Auto Lease Help

Buying a new vehicle is a complicated and expensive process. One of the biggest decisions you have to make as a buyer, aside from what type of car you want, is whether to buy or lease. Each option has its own advantages and drawbacks, but leasing can be difficult to understand without some prior information.

Function

A lease is essentially a long-term rental. You pay a monthly bill for use of a car over a lease term, which is usually around three years. During that time, you have an allotted annual mileage (often 12,000 or 15,000 miles) and keep possession of the vehicle until the end of the lease. When the lease is over, you may return the vehicle to the dealer or pay a buy-out, which is defined in your original lease agreement, and own the car outright.

Costs

The costs associated with leasing a vehicle are different from those that come with a purchase. The monthly payment on a lease is generally lower than the monthly payment to purchase the same car. Dealers may also offer lease deals with no down payment, which makes leasing possible for drivers who don't have enough money saved up to make a down payment to finance a vehicle purchase. However, when the lease term ends, you'll be responsible for a buy-out that usually exceeds the car's market value. If you choose not to buy, you may be responsible for a disposition fee, as well as fees for exceeding your allotted mileage or excessive wear and tear.

Benefits

One benefit of an auto lease is the chance to always drive a relatively new car. If you lease regularly, your vehicle will never be more than three years old, removing concerns over reliability and safety that accompany some older models. You'll also have a chance to try new vehicles without a long-term commitment; if you find one you especially like, you can buy it at the end of the lease term. Low monthly payments and the lack of a down payment make leases attractive to other drivers.

Considerations

When you lease a vehicle, you never have a chance to build equity in the car. This means that when you turn in your vehicle, you have nothing to show for your years of payments. Financing a new car gives you a vehicle that, once paid off, is yours to trade in, sell or keep driving without a monthly payment.

Lease buy-outs are generally priced above the market value of the car after three years of depreciation, which means you'd be better off surrendering the lease and buying a similar used model. However, if you exceed your annual mileage allotment, the fees may make it less costly to simply pay the buy-out. Consider your driving needs and mileage trends, especially before signing a lower-cost lease with a smaller mileage allotment.

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Is it Wise to Buy a New Car?

Deciding to buy a new car is a difficult process. You must analyze your financial situation, lifestyle and the new car market to determine what works best for you. If you're considering keeping an old car, you also must determine whether you should hold off on your purchase until the deals are better or until your financial situation improves. There's no easy solution, but proper research and an accurate appraisal of your finances can help you make a wise decision.

Finances

Perhaps the most influential factor when deciding whether to buy a new car is your personal financial situation. If you can't afford a new car, then you shouldn't buy one. But if you do have enough money to buy a car, research carefully to learn which auto manufacturers are offering the best deals, such as low interest financing, factory-to-dealer incentives and zero-down promotions. Many online resources exist to help you in your search for data about particular models and manufacturers, including Cars.com, Edmunds.com and KBB.com.

Old Car

If your old car still drives well or requires repairs within your budget, it might be better to hold off buying a new car. But if your old car has high mileage or needs extensive repairs, it might be best to buy a new car. Visit a mechanic to get an exact estimate of how much repairs are going to cost and use that data to help you determine whether it is wise to buy a new car.

Lifestyle Changes

Buy a new car if your old car doesn't match your needs anymore. If you've had children, for example, your old car might not have enough room for a large family. Or if you have a new job that requires a long commute, it might be best to buy a new car that can handle long distance traveling.

Fuel Efficiency

If fuel costs are too much for you, it might be wise to buy a new, fuel-efficient car. Older cars might not meet the same fuel-burning standards as newer, more advanced cars. While you're looking for new cars, note how many miles they get per gallon and consider buying a hybrid vehicle, which will use much less fuel than cars with traditional gasoline engines.

Considerations

If you need a loan to purchase a new car, you must factor into the cost of the car the amount you will pay in interest over time. Research the prices of cars you're interested in purchasing and the amount of money you'll get for trading in your old car. Use that data to determine how much you need to borrow, then use an online loan calculator to determine how much interest you'll pay for different loan term lengths and for different minimum payment schedules.

