7 Tips for Deciding How Much Car You Can Afford

HowMuchCar

According to the most recent State of the Automotive Finance Market study from Experian, the average new car loan surged to a shocking $30,534 during the first quarter of the year. Unfortunately, those purchasing new cars didn’t lower their expenses that much. The study noted that the average used car from a franchise set consumers back $20,904, whereas the price of the average used car purchased independently climbed to $16,612.

But what’s really astounding is how long people promised to pay their loans back. New car loans—for both new and used vehicles—lasted an average of almost 69 months, the report noted. Obviously, this is a lot of cash, and there are borrowers who can’t truly afford these loans.

If you’re getting ready to purchase a car and don’t want to overspend or borrow too much, here are seven tips that can help.

#1: Review Your Budget

Whether you plan to finance your car or pay entirely in cash, you need to make sure you understand the financial implications of the purchase. Figure out how the monthly payment will affect your monthly budget or how paying in cash might affect your finances over all.

If you’ve been paying a $400 or $500 monthly car payment all along, you might already know what you can handle. But if you’re financing a car for the first time, you’ll want to sit down and write out a budget and your expenses to gauge how much you can truly afford without forsaking your other financial goals.

If you’re paying for a car in cash, make sure you’re not depleting your emergency fund—and that you’re leaving enough money behind for your regular bills and living expenses.

#2: Consider the Interest Rate

While the total cost of your new or used car is a good place to start your comparison, you should also check to see what interest rate you qualify for. Generally speaking, the interest rate you qualify for will depend on the quality of your credit score. (You can view your free credit report at Credit.com to get a sense of how your credit score may affect your rates.)

And if you think it doesn’t matter, think again. Even a few percentage points can make a huge difference. If you borrow $25,000 at 8% APR, for example, you’ll pay $506.91 per month and incur a total loan cost of $30,414.59. If you take out the same loan but qualify for 4% APR, on the other hand, you’ll pay $460.41 per month and only $27,624.78 over the life of your loan.

#3: Don’t Forget about the Length of Your Loan

While it’s important to gauge the affordability of your new car’s payment and the interest rate you qualify for, don’t forget about the length of your loan. Taking out a longer loan can help you qualify for a lower payment, but you may pay a lot more interest due to the longer stretch of time it takes you to repay.

And if you need to borrow for longer than you really want, it might be worth asking yourself if you’re spending too much.

“If you must borrow money for a car, make sure it is an amount that can be paid off in three to four years and the payment will comfortably fit within your monthly budget,” says financial planner Matt Adams of Money Methods. “If you need to finance a vehicle for anything longer than four years to simply get the payment within reach, you are likely buying more vehicle than you should.”

#4: Remember the Higher Ongoing Costs of New Vehicles

In addition to the sticker price of vehicles you’re considering, it’s smart to look into other costs you might incur, says financial adviser Ryan Cravitz of Milestone Wealth Management.

“Make sure that you don’t forget to account for the many so-called hidden costs when buying a particular car,” he says. “Factors such as the cost of insuring the vehicle, the average maintenance and repair costs, the fuel economy ratings, and whether you should buy the extended warranty are just a few things that should not be ignored.”

Also, don’t forget that a lot of these costs can be higher if you purchase a new car right off the lot. Auto insurance rates in particular tend to be heftier than you might expect when you purchase a newer, more expensive vehicle.

#5: Ask Yourself about the Trade-Offs

Taking on a new car loan is often one of the easiest ways to get into the car you want. While it’s difficult and time-consuming to save up tens of thousands of dollars in a new car fund, you can visit a dealership, finance a car, and drive off the lot in a matter of hours.

Unfortunately, you’ll likely pay a pretty penny for the privilege. While you may theoretically be able to afford the payments on your new car, something usually has to give. And that something might be an expense you miss being able to afford like you were back in the days you didn’t have a huge car payment hanging over your head.

“Remember that whatever you spend on your car, that’s money you won’t have for clothes, food, or going out with your friends,” says financial adviser Anthony Montenegro of Blackmont Financial Advisors. “So, weigh out the trade-off carefully and spend wisely.”

#6: Set a Firm Limit and Consider Your Options

While any of the tips above can help you figure out how much you can afford to spend on your new ride, some financial advisers suggest simplifying the process with a firm limit.

For example, New York financial adviser Joseph Carbone of Focus Planning Group recommends that his clients never take out a car loan that exceeds 10% of their monthly income. “Of course, everyone’s situation is different,” he says. But this situation can truly work if you let it.

Let’s say your take-home pay is $4,500 per month. Using this rule, your car payment should come in under $450 per month. That may not be enough to get you into the car you want, but it’s enough to get you into the car you need.

Financial adviser Brian Hanks also suggests considering more than one car as you make your final selection.

“After you choose a model car you think you want, pick your second favorite,” says Hanks. “Compare the monthly costs of your first and second choice cars side by side. Without a tangible second choice to compare against, it’s too easy to justify higher monthly costs for your first choice.”

#7: Spend Less Than You Can Afford

If you’re still struggling to decide how much to spend—or you’re worried about overextending yourself—take a step back. Unless you need a new car today, there’s nothing wrong with thinking through your decision for weeks or months until you know exactly where you’re at.

And if you still can’t decide, try to err on the side of spending less than you can afford, says financial planner Mitchell Bloom of Bloom Financial, LLC. Bloom says he sees a lot of people who under-budget for and overspend on cars to the point where it puts them in financial peril. Fortunately, this situation is completely avoidable if you do some legwork.

The bottom line: Keep your expenses low, save as much as you can, and have a long-term plan. And if this advice doesn’t mesh with the car you want to buy, you’re probably spending too much.

 

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The post 7 Tips for Deciding How Much Car You Can Afford appeared first on Credit.com.

Ally Bank Auto Loan Review

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If you’re familiar with online banking products, you’re probably very aware of Ally Bank’s presence in the online banking market.

But contrary to what it may seem, Ally isn’t a direct-to-consumer auto lender. That means you can’t find out whether or not you prequalify for an Ally Bank auto loan unless you go through a dealership. In 2016, Ally Auto served 18,000 auto dealerships and over 4 million auto dealership customers.

The thing is, it’s never a good idea to walk into a dealership before you’ve shopped around to get financing offers from multiple lenders. But with that being said, you might find yourself looking at a financing offer from Ally through a dealership and want to better understand how it works and what some alternatives might be.

In this post, we’ll take a look at the Ally Bank auto loan to let you know what steps are required to borrow and our take on the entire process. We’ll also cover rates and terms of Ally auto financing because we found them to be lacking transparency.

Who Ally Bank auto loan financing is best for

We don’t recommend that anyone chooses an auto loan through a dealership unless you get a ridiculously good deal compared to other offers.

The far better move is to first shop around for interest rates on auto loans with multiple lenders. Then go to the dealership with financing already secured. This way you’ve had time to get preapproved for the most affordable financing you can get, and you won’t fall victim to a subprime auto loan.

When reviewing a dealership auto loan, compare the interest rate, monthly payment, and total costs to other loans to make sure it’s truly a better agreement overall.

Check out this post for an in-depth guide on how to borrow money before car shopping.

