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Cash, Finance, Or Leasing, What You Need To Know
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| Updated |
Jun 10, 2004 21:21:56 |
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 46 ( -8 -17.39% ) | | Author | Betty Baskin |
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Description:
A common myth when buying a car is that if you pay cash, you can get a better deal. This may have been true in the days before finance institutions created auto loans and leases, and the Dealer had to take the risk to carry your contract, but it's not true today. You must remember that no matter how you pay for your car, it's all cash to the dealer. In today's strong stock market, it makes very little sense to pay cash for a vehicle, as you have the potential to earn significantly more on that cash than you would pay in interest in automotive financing. Homeowners can even reap the additional tax advantages of a home equity loan to pay for your new vehicle.
If you are planning to finance a vehicle, be sure to shop for financing before you negotiate for that new car! If you think the negotiating is done after you leave the salesman and enter the F & I, or "Business Manager's" office, don't be so sure. By allowing the dealerships to do the financing on your behalf, they tend to make more money on your purchase in the form of a finance reserve; anywhere from a one-half to a one point spread on the interest. For example, if the published rate is 8.50 percent, the lender may discount the rate to the dealer to 7.75 percent. This is known as the "buy-rate". The .75 percent difference is the reserve held by the dealer as additional profit, and they may even mark-up the buy rate another 1-2-percentage points in your contract. This may not sound like much, but it is all additional profit to the dealer that you must pay, and in 1998, made up 12% of the total gross profit on each vehicle. This is the reason you should always arrange financing before going to the dealership, and then ask the dealer if they can beat your pre-approved rate. In most cases they cannot, unless there is a discounted rate from the manufacturer.
The same holds true for leasing. Individual banks and lending institutions, as well as the manufacturer's captive financing set both the residual value (What they expect the car to be worth at the end of the lease), as well as the money factor (multiply by 2400 to get an interest rate). These rates vary considerably from lender to lender. With a lease, you are paying for the portion of the vehicle you are using during the term of the lease (the deprecation), so you want the residual value to be as high as possible, and the money factor to be as low as possible, to lower your monthly payment. The dealership cannot change the residual value set by the lender, but they can mark-up the money factor to make additional profit. It's in your best interest to have shopped for leases before walking into the dealership, so you can be sure you got the best deal possible. |
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