense of the sales style you will be dealing with. 7 STEPS TO FINDING THE RIGHT CAR FOR YOU con’t. 6. How to test drive a car. The testtest-drive should replicate the conditions the car will be used in after you buy it. If you commute, drive the car in both stopstop-and and--go traffic and at freeway speeds. If you frequently drive in the mountains, try to find some steep t grades d tto climb. li b Be sure to sit in the backseat so you’ll know what it feels like for your passengers. Make sure the radio’s volume is not on high so you can hear if something is wrong. 8 4 STEPS TO FINDING THE RIGHT CAR FOR YOU con’t. 7 After the test drive. 7. drive You should leave the car lot. Why? You will probably need to drive other types of cars at other dealerships. It’s a good idea to do all of your testtestdriving in one morning or afternoon. Driving the cars backback-to to--back will help you uncover differences that will lead to an educated purchase decision. 9 STEPS TO FINDING THE RIGHT CAR FOR YOU con’t. 8. 8 Getting ready for the buying cycle. cycle. At this point you should have considered all the cars that interest you. You should have a good idea what you can afford. You should h ld know k if you want to buy b or lease l your next car. You should have testtest-driven your top choices. 10 5 New versus Used Automobiles PROS for NEW cars: Extended warranty Updated safety features Overall safety CONS for NEW cars: Depreciating value Expensive 11 New versus Used Automobiles con’t. PROS for USED cars: Most new carmakers now sell “certified” used cars, which includes warranties The history of a used car can easily be traced using the vehicle identification number Lower cost & Less depreciation p You’ll save money on insurance CONS for USED cars: More maintenance Mechanical surprises 12 6 Buying versus Leasing PROS for BUYING: Car ownership Build equity Drive for several years after payoff CONS for BUYING: Extended financing Cars depreciate in value 13 Buying versus Leasing (con’t) PROS for LEASING: You can drive a more expensive car for less New car every few years Lower monthly payments CONS for LEASING: No equity Greatest cost to you Never ending cycle of monthly payments Mileage restrictions 14 7 HOW LEASING WORKS Leasing a car is like renting a car – but for a longer time period. You can either give it back at the end of the lease or you do have the option to buy it. Leasing became popular in the 1990s because cars became too expensive to buy for many people. Leasing eas g ca can o offer e ta tax b breaks ea s for o ce certain ta occupat occupations. o s Before deciding to lease, please check out leaseguide.com and fightingchance.com. 15 COMPARISON CHARTS FOR BUYING NEW, LEASING OR BUYING USED The following charts show comparisons between buying new, leasing and buying used. For the purposes of the buying or leasing new car examples, examples we assumed that the owner would drive 12,000 miles a year and the price of the car was $20,000. 16 8 New Car Ownership — First Year (3 (3--yr loan @ 6%) Down Payment $3,000 Monthly payment $608 per month $7,296 Insurance $1,140 Maintenance & repairs $100 DMV Fees $300 (included in monthly payments for first year) TOTAL $11,536 17 New Car Ownership — 5-Year Total (3 (3--yr loan @ 6%) Down Payment $3,000 Monthly payment $608 per month $21,888 Insurance $5,700 Maintenance & repairs $1,100 DMV Fees $1,000 ($300 included in monthly payments for first year) TOTAL $32,388 18 9 New Car Lease — First Year (3 (3-yr lease @ 6%) Down Payment $1,000 Monthly payment $350 per month $4,200 Insurance $1,380 Maintenance & repairs $100 DMV Fees $300 (included in monthly payments for first year) TOTAL $6,680 19 New Car Lease — 5-Year Total (Two 3 3--yr leases @ 6%) Down Payment $2,000 Monthly payment $21,840 $350 /month for 36 months $385 /month for 24 months Insurance $6,900 Maintenance & repairs $800 DMV Fees $1,230 (included in monthly payments for first year) TOTAL $32,140 20 10 Used Car Ownership — First Year ($10,000 price ~ 33-yr loan @ 8%) Down Payment $2,000 Monthly payment $285 per month $3,420 Insurance $850 Maintenance & repairs $300 DMV Fees $200 (included in monthly payments for first year) TOTAL $6,570 21 Used Car Ownership — Five Five--Year Total ($10,000 price ~ 33-yr loan @ 8%) Down Payment $2,000 Monthly payment $285 per month $10,260 Insurance $3,430 (rates drop after first three years) Maintenance & repairs $2,700 DMV Fees $650 ($200 included in monthly payments for first year) TOTAL $18,390 22 11 COMPARING OWNERSHIP SCENARIOS New Car $20,000 $32,388 Used Car Leased Car $10,000 $20,000 Cash outout-of of--pocket $18,390 $32,140 $7,000 Value of the car now owned $2,000 $0 $25,388 Adjusted cash outout-of of--pocket $16,390 $32,140 23 What is the Lemon Law? Lemon Laws are American state laws that provide a remedy for purchasers of cars that repeatedly fail to meet standards of quality and performance. These cars are called “lemons.” The federal lemon law (the Magnuson--Moss Warranty Act) protects Magnuson citizens of all states. Lemon laws vary by state and may not necessarily cover used or leased cars. 24 12 Trivia ~ What is the reason for the law’s name? In the 1800s, 1800s people started using the word ‘lemon’ to describe people who were sour (or unfriendly). In American English the word was first recorded in 1909 in the slang “worthless thing.” Over time, ‘lemon’ came to refer f to anything hi that h was defective d f i or broken or which breaks constantly, particularly a car. 25 What if the Lemon Law does not apply? If the defects with your vehicle do not meet the requirements of the Lemon Law, you may have claims under other state and federal laws that protect owners of new or used vehicles. For more information, check out the Magnuson Magnuson-Moss Warranty Act & the Uniform Commercial Code at www.wikipedia.org www.wikipedia.org.. For more information on California’s lemon law go to www.californialemonlaw.info 26 13 Guaranteed Auto Protection (GAP) Insurance GAP insurance will cover the difference or gap between the amount you owe on your car and the car’s actual cash value (ACV) in the event the car is totaled or stolen. New cars depreciate 20% the moment they are driven off the dealer lot & continue to do so during the first three years of ownership ownership. If you finance 100% of the price of the car or make a down payment that is less than 20%, you will owe more than the car is worth for a period of time. This is known as being “upside down.” 27 GAP Insurance con’t. Edmunds com a leading information web site, Edmunds.com, site recommends GAP insurance on a new car for those who are: Financing for 72 months or more Rolling negative equity from a previous car loan into a new loan Making a down payment less than 20% Leasing a vehicle Purchasing a car that depreciates quickly (luxury/highly optioned) 28 14 HANDY CHECKLIST & TIPS Whether you are buying new, used or leasing. Choose the right vehicle for you Look up the car on Edmunds.com & check its reliability & consumer reviews. Research the internet for prices. Decide how you are going to finance your car & get pre--approved pre p pp before shopping. pp g If buying a used car, get a vehicle history report. Carfax.com If buying a used car, take it to your mechanic to be checked out before purchasing. 29 HANDY CHECKLIST & TIPS con’t. If you are trading in your old car, car check to see what it’s worth before going to the dealer. Kelly Blue Book @ kbb.com or Edmunds.com. Try selling your trade trade--in to a private party instead of letting the dealer give you the bare minimum for it. Inspect the car for dents, dings and scratches before taking final delivery. 30 15 HANDY WEB SITES www.californialemonlaw.com www californialemonlaw com www.carfax.com www.carinfo.com www.cars.com www.costco.com www edmunds com www.edmunds.com www.fightingchance.com (Leasing 101) www.kbb.com (Kelly Blue Book) www.leaseguide.com www.wikipedia.org 31 THANK YOU & HAPPY SHOPPING! 32 16