Here’s a summary of the steps you should take:

  • Improve your score. Work on your credit score health since a higher credit score is what will get you the best loan offers.
  • Get preapproved. If you’re worried that shopping for several loans will damage your credit score, you can breathe a sigh of relief. Having your credit pulled by several lenders within a 14- to 45-day period can count as a single inquiry and has a limited impact on your score.
  • Take your preapproval with you when car shopping. You can make well-informed buying decisions with a preapproval in hand.

How Ally Bank auto financing works

Ally Bank is an indirect auto lender. An indirect auto lender is one that offers loans through dealerships. You can’t call up Ally Bank directly to get auto loan rate estimates.

Instead, here’s how it works:

  • Step 1: You go to a dealership that has a relationship with Ally Bank.
  • Step 2: You choose a car you want to buy.
  • Step 3: The dealership performs a credit review.
  • Step 4: The dealership crunches numbers and comes up with loan offers you qualify for based on your credit and the car you’re buying.
  • Step 5: You choose between offers, which can include an offer from Ally Bank.

One thing to be highly vigilant of with any indirect auto lender is that they may set a base interest rate and allow the dealership to tack on an additional markup on top of that rate. The interest rate markup can be revenue for the dealership and is an incentive to give you a more expensive loan.

Ultimately, it’s the dealership’s prerogative to make the most money possible regardless of what it costs you. To avoid getting finessed into a bad deal, it’s imperative that you search for auto loans from many lenders before car shopping at a dealership.

Ally Bank auto financing products

Ally Bank has four auto financing options:

Buying. According to Ally Bank, their auto loans have flexible terms. Auto loans come with online account management, auto-payments, and speciality financing for accessibility needs.

Leasing. There are lease financing options as well. A lease is kind of like renting a car for a certain time frame. You may have a limited number of miles you can drive on your lease, and you may be responsible for car repairs. Leasing cars long term can be more expensive than buying. A situation where a lease may make sense is if you want to drive new cars every few years.

Otherwise, you’re likely better off saving to buy a car in cash or financing to own it outright. Learn what you need to know before leasing a car here.

Ally Buyer’s Choice. Ally Bank offers a middle ground option between leasing and buying called Ally Buyer’s Choice. With the Ally Buyer’s Choice program, you make regular payments on an auto loan until the 48th month. At that point, you can decide to sell back the car to Ally Bank, or you can continue making regularly scheduled payments on the car.

Ally Balloon Advantage. Balloon financing is when you have smaller monthly payments and a larger lump-sum payment at the end of the contract. The benefit of a balloon loan is that you can have payments that are lower than a regular term loan. The drawback is obviously the large payment you’ll have to come up with down the road. Learn more about Ally Balloon Advantage loans here.

What we like about Ally Bank auto financing

The educational resources and account management tools. Ally Bank has an online and mobile app that can be convenient for account management. Ally Bank offers some articles on their website that can teach inexperienced car buyers what they need to know about auto loans.

There’s a post on whether it’s better for you to lease or buy. Ally Bank also encourages you to shop for rates with other lenders before car buying in its auto financing guide, which is sound advice.

What we don’t like about the Ally Bank auto loan

Transparency is lacking. Since Ally Bank is primarily an indirect auto lender, there’s hardly any information available online or through Ally Bank customer service about fees, terms, or interest rates. There are no details on what type of cars (make or age) that qualify for financing.

Ally Bank points you in the direction of dealerships you can visit to see what loans you qualify for. The dealerships are pretty much the middleman.

In comparison, some lenders will give you more insight on auto loan products. You can also get preapproved for these products before ever stepping foot on the car lot. We’ll give you examples in the next section.

Alternative auto loans

You should always shop around to compare rates before you head to a dealership. The dealer’s financing office may be able to beat your rate from another lender — but they won’t do that unless you’ve got an actual rate for them to see.

Use MagnifyMoney’s auto loan comparison tool to find great offers in your area.

Here are some lenders that will let you shop for loans before going to the dealership:

U.S. Bank – Rates start at 3.12% APR

The maximum you can borrow is $100,000. You can get a 0.50% discount off of your interest rate if you buy an EPA-Certified SmartWay vehicle or sign up for automatic payments.

U.S. Bank lets you get preapproved online to check for rates and terms. The preapproval is free but does require a hard inquiry credit check. Remember, if you shop for auto loan rates with several lenders within a short time frame, it can count as a single credit pull.

LightStream – Rates start at 2.49% APR

You can borrow from $5,000 to $100,000. If you sign up for automatic payments, you can get a 0.50% rate discount. The process of getting a loan is simple. You apply online, accept your loan terms, and receive your funds to make the car purchase.

Your loan can get approved and funded the same day if your application process is complete before 2:30 p.m. ET on a bank business day.

Capital One – Rates start at 3.24% APR

Capital One lets you borrow between $4,000 and $40,000 for new and used cars. The car has to be 12 years old or older with less than 120,000 miles on it.

You can prequalify for rates on the Capital One website without a hard inquiry. Once prequalified, you can search for cars through Capital One partners and personalize your loan terms.

The post Ally Bank Auto Loan Review appeared first on MagnifyMoney.

How to Deal with an Underwater Car Loan When You Can’t Sell

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According to experts at the automotive website Edmunds, a new car loses up to $7,419 of its value during the first year on the road. Over the next three years, new cars lose an average of $5,976 in value, mostly due to age and wear and tear.

This shows just how quickly a fancy new car can depreciate in value—and how quickly it can become worth a lot less than what you owe. After all, if you financed that new car without a down payment, the average car owner would have to pay $7,419 in principal payments the first year just to keep up with rapid depreciation.

But what if you want to sell your car and your loan is underwater? Unfortunately, this is a real issue, and one that happens all the time. If you’ve financed a car and can’t afford the monthly payment, if you need a different vehicle to fit your family or job, or if you just want a do-over, it may be difficult to find a solution without taking a loss.

If you’re underwater on your car loan and can’t sell, here are some potential solutions and why they may or may not be a good fit for you.

1. Trade in Your Car

According to another study from Edmunds, 32% of all automotive trade-ins were underwater during the first quarter of 2016. Car owners who owed more than their cars were worth had an average of $4,832 in negative equity before they traded up to something shiny and new.

This just goes to show that if you owe more than your car is worth, you’re in good company. But that doesn’t mean trading up is good for your wallet. The dealership you work with may be able to wrap your debt into your new loan, but unfortunately, you’ll remain underwater, even with the new loan.

If you’re trying to get out from under an oppressive car loan, this isn’t the solution. The only time to consider this option is when you need a different car to accommodate a changing life situation, such as with your job or your family.

2. Make Extra Payments

If you’re tired of being underwater and just want to sell your car, some experts advise making extra payments on your loan to pay it off faster.

However, if you’re struggling to come up with cash, you may want to consider halting your investment or retirement contributions to free up cash, notes Joseph Carbone of Focus Planning Group. According to Carbone, while it might sound over the top to stop investing for a while, this strategy might be the best choice, especially if the interest rate on your car loan is over 10%. Once you pay down your car loan and sell your vehicle, Carbone says, you can resume investing as usual.

Another option is to go on a limited-time spending freeze, says Texas financial planner Matt Adams.

