LATIN BUSINESS ASSOCIATION
LBA Community AutoProgram
An informed consumer makes better decisions. The following valuable information will help you become better informed, and equipped, to make the best decision in acquiring your next vehicle!
- Automobile Leasing
- Factory-Certified Pre-Owned
- Why should I buy a Factory-Certified Pre-Owned vehicle?
- Alternative Financing
Leasing is a type of financing in which the vehicle is used for a specified period of time with payments made to the leasing company (lessor), who continues to own the vehicle. Leasing has traditionally been popular with self-employed people and businesses that considered the vehicle an expense, and not for personal use. Leasing popularity rose dramatically in the 80’s and 90’s, hitting a peak in 1999. Purchasing has since come to dominate the market, with leasing in decline some 52 percent.
Consumer leases are offered by auto manufacturers, financing companies, banks and credit unions. The Federal government began regulating the industry in the 90’s to the benefit of consumers by imposing a uniformity of standards, resulting in leasing remaining popular as a financing option since different leases can be easily and fairly compared. Although attractive, leasing is not for everybody and may not be a good fit for different needs and lifestyles. The following information should be useful in helping you determine whether or not leasing is a good fit for you.
Lease vs. Purchase
When you purchase a vehicle you pay for its entire cost, regardless of the mileage driven. Typically, you would make a down payment, pay applicable sales tax and have them factored into the loan, along with the interest rate offered by your lender.
When you lease, you’re paying for only a portion of the vehicle cost, namely that which you are planning to ‘use’ during the time it is driven. Usually, no down payment is made, only sales tax on the monthly payments (in most states), and an amount similar to the loan interest known as a ‘money factor’. Leases may require additional fees, and perhaps a security deposit not required on a vehicle purchase.
On a lease, you’re paying what is referred to as the ‘gross capital cost’ which is the difference between the agreed upon amount of the cost of the vehicle at the time the lease is written (‘lease inception’) and the estimated value of the vehicle at the time the lease terminates (the ‘residual). The value is known as the depreciation. For example, on a lease of a vehicle valued at $20,000 but estimated to be worth $12,000 in 36 months, you’re paying $8,000- the value you ‘used’, plus interest. When you purchase, you’re paying for the entire cost of the vehicle, hence the lower monthly payment on a lease vs. a purchase
Two similarly priced vehicles, however, may have significantly differing rates of depreciation over the same period of time. If, for example, vehicle Brand A is projected to be worth $10,000 in 36 months and vehicle Brand B at $12,000, then the Brand A vehicle will have a significantly higher monthly payment than that for Brand B, assuming, of course, all other factors are the same.
Lease Payments vs. Loan Payments
Lease payments are comprised of two parts- a depreciation charge and a service or rent charge. The depreciation is remuneration to the lessor for part of the value of the vehicle lost during the lease. The service or rent charge is interest on the money the lessor has held up in the vehicle while its in use.
Actual payments may vary among lessors. The same vehicle could have a different payment from one bank to another due to the fact that each has their own way of determining its residual value. If one bank places it at $12,000 and the other $12,800, then the latter will have a lower payment than the former, again, assuming all other factors are equal.
Factors affecting the payment include: the mileage allowed/year, service or rent charge (fee for the use of the money), duration of the lease, residual value of the vehicle, and ‘acquisition fee’, the amount paid to the lessor at lease inception.
Factors that do not affect the payment, but which may become quite substantial, include charges for mileage over and above the amount allowed, excessive wear and tear on the vehicle, and any required security deposit.
Loan payments are also composed of two parts: a principal charge, which pays off the vehicle’s original purchase price, and a finance charge, which is interest.
Loan payments cover the interest first. The remainder applies toward the principal and creates equity. Equity is the vehicle’s value you keep after the loan has been paid off.
Leasing is similar to purchasing, minus the equity. You are paying only for what you use. While true that you don’t own the vehicle during the lease, you are also not paying to own it.
