Auto's

After a home, an automobile is likely the largest purchase we make. Unfortunately, autos do not appreciate in value like our homes. With the average cost of a car well over twenty thousand dollars, it is more important than ever to buy smart.

There are several things to consider when you are deciding on an investment (your auto) of this size. We remind you of some of those considerations below, and if you use the worksheets provided they might help you make this decision.

First before you rush out and get a great deal on a car, give serious consideration to which car you buy. Sounds easy...however, enough emphasis can't be placed on the importance of choosing a car wisely. Pay special attention to two areas:

Many disappointed car owners would have been much better off if they had paid more attention to these two areas. Buying a car that doesn't fit your family well; uses more gas than you expected; has payments that are too high may cause you to sell or trade-in too early and set you up for big losses. Buying a car with poor resale value could mean paying for a car for years only to sell or trade-in and find that you have little or no equity; or worse yet, still owe more than it's worth.

Finances
Before you begin to shop for your car you will want to take a look at your finances. Let your budget guide your decision on which auto you buy. After you know how much you can spend each month you need to think about how much you can use as a down payment, if any at all. Down payments lower your monthly payments, save you money on interest and can sometimes earn you better rates on the money that you do borrow.

Lease or Buy
If you are like most consumers we need to finance part of our purchase. Since you are most likely familiar with how traditional financing works, we'll spend most of the time discussing leasing, which is simply another option available to us.

It is impossible to say one option is the best for all of us all of the time. The purpose is to make you aware of the differences so that you can decide what's the best for you.

If your plans include keeping the car forever, then leasing may not be the best alternative. However, if you regularly trade cars every few years then leasing may be a good option. The generally lower monthly payments associated with leasing may also work well for those who want or need 'more car' than their budget allows if they were to buy. Here are answers to some of the most common questions to help you decide. 

How does leasing a car really work?

When you lease a car, payments are based on the difference between the price of the car (its 'capitalized cost') and what it is worth at the end of the lease (its 'residual value'). If at the end of the lease you wish to buy the 'rest' of the car, you can.

For example, if you lease a car for three years that has a residual value of 40%, your payments are calculated based on 60% of the value of the car. You also pay interest on the entire amount for the three years. If you wish to buy the car after three years, it will cost you the remaining 40%.

Can you negotiate the price of the lease?

Of course. While the residual value and money factor are set by the leasing company, the capitalized cost is essentially how much the car costs. You'll want to negotiate this amount just as if you were buying the car.

What about mileage?

You need to evaluate your driving habits to see how many miles you put on your car. Average is about 15,000 miles per year. The more miles you put on, the less attractive leasing becomes since higher mileage lowers the residual value.

However, excess mileage will cost you even if you purchase a car. Think about it. If you rack up a lot of mileage on a car and then sell or trade it, it is going to be worth less as a result.

What happens at the end of the lease?

At the end of the lease you have four options. You may buy the car, sell it privately, trade it in, turn it in and walk away.

1) Buying the car. If you choose to buy the car, you may do so for the residual value or 'lease end value.' You will be told this amount at the beginning of the lease.

2) Selling the car privately. You may sell the car privately the same way you would if you had purchased it initially. You are simply responsible to the leasing company for the balance still owed (lease end value). You are entitled to any surplus and responsible for any deficit.

3) Trading it in. You may trade-in just as you would if you purchased it initially. The dealer assigns a value to the car and then applies it to the balance owed (lease end value). Any surplus or deficit will affect the new car.

4) Turning it in. You may turn the car in. You may be responsible for any excess mileage or wear and tear charges. Some leasing companies also charge a 'disposition fee' of a few hundred dollars.

Negotiating
Do not buy/lease anything until you have done your homework. At a minimum use a free quote service to find a target price.

Salespeople often use various kinds of pressure and tactics to get a customer to 'buy it now.' The reason for this is that once you leave, the salesperson's chances of selling you a car plummet. That's a fact. Car salespeople are under tremendous pressure to move cars off their lot. Try this approach: I'm an informed customer who is ready to buy today, and this is the price that will get the job done. If you can do it, great, if you can't I'm outta here.

This approach will put pressure on them. Dealers are very likely to drop their price or make a concession if they think a buyer is about to walk. Don't be afraid to stand up and tell them you're going to go shop. In some cases, leaving may even be the best strategy. Shopping around or simply being patient may save you a thousand dollars or more.

Once we fall in love with a car, we take mental ownership of it and we fear losing it to someone else. A good salesperson is keenly aware of these emotions and plays on them to his or her advantage. Nothing that you read here can stop that, but try to keep these tips in mind as you negotiate.

First, try to put some time between test driving the car and negotiating.

Second, try not to show your 'hot buttons.' Hot buttons are the things that excite or concern you most about the purchase.

Third, try to put a dollar value on your emotions.

Last, remember, there will always be another car. 

Happy Driving!

Copyright © 2004 Reliance Financial Services, N. A. All Rights Reserved.