“If cash flow is an issue, then it is time to tighten your budget and/or find a way to earn some additional income to pay the note down,” he says. This might be a good idea if you want to free up cash without changing your investment strategy.

3. Refinance Your Car Loan

While it might seem counterintuitive to take out another loan, refinancing your loan can make sense in certain situations, says Anthony Montenegro of Blackmont Advisors.

If you’re struggling to keep up with outrageous payments, for example, a new car loan could help you score a lower monthly payment, so long as you’re willing to extend your repayment timeline. It can also make sense to refinance if you have a high interest rate and you’ve improved your credit enough to qualify for a new loan with a significantly lower rate.

Before you refinance, make sure you look around for auto loans with no or low closing costs. Also, read the fine print on your new loan to make sure you understand your new payment and when the loan will be paid off.

4. Use Your Car to Make Money

Consider using your car to earn some extra cash. One way you can is with Turo.com—a website that lets you rent out your car. Alex Whitehouse of FinHealthy.com says that Turo.com is like “Airbnb for your ride” and notes that according to Turo, “hosts can typically cover their car payments by renting out their cars just nine days a month.”

If you have some spare time for a side hustle, you could also start driving for a rideshare company like Uber or Lyft. Financial planner Charles C. Scott says that you can “let your car work for you” this way. And since this side gig is flexible, those extra hours can fit nicely into your regular work schedule and social calendar.

5. Keep Your Underwater Car

Whatever the reason for wanting to ditch your underwater car loan, keep in mind that your alternatives may not be perfect. Sometimes it makes the most sense to just keep the car and pay it off the slow and painful way, says Ryan Cravitz of Milestone Wealth Management & Insurance Solutions.

If you’re able, paying your car off at a regular pace would eventually put you in an enviable situation—being free from car payments completely. The challenge at that point would be to avoid trading in your paid-off car and starting the whole process over.

The Bottom Line

The next time you find yourself itching for a new car, try to avoid a situation where you’re buying more than you can afford. According to Steven Rocha of Define Financial, “If possible, take your time and save money for a larger down payment,” and “doing so will make the purchase feel more real and might make you reassess just how much car you really want.”

Regardless of how you deal with an underwater car loan, keep in mind that you could easily make this mistake again if you’re not careful. Car dealers are more than happy to sell you one overpriced car after another, and you could spend most of your adult life owing money on cars that depreciate at lightning speed.

If you find yourself stuck in a pattern of underwater loans, or if you just want to get better at managing your debt, you can find more information online that may help. And before you buy another car or make any other big purchase, take a look at your credit report. You can see your credit report for free at Credit.com.

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Car Prices Hit an All-Time High — Here’s How to Save When Buying New

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The first Model-T cost as little as $825 in 1908, which is about $18,000 adjusted for inflation. Today, the average car buyer can expect to leave a dealership with a new car for around $35,428. That was the average transaction price for a new vehicle in October — an all-time high — according to auto comparison website Edmunds.com.

The average new-vehicle transaction rose 2 percent from October 2016 and 12 percent over the past five years. The average down payment on a new car also hit a new record: $3,966, which is up $374 from last year and $454 from five years ago.

Why are prices up?

The increase is due in part to a rise in the number of features that come standard with a new car these days, like automatic emergency braking and backup cameras, says Ronald Montoya, senior consumer advice editor for Edmunds. In addition, consumers are moving away from lower-cost, smaller sedans, climbing into higher-priced, larger SUVs and trucks.

Montoya says the general decline in overall gas prices since 2008 is partly responsible for the shift in consumer preferences. Plus, many shoppers favor a higher driving position and having more storage space.

Before we get to how you can find savings on a new car despite the higher price tags, let’s talk about a savings strategy that can backfire.

Looking beyond your monthly payment

Many are opting for longer auto loans to cope with rising car prices, says Matt DeLorenzo, managing editor for kbb.com, the website for vehicle research publisher Kelley Blue Book. Recently, the Consumer Financial Protection Bureau (CFPB) found that 42 percent of auto loans made in the last year were for six-year terms or longer, up from 26 percent in 2009.

Taking out a longer auto loan to pay a lower monthly price isn’t an ideal hack, DeLorenzo tells MagnifyMoney. While a longer term keeps your monthly payments lower, you end up paying more in interest over the life of the loan than you would with a shorter-term product. That makes your new car even pricier, so avoid taking out a longer loan to squeeze an expensive vehicle into your budget..

The CFPB found that six-year auto loans cost more in interest over time, are used by consumers with lower credit scores to finance larger amounts, and have higher rates of default. Here’s a good rule of thumb to keep in mind when you’re reviewing financing options: If you are unable to afford financing an auto purchase over four years, perhaps it’s out of your price range.

DeLorenzo says going with a longer loan is one of two actions people are taking in response to higher prices. The other: leasing.

It is true that leasing a vehicle saves you money on monthly payments in the short run, but there’s more to this financial story. Indeed, if you drive a lot of miles, leasing may be a bad idea. You may be hit with extra mileage and wear-and-tear charges at the end of your lease.

How to save on a new car

So prices are at record highs. The experts we talked to say there are still ways you can save when buying a new vehicle in this market.

Try a compact vehicle

If you’re shopping for a car in 2017, you’re likely looking at a crossover, midsize vehicle or truck. Those larger vehicles are in demand right now, and, according to Edmunds, the shift to the larger vehicles has driven interest rates and prices up. However, automakers are struggling to move less-popular 2017 models like compact sedans off dealership lots.

DeLorenzo, the KBB editor, recommends purchasing a less-in-demand sedan or crossover vehicle to find savings.

Many new compact cars may be sold for up to $10,000 less than a larger SUV or truck by the same manufacturer, he says. By choosing a sedan or other compact vehicle, you trade size for better fuel economy and a more affordable car.

And because dealers are having a hard time selling these models, you might see better discounts, more incentives and improved lease deals on more traditional sedans and family cars, according to DeLorenzo.

Pair a lower down payment with GAP insurance

Common savings advice for car shoppers includes making a down payment of at least 20 percent of the vehicle’s transaction price. This tactic is intended to save you money right away, as a new car loses about 20 percent of its value in its first year of ownership, according to Montoya.

People are putting down closer to 12 percent of the vehicle’s value at signing because it’s tough to save up 20 percent since vehicle prices have gotten more expensive, Montoya tells MagnifyMoney. He says most people tend to go with making a down payment that results in a monthly payment they are comfortable with.

But, since a new vehicle loses about a fifth of its value in its first year of ownership, “if you put down payment of 12 percent, you are already in the red,” Montoya adds. He says you may want to look at GAP insurance if you put down less than 20 percent.

Services like GAP — Guaranteed Auto Protection — insurance and new car replacement insurance will cover the difference between what the vehicle is worth and what is owed on the loan in the event of total loss or accident.

Ask your insurance company if it offers new car replacement insurance or GAP insurance. If your insurance doesn’t offer new car replacement or the monthly cost of the insurance is outside of your budget, Montoya says to consider getting GAP insurance from the dealership.

Adding GAP insurance may tack on another monthly transportation cost, but it can save you from possibly owing thousands on an upside down auto loan in the event you have an accident and lose your vehicle.