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How to Calculate the Price of a Car

The price that a dealer pays for a new vehicle and the price you should pay to the dealer are two different numbers. To calculate the price that you should pay for the car, you first have to know the specific details of the features that the car has. You also need a copy of the factory invoice, which is not the Manufacturer's Suggested Retail Price (MSRP) sticker that the dealer sticks to the car, along with the added charges the dealer puts on the sticker price.

Instructions

1

Identify the manufacturer's invoice price for the car. You can obtain copies of the manufacturer invoice for the car you are pricing on various automobile information websites. To find the invoice with the correct pricing, you need to input the features on the car, such as number of doors, sunroof, navigation system and alarm system. The invoice lists the base price of the car and then itemizes and adds the cost for each of the additional features.

2

Subtract the holdback charge from the manufacturer's invoice from the total price on the invoice. This is a fee that the dealership pays upfront to get the car on its lot, but that is reimbursed once the dealership sells the car. You should subtract the holdback fee since it is not a lost cost for the dealer.

3

Subtract the floor-plan or dealer floor assistance from the manufacturer's invoice. The same holds true for the floor-plan fee as for the holdback charge. Since the dealer gets a reimbursement of this fee from the manufacturer when they sell the car to you, subtract this fee from the price of the car when calculating what you should pay.

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What Insurance Is Required for a Financed Vehicle?

Beyond your state's required liability policy, your lender may require you to keep a full-coverage insurance policy on your car throughout the entire period of its loan. A full-coverage insurance policy is the most expensive available, but will pay your lender for the car's market value in the event of a loss, possibly paying off your entire loan.

Full-Coverage Insurance

A full-coverage insurance policy is often required by lenders. This insurance policy covers damage to your vehicle even in accidents that are your fault. Minimum liability policies, the coverage required in most states, only covers damage to other people or property, but not any damages to your vehicle. Banks require this policy because it ensures the loan, or most of it, will be paid off in the event of a loss. The policy pays for the market value of your vehicle.

Insurance Considerations

Check with your lender to find out if requires higher limits and deductibles than your state's minimums. Most banks do not allow more than a $500 deductible and require extra coverage for bodily injury and property damage limits. Some insurance companies allow deductibles over $1,000. Raising your limits and lowering your deductible does increase your policy cost, but also protects your vehicle and your finances in the event of an accident. Finding out the coverage your lender requires also allows you to receive an accurate policy quote.

Gap Insurance

Gap (guaranteed automobile protection) insurance is not required by all lenders, but you should consider purchasing it if you're borrowing more than the vehicle's market value. Gap insurance pays the difference between the car's market value and your loan amount. Without it, you would have to pay any balance due if there is a balance left after your insurance payment. If you're leasing a vehicle, this coverage is most likely required. Ask your dealer, insurance agent or lender for pricing information if you're borrowing more than the vehicle's market value.

Lack of Coverage

If your bank requires a full-coverage policy during the term of your loan and you let your policy lapse or cancel it during the loan period, you are likely to face financial repercussions. The bank may enforce an expensive full-coverage policy and charge your loan account. A bank-enforced insurance policy is more expensive than one you can purchase on your own. You can expect a bill for a higher car payment, which reflects the cost of your new loan amount. You will have to prove you purchased another policy to cancel the extra loan amount, but may end up having to pay extra for the time you did not maintain coverage.

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The Meaning of Vehicle Refinance

Refinancing your vehicle can provide the same benefits that refinancing a house provides. If done at the right time with the right lender and interest, it will not only reduce your monthly car payments, but will also reduce the total amount of the final loan amount. You can also end up with higher payments and higher interest depending on when and why it is done. Understanding the meaning and purpose of refinancing a vehicle will help you avoid potential pitfalls and use the process to your advantage.

Who Should Do It

Just because you are able to refinance your vehicle, doesn't mean you should. If your current auto loan for a new car is at 3 percent interest or less, it's unlikely you will find a better rate. However, if your current car loan is for more than 3 percent or you have a used vehicle with higher interest rates, then vehicle refinancing may provide financial benefit to you.

How it Works

Refinancing a vehicle is the same yet also different than refinancing a house. When you refinance a house you must have a new appraisal because the loan is attached to the amount of equity in the house. A vehicle refinance is not attached to the vehicle but attached to the amount you owe on the loan, therefore, no new appraisal is needed.