Other Important Leasing Information
To an extent leasing is more complicated then purchasing. The following factors should be considered:
During the lease, should a situation arise wherein you should want out of the lease prior to its scheduled term, you have three options:
- Find another interested party to assume the lease, which would require a call to the lessor to see what their policy is on ‘assumptions’. A typical fee of $300 will be assessed. It would be a good idea to ask about this when negotiating your lease.
- Sell the vehicle. You would first need to call the lessor for the ‘pay off’ the exact current dollar amount to buy the vehicle. Once you have that, then find the market value of the vehicle, adjusting for mileage, region, color and options. If the pay off is close to market value, you can sell the vehicle and then pay off the lease.
- Turn in the vehicle to the lessor and walk away from the lease. This is the worst possible choice since doing so would result in it being reported against your credit as a repossession.
At the end of the lease, turn in the vehicle and the lessor will inspect the vehicle and charge for damage, excessive wear and tear and any deviations from the lease contract. You can avoid such charges if, at lease inception, you also carefully inspected the vehicle, noting any obvious problems and listing them, and taking a photo of the vehicle. Otherwise, stay within your mileage allotment, make any necessary repairs, and in general maintain the vehicle in above average condition. You should also fill out a condition report of the vehicle prior to turning it in.
At the end of the lease, you may purchase, sell, or turn in the vehicle.
Negotiating a fair lease in the first place can prevent undesirable complications or complaints. Consider consulting someone you know to be knowledgeable with contracts or an accountant or tax professional regarding possible tax advantages.
Lease vs. Purchase: Which is Better?
The question of whether to lease or purchase a vehicle is more a lifestyle choice than a financial matter.
People who like to drive a new car every three or four years or so, and do not want to be concerned with having to pay for major vehicle repairs, generally prefer leasing. In addition to requiring a relatively small cash layout at lease inception, typically the first monthly payment and a security deposit, most leased vehicles are under full factory warranty for the entire duration of the lease.
The disadvantage is mileage, vehicle condition, and insurance. If you choose to lease be aware that over-mileage charges can become quite substantial. A charge of 20 cents per mile over the allowance doesn’t sound like much when starting out, but if you find when you turn the vehicle in that your odometer reads 10,000 miles beyond it, then you’re looking at an added charge of $2,000. So, if you know you are going to drive more than, say, 12,000 miles per year, it is better to structure 15,000 miles into the contract, or whatever the number of additional miles you anticipate having to drive at the time you are negotiating the lease. The additional cost per mile is generally going to be lower if you end up paying for excess miles. You will also be responsible for returning the vehicle at the end of the lease in good condition. While the definition of ‘good condition’ may vary from lessor to lessor, without exception you will have to pay additional charges if you return the vehicle with missing or broken parts, or collision damage. And leasing companies may require you to carry greater insurance coverage than some buyers would typically wish to carry, which also drives up the cost.
If you’re the type of person who wants to keep your vehicle for a long time, drive a lot and maybe have a trade-in or large down payment you would benefit from a purchase. While you will have to absorb the initial depreciation of the vehicle at the beginning, you will be free of paying for miles and the vehicle will last you for many years, provided, of course, that it is properly maintained.
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“Even greater savings on vehicles that are like new”
All vehicles must meet or exceed rigorous factory standards for mileage and physical condition in order to be certified by the manufacturer. Factory-trained technicians perform comprehensive inspections of the vehicles and testing on all major mechanical systems. Only when they pass do these vehicles become factory certified, and covered by an extended warranty backed by the manufacturer.
Each manufacturer has its own certification process but all require a minimum 100-point inspection of the vehicle which includes testing engine performance, powertrain, electrical systems, safety systems such as braking, and self-restraint systems such as seat belts and air bags and an evaluation of the vehicle’s body panels and bumpers. For more specific on each individual certification process, select a manufacturer below.
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Why should I buy a Factory-Certified Pre-Owned vehicle?
“You’re not just looking for a vehicle, you’re looking for peace of mind.”