On the downside, GAP insurance coverage may vary from insurer to insurer, so be sure to ask what the insurance can apply to. Some policies, for example, may cover collisions but not flooding or theft.

Look out for incentives

A little research can go a long way when you’re car shopping. Keep an eye out for extra savings in the form of incentives from both the dealer and the manufacturer.

Both Montoya and DeLorenzo recommend checking the manufacturer’s website or comparison websites like KelleyBlueBook.com or Edmunds.com for savings before you set foot on a dealer’s lot.

There may be special incentives you qualify for based on your status as a veteran, student or ride-share driver. You may also find a loyalty incentive, reserved for those who already own a car by the same manufacturer, or a conquest incentive, offered to customers willing to trade in a competing brand.

Be sure to enter your ZIP code to find incentives most relevant to you at local dealerships, and to search based on the exact model you’re looking for.

Even if you think you’ve found all you could dig up, you may discover additional savings if you ask the salesperson about any deals or promotional offers the dealer may be running when you come in. Wait until you’re at the negotiating table to bring the deal up, advises DeLorenzo.

“Keep that in your back pocket,” he says. “If they don’t offer them to you. then bring them up.”

Get preapproved for financing

You don’t have to leave the financing to the dealer, and you shouldn’t if you want to ensure you’re getting a good deal. Get preapproved for financing before you show up at a dealership. That way, if the dealership offers you financing at a higher interest rate, you can counter the offer or, at the very least, have a benchmark for offer comparisons. Naturally, you should aim to finance your new vehicle at the lowest interest rate possible.

Compare prices

The first step to saving money on anything is shopping around. Compare prices of the vehicle you want across multiple dealers.

“A lot of people tend to go to the dealership that’s closest to them and they don’t shop around,” says Montoya. He recommends going to at least three different dealerships. “You’ll see three different offers and you’ll get a better idea as far as price,” he says.

Websites like Kelley Blue Book, TrueCar and Edmunds make it fast and simple to compare prices of new and used vehicles online. Use the sites to compare sticker prices before you head out to the dealership. Beyond the physical vehicle, take the time to compare what you can expect to pay for must-haves like auto insurance and vehicle maintenance, as they can fluctuate depending on the vehicle you choose.

Time your purchase just right

Simply walking onto the a dealer’s lot at the right time of the year can save you a chunk of cash. Montoya says the holiday season is a good time to shop for a new vehicle; dealers are looking to clear out their inventory of the outgoing year’s models to make room for new vehicles.

“Look at vehicles on the outgoing year,” says Montoya. “They will have more discounts and there is more incentive for dealers to sell those models.”

You also want to pay attention to when the vehicle came out. The longer a car is out, the more likely it is to have more discounts than newer models, adds Montoya. He recommends going back a model year to save money if you don’t mind getting a used car instead of a new one.

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How to Handle an Upside-Down Car Loan

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Upside-down. Negative equity. Underwater. No matter what you call it, it means you owe more on your car than it’s currently worth. While it happens to most people who finance the purchase of a vehicle at some point, it’s not a good place to be — especially when you’re planning on selling the car or trading it in for a newer model.

It’s also a situation that’s becoming more common. According to the Edmunds Used Vehicle Market Report for the third quarter of 2016, a record 25 percent of all trade-ins toward a used car purchase have negative equity, and the average negative equity at the time of trade-in was $3,635 — also a record in the used-car market.

You can find out if you’re in this position by looking up the value of your vehicle using a research tool such as Kelley Blue Book. If the value is less than the balance on your current car loan, you are upside-down.

Part I: How do you get upside-down in the first place?

There are some reasons car loans may be upside-down.

Low down payment

Dealerships often offer incentives for new cars, including very low or no down payment loans. A new car loses about 20 percent of its value in the first year, so a small down payment can quickly cause the balance of your loan to soar above its actual value. A healthy down payment can help keep your loan balance in line with the worth of your car.

High interest rate

Remember to shop around for an auto loan, because the higher the interest rate, the less you’re paying toward principal each month. That makes it more likely you’ll become upside-down, even if you made a decent down payment.

Anthony Curren, a sales and marketing manager and salesperson with Rick Curren Auto Sales in Corning, N.Y., says he sees this happen pretty regularly when disreputable salespeople charge higher interest rates to make more money off a loan.

“This happened to my girlfriend before we met,” Curren says. “She had an 800-plus credit score and got stuck in a loan charging 5 percent interest. She should have been paying 2 percent or less at that time.”

Longer loan term

According to Experian’s State of the Automotive Finance Market report for the second quarter of 2017, the average length of a new auto loan is currently nearing 69 months. While longer loan terms may keep your monthly payment low, you’ll end up paying more interest, and you’re more likely to be upside-down.

Past upside-down loan

You could be upside-down because you carried negative equity over from your last car loan. Many dealers offer what’s known as a rollover loan: When people trade in an upside-down vehicle, the dealership rolls the negative equity into the purchase of their next car. With a rollover loan, you are upside-down before you even drive off the lot.

People who trade up for a new vehicle every couple of years are most likely to have car loans with rolled-over negative equity. In the first few years of a new car loan, your car depreciates faster while your loan balance declines the slowest due to interest. This means many people are upside down in the early years of their loans. The longer you keep the vehicle, the more likely it is that the loan balance will be less than the current value of the vehicle.

Being upside-down on your car loan may not pose a problem, as long as you are planning on holding onto the car until you have some equity in it. But if an unforeseen financial setback means you need to sell the car, you may need to come up with extra cash to pay off the loan difference. And if your car is wrecked or stolen, your insurance may not pay out enough to retire the loan.

Part II: How to get out of an upside-down car loan

The first step to dealing with an upside-down car loan is knowing your numbers.

Step 1: Figure out how much you owe.

The fastest and most accurate way to find out how much you owe on your loan is to contact your finance company. If you are planning on selling or trading in your car right away, you’ll need to know the payoff amount, not just the amount remaining on your principal. The payoff amount is how much you actually have to pay to satisfy the terms of your loan. It includes the payment of any interest you owe through the day you intend to pay off the loan, as well as any prepayment penalties.

You may be able to find this figure by logging into your lender’s online account portal. Otherwise, you’ll have to call the finance company.

Step 2: Figure out how much your car is worth

You can get a value estimate using Kelley Blue Book’s What’s My Car Worth tool. You’ll need to provide the car’s year, make, model, mileage, style or trim level (the alphanumeric code that helps identify at what level the vehicle is equipped), and the car’s condition. If you’re not sure how to rate your car’s condition, you can take a quick quiz to help you assess it.

Once you input those details, you’ll receive a range suggesting how much (or how little) you can expect to receive from a dealer for a trade-in. Keep in mind that every dealer is different, but you may be able to negotiate.

Step 3: Calculate your negative equity

If the payoff amount on your loan is greater than the value of your car, you are, as we’ve said, upside-down. Subtract the value of your car from the payoff amount to find out how underwater you are. If the difference is small, you may be able to make extra payments toward the loan’s principal to catch up. If the difference is significant, you may have to take more drastic steps.

Step 4: Strategize remedies

If you find yourself upside-down on your car loan, the most prudent course of action is continue to pay down the debt until you have some equity in the car. You can hasten the process by making extra payments toward the loan’s principal.

