Car Lease Vs. Buying What Is Cheaper?

When it comes to getting a new car there are generally two options: leasing the vehicle or buying it. There are many pros and cons for either option and the decision often comes down to personal preference and finances.

Short Term Cost

Leasing features several advantages over buying. When leasing a car there is little if any down payment, the monthly payments are less and there is generally lower sales tax, because tax is only paid on the amount of the car's value that is used by the lessee. When buying a vehicle there is generally more money required initially, there will be higher monthly loan payments and more taxes paid.

Long Term Costs

In the long term, once a car loan is paid off there are no more payments and the car is yours until you decide to sell it or trade it. Although you will still have repair expenses, there will be no regular monthly payments. If you lease a vehicle you will continue making lease payments, then you'll make any down payments for a new lease when your current one expires. The lack of future monthly loan payments makes buying a car the least expensive financing option in the long term.

Repairs

When comparing the cost of leasing versus buying you must consider the cost of repairing the vehicle. Because lease terms are generally within the warranty period, the expense of repairing the vehicle will be minimal. If you purchase the vehicle, however, once the warranty expires, the cost of repairs will be entirely yours to cover.

Lease penalties

When considering the cost of a lease there are some less visible fees and penalties to consider that are not a concern when you buy a vehicle. When you sign a lease you receive a mileage allowance. Once these miles have been exceeded fees are assessed at a certain rate per each additional mile. In addition, if the dealer considers the amount of wear and tear on the car to be excessive, or if you pull out of the lease early, penalties may be assessed. There are no such penalties when you buy a car.

Cash Payment--No Loan

Although most people do not have the resources to pay for a vehicle without the assistance of a loan, buying your vehicle with cash is another option that affects your decision. Because you'll be paying for the vehicle yourself, and not shelling out interest, it is the least expensive option when compared to making lease payments or buying the vehicle with financing. Buying the car with cash also eliminates the need for monthly payments. If your car is new it will be under warranty, so your repair costs will be minimal.

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What Is the Diffence Between Trade Value and Cash Value on a Car?

One way to get rid of a current car and buy a new one is to trade the car in at the dealership. For a trade in, the dealer pays what it considers to be a market value for the trade, and the trade value is applied against the purchase price of the new car. Trade and cash values have different meanings to the dealer.

Cash Value

At the dealership, the used car department appraises your trade in and gives the car a value. This value is the wholesale value of the car, and if purchased at this price, the dealer should be able to sell it for a profit. The appraised value is the cash value. If you brought the car to the dealer to sell it, not as a trade, this is the value you would receive.

Trade Value

The trade value is the amount listed for the trade in on the deal proposal or purchase order. The trade value may be different than what the dealer thinks the trade is worth -- the cash value. A high trade value may be used to make the deal more attractive to the new car buyer. A low trade value offer most likely means that the dealer is trying to make extra profit by offering the customer less than the trade is worth.

Negotiating the Trade Value

For the dealer, the real value of the trade in is the cash value. Any difference between the trade value and the cash value is either a reduction or increase of profit to the dealer. If the dealer offers a high trade value, the negotiating room on the new car is reduced. Dealers may offer low trade in values in hopes that the customer will accept and allow the dealer to book a bigger profit. A car buyer must protect herself by researching the value of her trade before heading off to the dealership.

Trade Value When Upside Down

If the outstanding loan balance on the trade in is greater than the cash value, the trade is "upside down." If the cash value is used as the trade value on the new car purchase order, the trade will show negative equity. Car lenders do not like to see negative equity in a car finance deal. To avoid showing negative equity, the dealer will increase the purchase agreement on both the trade value of the trade and the sales price of the new car to erase the negative equity -- at least on paper.

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Can I Get a Car Loan After a Discharge of a Bankruptcy?

Bankruptcy is a drastic way to get out of debt because it releases you from some or most of your bills, depending on which type you file, but it also stays on your credit bureau records for a decade, according to the Federal Trade Commission. Lenders such as car loan providers are less likely to give you credit when you have a bankruptcy on your records.

Rebuilding Credit

Bankruptcy does not keep you from getting new credit forever, but it takes time to re-establish your finances so you can qualify for larger loans, like automotive financing. Maintain steady employment and get smaller loans first, Bankrate.com columnist Tara Baukus Mello advises. Open a secured credit card account if banks refuse to give you a traditional card. The secured account requires a bank deposit to guarantee payment of your credit line. Make every payment promptly on your new accounts to show potential car loan providers that you are serious about rebuilding your credit.