Applying for a vehicle refinance typically requires an application, a new credit check and employment verification. Once approved, you use the new loan to pay off the old loan and you begin paying the new loan off. You don't have to use the same lender that provided the original loan. You can go anywhere that will give you the reduced interest rate.

Benefit

Refinancing your vehicle loan at a smaller interest rate reduces the amount of your monthly payment. In addition, because of the reduced interest rate, your total loan payout will often be less. You can also take the money you are saving each month and apply it to the new loan and get the loan paid of early.

Possible Pitfall

According to Bankrate.com, refinancing a new car is not always a good decision because your vehicle is no longer new, therefore, you may be asked to pay higher interest on your "used" vehicle. If your current loan is only a few months old, however, you may be able to convince the new lender to give you the new car rate.

If you are far enough into the current loan, refinancing might extend the time to pay it off, meaning you will not own your car until later.

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If My Car Is Paid Off Will My Credit Improve?

Paying off a car loan can bring great emotional satisfaction, but most consumers have a practical question: whether paying off a car will translate to an improved credit score. Higher credit scores frequently lead to preferred interest rates and terms on home mortgages, so if you're looking to buy a home after paying off that car, it makes sense to check whether your scores are due to rise. If your car is paid off, there's a good chance that credit will improve.

Credit Components

Car payments represent just part of what's taken into consideration in factoring your credit score. The FICO score, created by the Fair Isaac Corporation, helps lenders determine the risk factor in doing business with you based on your previous financial decisions when handling credit. FICO scores range from 300 to 850; in general, scores over 720 are considered good and scores in the range of 500 or below are considered bad. Payment history represents 35 percent of your credit, amount owed represents 30 percent, length of credit history represents 15 percent, new credit reflects 10 percent and types of credit used represent 10 percent.

Significance

With that in mind, consider how paying off your car will affect your credit. Hopefully you've been making timely payments over the course of your auto loan, contributing to overall good credit. Having your car paid off may significantly reduce your total amount owed if you had a huge car loan and finished paying it off with a few lump sums; otherwise, your credit may have been steadily improving all along as the loan balance slowly diminished. In that case, don't expect a giant leap in credit improvement. If you've been making payments on the car loan for a number of years, this has probably positively contributed to overall credit as your lender relationship lengthened.

Other Factors

If paying off your car leaves you with extra cash in hand and you feel inspired to go on a shopping spree, racking up extra credit card debt or opening department store credit cards for celebratory purchases; beware. Remember that types of credit used represent 10 percent of your credit score. Installment loans (such as car loans, student loans and home mortgages) are considered better credit risks on your account than revolving credit, such as credit cards. Opening new credit cards after you've paid off your car may hurt your credit score, not improve it.

Report Rate

Another consideration is how fast that final car payment is reported to the credit bureaus. Lenders may take their time in reporting that you've paid off your car since they're more concerned with targeting delinquent accounts than giving you a gold star for repayment. Bureaus may have contracts with lenders that specify reporting timetables, but these may not be strictly enforced, since lenders are customers of the bureaus, according to Stason.org. If reported, it may show up in 30 to 45 days. If your credit report incorrectly shows that you still owe money on a car loan, then contact the bureau to fix this information.

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Automobile Lease Information

Leasing an automobile is like renting it for an extended period of time. Leasing allows an individual to have a new car with little or no down payment at the time of purchase and a smaller monthly payment.

Definition

A car lease is when an individual makes monthly payments on a vehicle but those payments do not go towards owning the car. The lessee is only paying for the depreciation on the vehicle plus vehicle charges.

Benefits

Individuals who like owning a new car every few years or those wanting a lower monthly payment benefit from a car lease.

Payments

A person should negotiate with the dealer for the lowest possible price on a leased vehicle, as well as check for any rebates or incentives, since this will affect the monthly payment on the lease.

Mileage

Lease contracts specifically outline the number of miles a lessee can drive the vehicle. Most often it is limited to 12,000 to 15,000 miles a year. Going over the allotted mileage will result in costly fees when the car is returned to the dealer.

Care

Maintaining the vehicle is crucial when leasing. It is the responsibility of the lessee to keep the car in good condition both mechanically and in appearance. The lessee will be responsible for the costs to repair the car when she turns the car back in to the dealer.

Length

An automobile lease is normally two to five years in length.

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