If that isn’t an option, here are a few other ideas.

Pay off the car with a home equity loan or line of credit

As with most things in life, there are pros and cons to paying off a car loan with a home equity loan or line of credit (HELOC). One advantage is that you can typically lengthen your repayment period, thereby reducing your monthly payment. HELOCs also have more flexible repayment options, compared with the fixed monthly payment that comes with an auto loan. This may be a good option if you’re having trouble making your monthly payment due to a temporary financial setback.

The second advantage of paying off your car loan in this fashion: The interest paid on your HELOC is typically tax-deductible, while interest on your car loan is not. Keep in mind that you’ll have to itemize deductions on your tax return to take advantage of this benefit. If you take the standard deduction, there’s no tax advantage.

But before you pay off a car loan with a HELOC, consider the downsides. First off, HELOCs are often variable-rate loans. If interest rates rise, your monthly payment could go up. Second, even if the interest rate on your HELOC is lower than the interest rate on your car loan, you could end up paying more in interest by stretching out the loan term. Finally, if you can’t make your HELOC payments, you could lose your home.

If you decide to take this route, make a plan to pay down the HELOC as soon as possible. Otherwise, it could well outlive your car, and you’ll be paying off the HELOC and a new loan for your next vehicle at the same time.

Pay off the car with a personal loan

Paying off a car loan with a personal loan could be a good option if you plan on selling your car without buying a new one. In that case, you would sell the car, use the proceeds to pay down the balance of the car loan, then refinance the remaining balance with a personal loan.

However, keep in mind that auto loans are secured by collateral (the car). If you’re unable to pay, the lender can repossess the car. Personal loans are unsecured. If you stop paying, the lender has fewer options for recovering the money. For this reason, personal loans usually come with higher interest rates than auto loans.

The Federal Reserve Bank’s survey of commercial bank interest rates for the second quarter of 2017 shows just how much higher those rates can be. The average 60-month new car loan comes with an APR of 4.24 percent. The average 24-month personal loan has an APR of 10.13 percent. So with the typical personal loan, you’ll pay more than twice as much interest in half the time. Hard to see that as a good deal.

Refinance the car loan

Refinancing your car loan can help in a few ways. You may be able to lower your interest rate and lower the term of your loan, both of which will help you get equity in your car sooner. Curren says deciding whether refinancing is the right option depends on the remaining loan term and interest rate.

He uses the hypothetical example of a person who, because of credit issues, used a subprime loan with an interest rate of 22.9 percent to purchase a car. “My advice to that person is to build their credit up as much as possible and as quickly as possible,” Curren says. “In one year, they should be looking at refinancing the loan with an interest rate as low as 6 or 7 percent, which is still relatively high, but much more palatable. It will save them thousands of dollars in repayment.”

However, Curren says he doesn’t offer the same advice to someone with only a year or two left on a loan. “At that point, the savings is minimal,” he says. “The better advice is to pay off the car quicker.”

Part III: What to watch out for when you have an upside-down car loan

Car dealers push the latest vehicle designs and advertise very attractive incentives for trading in your old vehicle, no matter how upside-down you are at the moment. But take heed: You’ll want to be very careful about trading in an upside-down vehicle for a new loan. Here’s a look at the problems that can arise:

Rolled-over negative equity

As we mentioned above, many car dealers are willing to roll the negative equity from your old car loan into a new loan. This is a popular option because it doesn’t require coming up with any money immediately. But it also means your new car will be underwater before you even drive it home. That new car may be fun to drive, but your monthly will be higher because it includes the cost of your new vehicle and the remaining balance on the old one.

Dealer cash incentives

Some car dealers offer cash incentives that can help pay off your negative equity. For example, if you have $1,000 in negative equity on your current car loan, you could buy a new car with a $2,500 rebate, use $1,000 of the rebate to pay off the negative equity, and still have $1,500 left over to use as a down payment on the new car.

But be wary of dealers advertising they’ll “pay off your loan no matter how much you owe.” The FTC warns consumers that these promises may be misleading because dealers may roll the negative equity into your new loan, deduct it from your down payment, or both. If the dealer promises to pay off your negative equity, read your sales contract very carefully to make sure it’s not somehow folded into your new loan.

Part IV: How to avoid an upside-down car loan

Being upside-down on your car loan, at least for a little while, is very common. But there are things you can do to prevent it from happening.

  • Make a larger down payment. Because a car depreciates by around 20 percent in its first year, putting down 20 percent of the total purchase price (including taxes and fees) can help you avoid going underwater.
  • Choose a car that holds its value. Some makes and models hold their value better than others. Kelley Blue Book, Edmunds and other car research sites regularly release lists of car brands and individual models with the best resale value. Do your research and pick out a car that will depreciate more slowly.
  • Opt for a shorter loan term. Longer terms are more likely to leave you underwater in the early years of the loan because you’re paying less toward the principal each month. Try not to finance a car for longer than you plan on keeping it.
  • Shop around for the lowest rate. The lower your interest rate, the more money you’ll pay toward principal each month. Don’t settle for the first offer you receive at a dealership. Shop around for a car loan before you go to the dealer, so you can feel confident you’re getting the best deal.
  • Avoid unnecessary options. Sunroofs, leather upholstery, rust proofing, extended warranties, fabric protection, chrome wheels — all these attractive add-ons are often overpriced. They’ll increase the purchase price of your vehicle, but rarely add long-term value.

Final thoughts

Being upside-down on your car loan is not an ideal situation, but you do have options. Understand the circumstances that led you to be upside-down in the first place can help keep the problem from recurring, or from carrying over to your next loan.

The post How to Handle an Upside-Down Car Loan appeared first on MagnifyMoney.

The Dark Side of Leasing: What Car Buyers Should Know

Source: iStock

Leasing a car can be the right decision in some cases. You can enjoy driving a new car without putting down a large sum of money or slide behind the wheel of a used car with little investment.

The average lease payment in 2016 was $120 less than an average finance payment on a new car, according to a 2017 report from Edmunds, a car-comparison and research site. For large pickup trucks, the savings were even higher: $206.

Lease contracts also require less commitment because they last an average 36 months, while finance agreements average 69 months, Edmunds reports.

What you need to know about leasing a car

For drivers who are unlikely to exceed a contract’s mileage cap and will take good care of the vehicle, leasing can be a good option.

A growing number of Americans are leasing instead of purchasing, according to the 2017 Manheim Used Car Report. A record-breaking 4.4 million new leases originated in 2016, according to the Atlanta-based provider of vehicle remarketing services. (Edmunds puts that number at 4.3 million, but either way, it’s a new high.) Leases also exceed 30 percent of the new vehicle market for the first time ever in 2016, Edmunds reports.

But there’s a dark side to leasing. Autos were the number one subject of consumer complaints in 2016, according to the Consumer Complaint Survey Report conducted by Consumer Federation of America (CFA) and the North American Consumer Protection Investigators (NACPI). The report cited multiple complaints about leasing, including used-car leasing.

“It seems like more and more people are not wanting to fork out lots of money for a new car, which makes sense. But it’s very shocking to see a growing number of people lease used cars when they don’t have protection,” says Amber Capoun, president of NACPI.

