Car BUYING vs. LEASING
Last time we visited, we talked about the proper time to buy a car. We discussed “need” versus “want “and which will dominate. Face it, folks, “want” takes the first-class seat while “need” rides in the luggage compartment.
Our next challenge will be to determine how we pay for our new ride. There are several options that can accomplish this. The best choice is always based on your circumstances. Let’s explore the basic options: Lease versus Buy.
Buying a car is fairly straightforward. You negotiate a price for the new car and if applicable negotiate a price on your trade. Now the only option is to pay the difference in cash or finance. Let’s start with the price on the new car. That is actually very easy. The cost of most new vehicles can be found online with a simple Google search. Once you have discovered the cost of a new car I suggest you add a profit for the dealer, as it’s not fair to expect somebody to work for nothing. Conventional wisdom says anywhere between 2% and 3% is fair. However, this also depends on the vehicle you have chosen. If it is a run-of-the-mill car or truck with mass appeal there is usually a lot of inventory and the demand isn’t out of the ordinary. There are some models out there that are in high demand and, under those circumstances, profit may exceed the normal 2 or 3%.
The trade-in value is somewhat subjective. You can do some preliminary checking on such websites as NADA.com and Kellybluebook.com for a general range of your car’s value. Do not make the mistake of overlooking the actual condition or mileage on your existing car. Some people see their car through the proverbial “rose-colored glasses.” Your car will probably not be worth more because it has custom-tailored microfiber tire covers for those cold lonely winter nights in the garage. Be practical and objective.
Make sure you negotiate a price for the new car before you spring the trade on the dealer. This will prevent the dealer from bulking up the price of the new car in order to show you a higher trade-in value. For example, if your trade is worth $3,000.00 and the new car is $30,000.00 but there is $5,000.00 profit in the new car, the dealer may show you the deal this way:
New car…$30000.00
Trade in…$7,000.00
Net difference…$23,000.00
Profit to dealer…$1,000.00
This is the same as this:
New car…$30,000.00
Discount…$4,000.00
Trade in…$3,000.00
Net Difference…$23,000.00
Profit to dealer…$1,000.00
Same church, different pew.
Once you have decided on price of the new car and the trade, the next decision is how to pay for it. If you have the cash, that may be the way to go. This is depending on how much your cash can earn for you versus the interest rate on the car loan. Let’s look closer at this. If your money were invested and you are expected to earn a rate of return over the next 5 years of approximately 6% and the car loan carries an interest rate of 4% then borrow the money as you are making a 2% profit on the banks money. The opposite is also true. If the car loan is a higher interest rate than what you can earn, then pay for the car in cash if you can.
If you don’t have the cash your best bet is usually to get a loan quote from the dealer and shop it online. You have many options for car loans. I would check with your local bank as a start. I would also check AAA if you are a member. There are some great deals out there.
Once you make a deal and decide how to pay for it, you will be introduced to the Finance manager at the dealership. His or her job is to sell you finance, insurance, warranties of all sorts, paint protection and other such intangible products. Each of these products are profit centers for the dealer and can sometimes eclipse the profit they are making on the new car. Choose any of the options CAUTIOUSLY. Lots of them have no return on investment and can be just an added expense. Especially if you finance the costs of these items in your car loan note.
On to leasing. Below are what I believe are myths that exist about leasing and my opinion related to those myths, which I draw from 20 years in the new car business as a former dealer/owner.
~ Myth number 1. You only pay for the portion of the car you use.
Myth exploded. Your car has a residual value. This is the value the lease company estimates the car will be worth at the end of the lease. So, a $30,000.00 car may have a 50% residual value after a two-year lease term for a net value of $15,000.00. The dealer will tell you your payment is based only on $15,000.00. Not true. You pay interest on $30,000.00 throughout the term of the lease. At the end of the lease if there is damage beyond normal wear and tear or if you exceeded the mileage limit you contracted for, DUCK! You will get hit with fees that will rupture an appendix … and not the kind at the end of a book.
~ Myth number 2. You can deduct the payment.
Myth exploded. You can only deduct the portion of the payment used for business. Also, if you deduct a portion of the payment you can’t deduct a cost per mile that you travel. It is either one or the other.
~ Myth number 3. It is less expensive to lease
Myth exploded. NO WAY! First you are paying interest on the whole purchase price of the car. Second, if you pay your property and sales taxes in the payment, you are paying sales tax on your property tax liability. I think we had a war related to taxes in this country back in the 1700’s which makes me think that paying taxes on a tax isn’t exactly a popular idea these days.
There seem to be only a couple of good reasons to lease.
Reason number one…a business can offer a lease car as an incentive to an employee without causing the employee to pay income tax on the whole value of the car Just the payment. The company can then deduct the total cost of the payments as a business expense.
Reason number two… This one is more want than need and makes no economic sense but, occasionally, we give in to want. You can have a more expensive car for a bit lower payment.
In either case, lease or buy, don’t be blinded by payment. Payment is a function of price, trade in value and cost of money. Negotiate numbers not payments.
And in the interest of full and fair disclosure, any issues where I reference taxes or tax issues, please check with a tax professional for verification before making any decisions.
Beyond all this, you have choices. Take a look at options and next time we will discuss negotiation strategies…
– Dan
Important Disclosures: Innovative Planning Partners, LLC, Daniel Angelone, Christina Gatteri, and Sean Holly offer Investment advisory and financial planning services through Belpointe Asset Management, LLC, 125 Greenwich Avenue, Greenwich, CT 06830 (“Belpointe), an investment adviser registered with the Securities and Exchange Commission (“SEC”). Registration with the SEC should not be construed to imply that the SEC has approved or endorsed qualifications or the services Belpointe Asset Management offers, or that or its personnel possess a particular level of skill, expertise or training. Insurance products are offered through Belpointe Insurance, LLC and Belpointe Specialty Insurance, LLC. Additional information about Belpointe Asset Management is available on the SEC’s website at http://www.adviserinfo.sec.gov.
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