According to a recent study by J.D. Power and Associates, the popularity of Factory-Certified Pre-Owned (CPO) vehicles has virtually exploded with sales having surged by 46 percent since 2000. Of those responding in a survey by Edmunds.com, 85 percent stated they would consider purchasing a CPO vehicle. Consider the following reasons why your next vehicle should be a Factory-Certified Pre-Owned:
– Thorough Inspection- Vehicles receive a minimum 100-point inspection of all mechanical and cosmetic components, ensuring the vehicle is in exceptional working condition. If a faulty component is found, it is repaired or replaced; if the problem cannot be rectified the vehicle cannot be ‘certified’.
– Factory Warranty- After passing the rigorous certification process the vehicle is provided with an extended warranty supported by the original vehicle manufacturer, which is in addition to any remaining original factory warranty. Owners of CPO vehicles can have them serviced at any of the manufacturer’s dealerships, providing greater convenience and peace of mind.
– Greater Affordability- CPO vehicles cost an average of 20-60 percent less than new vehicles, so you get greater value (or maybe the leather seats or premium sound system you’ve been wanting)!
– “Like-New” Condition- CPO vehicles are in great physical condition and are virtually indistinguishable from new vehicles due to the stringent manufacturer standards and testing they undergo.
– Dealer Incentives- Many dealerships offer the same incentives such as roadside assistance, loaner cars, and pick-up and drop-off service to CPO buyers as they do buyers of new cars. Contact the dealership for their own specific offerings as they may vary from dealer to dealer and may not be available in all areas.
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FAQS– Frequently Asked Questions
“Get a nearly new vehicle, and the protection and peace of mind of a factory warranty, at a great low price”
Factory Certified Pre-Owned Vehicles
What is a Factory-Certified Pre-Owned vehicle?
A Factory-Certified Pre-Owned (FCPO) vehicle is a used automobile that underwent and passed rigorous factory inspections and diagnostic testing and is provided an extended factory warranty. Most FCPO vehicles are in ‘like-new’ condition.
How are Factory-Certified Pre-Owned vehicles priced?
Generally, pricing is predetermined on FCPO vehicles and may be either mid-to-low Kelley Blue Book values (see kbb.com) or a preset discount off the dealer’s lowest posted price on that vehicle. Either pricing structure ensures that LBA members receive maximum possible savings on the vehicle of their choosing.
What is Mid-Kelley Blue Book Pricing?
Kelley Blue Book assigns two prices on every vehicle- wholesale and retail. Mid-Kelley Blue Book pricing is the halfway point between the two.
What is the Lowest Posted Price?
The lowest posted price is the advertised price the dealer has placed on the Web, newspapers, and at the store. Dealers may offer this price or Mid-Kelley Blue Book.
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While financing an auto loan at the dealer may be most convenient, it may not provide you the lowest rate. Consider looking into alternative financing before you shop for your next vehicle so you have a reference, and know ahead of time what you qualify for. That knowledge can provide leverage as well, should you decide to finance your vehicle through the dealer.
The following are recommended alternative financing options:
Credit unions are a terrific source for auto loans. Even if you are not a member, they are more accessible to far more people than they used to be. Basically, credit unions are non-profit banks, so they can offer some of the best deals. To find a credit union:
Check with local banks in your area. Also, the bank you already have a checking account with may be willing to offer you a lower rate for opening an additional account.
Also recommended is trying out a website that provides instant quotes, such as http://www.Bankrate.com
Auto loan rates can vary considerably, and may range anywhere between 4.25% to 11.22%. Based on the national average of a $25,000 auto loan, the savings you could enjoy on finance charges alone by shopping financing as well as the vehicle could be upwards of $2,000, making it well worth the time and effort.
Again, the fact is that with alternative financing in hand, you have knowledge, which gives you power. Don’t disregard dealer financing altogether, but don’t rely on it alone. Based upon the volume of loans they generate, a dealer oftentimes can get financing for an individual who might not otherwise qualify, or negotiate a better rate than that individual may be able to negotiate for him or herself.
Just remember, getting outside quotes gives you a point of comparison. And that gives you power!
Peter Beltran- AutoProgram Director
Tel: (213) 628-8510 ext. 230