While the cheaper price tag on a used car lease can be enticing, consumers leasing older cars may lose protection if it is no longer covered by a warranty, says Mark Anderson, a consumer protection attorney at Anderson, Ogilvie & Brewer in San Francisco.

Must-know facts about leasing

If you are considering leasing a car, watch out for these six pitfalls.

1. Credit score hit

When you lease a car, a credit inquiry is conducted, just like when applying for a car loan. Your credit score will fall slightly, but it can be rebuilt by making timely payments.

A lease payment may be less per month than a finance payment, but missing a payment or ending your lease early can further reduce your credit. If you don’t have a strong credit history, you may need a co-signer. However, both you and your co-signer should be aware that late payments can damage both credit scores.

2. High interest rates

At first glance, the interest rate — the amount you pay for borrowing the lease company’s money while you drive their car — may appear lower than the annual percentage rate (APR) you would pay to finance a vehicle. That is because the rate is expressed in the leasing agreement as the “money factor” and is a very small number, like 0.0022. To calculate your lease’s APR, multiple the money factor by 2,400, which would be 5.28% APR.

The interest rates on used cars are usually even higher, since the vehicle value at the end of the lease is difficult to predict. Don’t forget to multiply that low “money factor” to figure out your interest rate. It could make all the difference in your ability to afford leasing a car. Good credit will help you get a better interest rate.

3. Lack of consumer protection

An older car with higher mileage may have exceeded its warranty by the time you lease it, which means you are responsible for repairs that would have been covered under a warranty on a newer car, or a car with lower mileage.

The Consumer Leasing Act requires lessors to disclose certain information, including conditions for early termination, the lessor’s standards for wear and tear, and all fees and taxes before a lease is signed, but a company can take advantage of you if you are unprepared. Consumer protections and lemon laws differ state to state, Capoun says, and can leave drivers on the hook for costly repairs. While all lease agreements allow
for normal wear and tear, contracts vary greatly.

“You are the one who’s responsible if your car breaks down, so it’s very important to read the fine print before signing a lease and know what’s included in the contract,” Capoun says.

Consumers should also be wary of third-party “extended warranty” offers, which Anderson says are far more reliable than automakers in providing services and repairs.

“Lemon law applies to leases, but it won’t protect you if you don’t fulfill your payments. You’ll get hit by some steep fees,” Anderson says. “And people often forget leasing doesn’t mean you own the car. If you miss a payment and the car gets repossessed, you don’t have any rights.”

4. Hidden costs

Anything from a small scratch to ending your lease early could result in a hefty fee. The acquisition and delivery fees (which both range from $300 for compact cars to $900 for luxury vehicles) are some of the largest, and unexpected, expenses.

Upon returning your car, be prepared for the car to be looked over with scrutiny. The dealership wants the car returned in “salable” condition so it can be sold or leased to someone new at its highest value. Any damage or changes detract from that value, and you can be fined. If you want to make alterations to your car, they should not be permanent. You also will be responsible for the majority of the maintenance and repair costs, which add up the longer you lease.

Even leasing new cars can be dangerous, says Stacey Nix, a 52-year-old mother of three in Valdosta, Ga. Nix and her husband once leased a car, but say they never will again after being stuck with extra costs for exceeding the mileage limits stipulated in the leasing contract.

“I felt we were misled and not told all the facts,” she says.

Exceed that mileage limit — even by a mile — and you’ll be hit with another fee. Be sure to know exactly how many annual miles your contract allows, usually 15,000 miles or less, and keep an eye on your odometer. Mileage fees typically range from 15 cents to 30 cents per mile, depending on the vehicle.

5. Lack of equity

Over time you will likely end up paying more than the vehicle is worth, but you haven’t gained any equity toward buying a new vehicle. At the end of a lease, you do not own the vehicle, which means you cannot sell it and take advantage of its residual value and profit off the vehicle. Despite higher monthly costs, when you purchase a vehicle, its cash value is yours to do with it as you wish.

6. Pricey, and limited, exit options

Ending your lease early can result in having to pay anything from a fine to the remaining balance on your lease. No one can predict the future, so it is important to know your exit options, and how much each will cost, before signing your contract.

One exit option is buying the car outright. Each lease has different payoff or buyout options, some of which can be negotiated, but each car’s value varies so it is difficult to predict just how much your car will be worth. You also can trade in your car for one with a cheaper lease, but you will have to pay penalties and fees for ending the other lease early. Finding someone to take over your lease is another option, but yet again, you won’t avoid fees.

Tips for protecting yourself from a bad lease

1. Consider all of your options

Is leasing really for you? Once you sign a contract, you’re bound to that agreement. If you don’t think you will exceed the mileage allowance, damage the car, and have to end the lease early, and don’t mind not building equity, then leasing might be the right decision. The Federal Trade Commission has guidelines to help you decide whether you should finance or lease a car.

2. Remember the old school rules

Taking a car to a mechanic you trust first can prevent you from driving off the lot with a car full of problems. Asking about warranties and what is and isn’t covered by the dealership or the manufacturer can even save you legal trouble, Anderson says.

3. Negotiate, negotiate, negotiate

Everything from the overall price to aesthetic changes to a car can be negotiated. Good credit could give you the edge: Lessees had an average FICO Score of 716, eight points higher than new vehicle buyers, according to the Manheim survey. Other smaller fees, like document-processing fees to service fees, can be negotiated if you’re willing to put in the effort. Negotiations also can help save you money in unpredictable situations like accidents or terminating a lease early. Finally, never forget to ask about any leasing specials.

4. Understand your contract, down to the nitty-gritty

Leave with a copy of your lease so you always have the official contract to reference and can hold your lessor accountable to the agreement. You also can use the Consumer Leasing Act’s examination checklist to ensure all of the proper details are disclosed during a lease signing.

The post The Dark Side of Leasing: What Car Buyers Should Know appeared first on MagnifyMoney.

A Quick Guide to How Much Car You Can Really Afford

how-much-car

If you’re planning a car purchase, and even if you’re in the middle of financing your car, a few tips from financial experts can help you save money (and hopefully guard against becoming “underwater” on your loan).

Paying off a car is, of course, a highly individual process dependent on many different personal factors like credit score (you can view two of your credit scores, updated every 14 days, for free on Credit.com), financing rate, down payment, and how much you can afford to pay each month.

When budgeting, it’s also critical to consider expenses such as your auto insurance premium, gas, and maintenance into the total cost of ownership of your vehicle.

Still, there are some general guidelines that most people can follow:

  • Financing: Experts The Zebra spoke to said they recommend auto loans not exceed 10% (for just the loan) to 20% (for the loan plus related expenses like gas and insurance) of a consumer’s gross monthly income.
  • Timeline: You should take the shortest term you can afford for two reasons: Shorter terms come with lower interest rates and they allow vehicle equity to build faster, Bob Harwood, vice president of Carloan.com in Richmond, Virginia, said. Experts cited four or five years as the ideal balance of affordable monthly payments and reasonable total interest. If you have to spread your payments out over six years (72 months) or more to get monthly payments you can afford, you might want to consider a less expensive car.

“Your goal as a consumer is to decide what works best for your monthly budget so you can decrease the long-term expense,” banker Deric Poldberg from American National Bank in Omaha, Nebraska, said.

Hypothetical Financing

The Zebra asked three financial experts from around the country for their input about what type of loan over what time period a person living in Texas making $50,000 a year (the average statewide income) should expect to pay for a 2016 Honda CR-V LX (one of the most popular cars in the U.S.) for $23,000 (a little below the MSRP).

The Verdict(s): You’ll pay between $400 and $500 per month, depending on your credit and how quickly you can/wish to pay the vehicle back. Here are three ways of getting there:

  • Per Poldberg: “For this customer, the interest rate is going to be between 4.79% – 5.49% based on the U.S. average credit score (687). Because most people finance their vehicles for five years, that would lock our customer into a rate of 4.99% for 60 months, making the monthly payment $433.93. During the term of the loan the customer would end up paying an extra $3,035.97 in interest, bringing the total out-of-pocket expense to $26,035.97. Financing your vehicle for the least amount of time possible will save hundreds or even thousands of dollars in the long run, but often people just want a lower monthly payment and disregard the long-term cost of the loan. If you financed that same CR-V for the maximum 75-month term, you’d end up paying $3,820.11 in interest (quite a bit more). But most consumers just look at the low monthly payment of $357.60 and think it’s a better deal.
  • Per Rob Jupille, president of RTJ Financial in Santa Monica, California: “Assuming a relatively ‘normal’ level of other debt, when doing a budget, generally target your auto loan to be in the neighborhood of 10% of gross pay (excluding other auto-related costs like gas, maintenance, insurance, etc.) and put at least 20% down to reduce the likelihood of being ‘upside down’ on your loan. This way, you’d look for a monthly car payment not exceeding $400 and we’d recommend shopping for a combination of interest rate and term to stay within that number.”
  • Per Harwood: “Considering that your monthly car expense (including insurance, gas, etc.) should be no more than 20% of your take home pay, we can assume that an annual income of $50,000 translates to about $3,300 in take-home pay monthly after taxes. Budgeting around $250 for secondary auto expenses leaves room for a payment of around $450. For a consumer with decent credit, the $23,000 financed over 60 months at an interest rate of 6.9% lands the payment at $454 per month. (Of course, everyone should pay off their car loan as quickly as they can, but this is a realistically affordable scenario.)”

The bottom line: For a smart financing deal, pay the most you can for the shortest amount of time and after you’ve paid off your car loan, keep saving for your next car – or for a “rainy day.”

Image: Squaredpixels

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12 Cars That Depreciate Quickly (& Are Good to Buy Used)

cars-that-depreciate-quickly

If you’re in the market for a new car, you may be tempted to drive a brand-new one off the lot. After all, many manufacturers are already releasing their feature-packed 2017 models, and the weather hasn’t even turned cold yet.

But, before you do, consider this: A new study by iSeeCars.com, an automotive data and research company, found that buying a new car is not always going to get you the best bang for your buck. In fact, the company discovered that purchasing some cars that are just a year old can provide consumers with substantial savings.

“Most people know new cars depreciate the most in the first year and that different cars have different depreciation rates, but we wanted to determine which used cars experienced the largest price drops compared to their new models,” Phong Ly, the CEO of iSeeCars.com, said in a press release.

To establish the savings, iSeeCars.com analyzed the more than 14 million cars sold from August 1, 2015 and July 31, 2016, excluding models with fewer than 250 new and 250 used cars sold. The average asking prices of year-old cars were compared to those of new cars from the same model, according to the release, with the difference in price expressed as a percentage of the new model average price. This percentage was then compared to the overall percentage difference across all models.

Using this data, iSeeCars.com researchers found that the average price difference between a new car and a lightly used car was 21.2%, ranging from $6,099 to $19,966 in savings. (Note: For this study, a lightly used car is defined as a vehicle from the 2014-2015 model years with mileage within 20% of 13,476, the average annual miles traveled in the U.S., according to the Department of Transportation.)

But it isn’t all cars — iSeeCars.com established a dozen cars that offer the best value when purchased lightly used instead of brand new, with price differences between 31.2% and 34.6% — at least 1.5 times more than the overall average. Below are those 12 cars.

1. FIAT 500L

Price Difference: $8,096 less
Percentage Price Difference: -34.6%

2. Lincoln MKS

Price Difference: $16,039 less
Percentage Price Difference: -34.5%

3. Volvo S60

Price Difference: $14,204 less
Percentage Price Difference: -34.4%

4. Kia Cadenza

Price Difference: $12,940 less
Percentage Price Difference: -34.3%

5. Mercedes C250

Price Difference: $15,247 less
Percentage Price Difference: -34.3%

6. Nissan Maxima

Price Difference: $12,469 less
Percentage Price Difference: -34.0%

7. Lincoln MKS + MKZ Hybrid

Price Difference: $14,177 less
Percentage Price Difference: -33.8%

8. Jaguar XF

Price Difference: $19,966 less
Percentage Price Difference: -32.3%

9. FIAT 500

Price Difference: $11,106 less
Percentage Price Difference: -31.9%

10. Cadillac ATS

Price Difference: $6,099 less
Percentage Price Difference: -31.8%

11. Chrysler 300

Price Difference: $13,351 less
Percentage Price: -31.7%

12. Buick Regal

Price Difference: $11,525 less
Percentage Price Difference: -31.2%

If you’re considering purchasing a new car — whether it’s straight from the manufacturer or simply new to you — it’s a good idea to make checking your credit part of your shopping process. Knowing where your credit stands can help you get an idea of what terms and conditions you may qualify for with your auto loan. You can see two of your credit scores for free, updated every 14 days, on Credit.com.

Image: AdrianHancu

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Lease or Buy: The Definitive Guide for Car Buyers

6 Credit Cards That Can Get You Into a New Car

Americans love a good rivalry: Yankees versus Red Sox, Coke versus Pepsi, and most of all, leasing versus buying.

Leasing a car is sizzling hot right now. New data show one out of every three new cars is leased. And leasing may very well rule the future, as it shot up 46% over the last five years among millennial new car buyers. To those who think leasing is always a terrible deal, this is a travesty. To leasing fans, it’s vindication.

The topic of car leasing brings out a lot of emotion in drivers. Many people think leasing is non-sensical because after making payments for three years, consumers own nothing. But, in reality, that’s an inaccurate assessment and whether or not you should lease depends — not only on the driver’s needs but on those of the auto industry. Sometimes car makers offer incentives that make leasing attractive. So those who dismiss leasing outright could be missing out.

The truth is, leasing is more expensive than buying most of the time. The average American keeps a new car for six-and-a-half years, but a 2012 survey found Americans intend to keep their cars for up to 10 years. In either case, buying will probably be cheaper than leasing because when you buy a car, the monthly payments will eventually stop. Pay off a car loan, you keep the car; pay off the lease, you just get another. So the longer you intend to keep a car, in general, the better it seems to buy.

Yet even this equation comes with a hitch. My four-year-old Toyota Rav4 needed a new transmission recently. But as a high-mileage driver, I was out of warranty, and worst of all, out of luck. My repair bill was $5,000 (although Toyota kicked in $1,000 when I complained).

The advantage renters have is like the advantage renters have over mortgage holders — no surprise repair bills. As long as drivers stay within mileage limits, whatever happens to the car will generally be covered under warranty. As one reader on my website put it, “I’ve been leasing for about 10 years now. No unpredictable repair shocks to my wallet because I’m always driving a new car.”

Of course, mileage caps are another factor in the lease vs. buy dilemma. Those with long commutes or who like to travel generally shouldn’t lease because leases tend to limit drivers to about 1,000 miles per month. Exceeding the limit is expensive and can cost from 10 to 30 cents per mile. Also, watching your miles every week is a drag. Imagine turning down a road trip because of your mileage cap. This is especially critical, as dealers have been sweetening lease deals lately with even more complex, i.e., lower, mileage caps.

One factor often cited as a reason to buy is equity. It’s usually stated like this: “With buying, you own something of value after you pay off the loan. With leasing, you have nothing at the end.” But that’s just part of the story. Cars are terrible assets; they lose value quickly and in unpredictable ways. In the end, I find most five- or six-year-old cars are worth a few thousand dollars as trade-ins.

Online auto valuation sites may say your car is worth more, but what matters is what you walk away with. Used car sales are so clunky, it’s silly to use those lease vs. buy calculators and feel vindicated you saved $982 on a vehicle you owned for five years. You may have given that value back to the dealer when you received wholesale value instead of street value.

In the end, people want — and need — reliable transportation, so you can see why leasing’s attractive.

When Leasing Can Beat Buying

Less sales tax: You don’t pay sales tax on the full price of the car but on the value of the car used during the lease. (If you buy the car at the end of the lease for its established ‘residual value,’ you’ll pay the rest of the sales tax.)

Tax perks: For some folks, leasing is a much easier tax write-off.

Luxury: You’ll probably be driving around in a nice new car every three years.

It feels cheaper: Monthly and down payments will probably be lower.

No repair surprises: Fear of big repair costs will definitely be lower.

Buy ‘used’ for less: Particularly low-mile drivers may get a bargain at the end of the lease by buying the car at residual value. (Sometimes, but rarely, is this cheaper than buying the car in the first place.)

When Buying Can Beat Leasing 

End-of-lease risks: What happens when the lease ends? “Wear and tear” damages can turn a good deal bad quickly. And the dealer pretty much has the upper hand. You generally have no bargaining power, unless you’re about to buy or lease another car.

Inflexibility: Young people seem attracted to leases because they feel flexible. But leasing is often less so because it’s much harder to get out of a lease than sell a car (even a car with a loan balance). What happens if you take a job where you can’t have a car? Leaseholders can get really burned.

Miles: A thousand miles per month may sound like a lot to you today, but what if your company moves 35 miles away months from now? Mileage limits can be pretty oppressive, especially in a world of unknowns. The average 20-something holds 7.2 jobs before age 29.

Overall cost: Leasing is more expensive than buying, even with a loan. But here’s a simple way to look at it: Both are methods of financing a car. With leasing, since you’re paying less upfront, you’re borrowing more longer. So, of course, it costs more. Another way to look at it: With leasing, rather than making a down payment upfront, you can make a down payment three years into having the car (buying for its ‘residual value’). That essentially means you’re borrowing more longer.

As with all generalizations, these concepts may be more or less true based on your unique car deal. Remember, everything is negotiable at a dealership: upfront costs; monthly payment; residual value; ‘money factor’ (leasing speak for interest rate). Even mileage is negotiable since you can buy extra miles upfront for less than you’d pay after three years. It’s possible to lower leasing risks through negotiation or car-maker incentives. If so, leasing may be right for you. (A good credit score can give you more bargaining power on auto financing. You can see where your credit currently stands by viewing your two free credit scores, updated each month, on Credit.com.)

The Bottom Line

Leasing is a bit too much like the Eagles’ song “Hotel California” for my taste. Once you check in, it’s pretty hard to check out. Renters turn in cars and get new leases, and they tend to do so at the same dealerships, for the reasons mentioned above. You’ll never escape the monthly car payment. And worse, perhaps you’ll get a good lease deal today, but three years from now, leases could fall out of favor and you’d be stuck.

In the end, leasing is a seductive but generally a bad plan for saving money. But for folks who care less about money and more about having a new car every three years, don’t drive often and lose sleep over repair bill risks, it can make sense.

More on Auto Loans:

Image: VStock

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Should You Ever Lease a Car? Here’s What You Need to Know

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If you’re in the market for a new car, you may be wondering whether it would be better for you to lease or outright buy new your set of wheels. While there are many factors to consider, we’ll put it out there upfront that most experts say that it makes more long-term financial sense to actually buy and keep a new car than it is to lease one.

Having said that, here are some of the factors that should go into your decision, either way.

1.What’s your monthly budget?

While it’s true that you may be able to lease a car for less money than it would cost for you to outright buy one, what you’re essentially doing in the case of leasing a car is renting it and paying interest on something you’ll eventually need to return. That means that once your lease is up, you’ll be left with the same decision you’re faced with right now — what’s the best option for a new car?

Also keep in mind that breaking a lease — for whatever reason — often comes with early termination fees and strict payback policies (meaning you could still be on the hook for the money that’s left on your lease). You might be able to work with your dealer on some of these things, but in most cases, if you want to break a lease early, you’ll be responsible for the remaining amount left on the lease, as well as the termination fee (which could be a couple hundred dollars).

2. Check for additional upfront fees

While your overall monthly fee to drive a car on a lease will may be cheaper than auto loan payments, there are additional fees to be on the lookout for before signing a contract. For example, often customers are asked to shell out hundreds or even thousands up front in order to get the best deals on leases. This extra money is usually put towards paying down a portion of the lease, but if something were to happen to the car early on (like an accident), insurance companies often agree to pay back the value of the car, while the amount that you paid upfront would most likely be forfeited.

3. Consider any mileage limitations

The problem with leasing instead of buying is that you don’t outright own your car, so there will still be rules — set by your leasing agent — to follow. Take mileage limits, for example. Most leases have limits on the number of miles you can drive while leasing a car (usually between 10,000 and 15,000 miles per year), and customers are penalized when they drive over that set amount. At a penalty that could be around 20-to-25-cents-per-mile, those fees can really start to add up, depending on how much you drive. Always do a little math before signing on for a lease to determine if you think your estimated mileage will be within what’s offered with your lease.

4. Get on the same page about “normal” wear and tear

Since you’ll be returning this car after your lease it up, most leasing companies want to ensure that they get cars back that are within a certain realm of wear and tear. If you return a car that the company deems above average use, you’ll likely be charged extra for it. To avoid that problem, make sure you chat with the leasing agent in depth about what’s expected in terms of the condition of the car when you return it, and take photos for back up if needed.

Remember that in some cases these stipulations will be negotiable, but again, you’ll likely have to pay more for any modifications or upgrades to the typical lease that you want to make.

While leasing a car may seem like a viable option right now — and it could be — it’s worth putting in a lot of thought about the type of driver you are, how much driving you do and how much flexibility you want with your car before going into a lease. If you can’t afford a new car and a lease doesn’t feel right to you either, you can always consider buying a used model. Check out this piece for six of the best auto loans for buying a used car.

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