Other Factors

Raise your chance of qualifying for a post-bankruptcy car loan by saving up the largest possible down payment. This reduces the lender's risk because it brings down the amount of money you need to borrow, Baukus Mello advises. An auto loan is a form of secured credit because the creditor can seize your car for non-payment and sell it to recoup some of the loan balance. The lender has a better chance of covering most or all of the owed balance when you borrow a low amount.

Refinancing

You are likely to get stuck with a high interest rate on your post-bankruptcy car loan because you are labeled as a sub-prime buyer. The high rate costs you hundreds of dollars over time, so Warren Clarke of the Edmunds automotive website recommends refinancing your loan at better terms after two to three years of rebuilding a good credit rating. Check with your credit union, bank and online lenders for financing at better terms.

Time Frame

Bankruptcy's effects do not last forever. The impact on your credit diminishes within several years, even though the bankruptcy still appears on your credit reports, Baukus Mello explains. Lenders focus most heavily on your recent account activity, so pay your bills on time and check your Experian, TransUnion and Equifax reports for potentially harmful mistakes. You get free report copies yearly from AnnualCreditReport.com, the FTC advises, and you have a right to to dispute mistakes and get erroneous information removed.

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How to Calculate Yearly Interest on a Car Loan

On a $20,000 car loan at 7 percent, the total interest paid is almost $3,800. The way car loan interest is calculated means the interest amount is different on each payment and for each year of the loan. If you understand how loan interest works, you can determine what portion of that $3,800 is paid to the car cost each year.

Loan Interest Function

Car loan interest is calculated on the amount of the outstanding loan balance. The interest rate is computed for a monthly rate by dividing the annual rate by 12 and that rate is applied to the loan balance to determine the interest amount on the next payment. The amount of the car payment not attributed to interest is the amount that goes to reduce the loan balance. The interest due always controls how a payment is divided between principal and interest.

Calculate A Payment Distribution

On a $20,000 car loan at 7 percent for a five-year term, the monthly payment would be $396.02. Divide the annual 7 percent rate by 12 to convert to a monthly rate of 0.5833 percent. When this rate is applied to the original $20,000 loan balance, the interest on the first monthly payment is $116.66. Subtract the interest from the monthly payment and the principal reduction from the first payment is $279.36, leaving a loan balance of $19,720.64.

Yearly Interest Calculation

To calculate by hand the car loan interest for an entire year, the monthly interest and principal reduction calculation must be repeated for each of the 12 monthly payments. On the example loan, the interest on the second payment would be $19,720.64 times 0.5833 percent, giving interest of $115.03, principal reduction of $280.99 and a new loan balance of $19,439.65. If this process is repeated 10 more times, the total interest on the example loan for the first year is $1,290.33.

Loan Calculation Tools

One method to automate the car loan interest calculation is to set up a spreadsheet using software like Microsoft Excel or OpenOffice Calc. Set up columns for the monthly payment, monthly interest rate, interest, principal and loan balance. Use math functions to calculate the principal, interest and loan balance each month, carrying the results into the next row for the next month's calculation. Once the spreadsheet is set up you will be able to find the interest paid for any set of car loan payments.

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How to Calculate Swingarm Leverage Ratio

Because off-road motorcycles, particularly those used in motocross events, must be equipped with shock absorbers able to handle large, jarring bumps without losing traction, motorcycle engineers developed swingarm shocks, a system that places the rear axle on a lever that's attached to a shock absorber. Using the mechanical advantage of leveraged forces, this allows shocks to absorb bumps much larger than the length of their springs. On a swingarm with a 2:1 leverage ratio, the rear axle moves 2 inches for every inch of compression the spring absorbs. The leverage ratio merely represents a measurement of the difference between the axle and the shock's movement.

Instructions

1

Place a plastic wire tie next to the rear shock's head when the motorcycle is parked. Secure the tie tightly enough so it won't slide on its own and must be moved by hand or by the movement of the shock.

2

Drive the motorcycle over terrain rough enough to exceed the swingarm's capacity, where the motorcycle "bottoms out" on its rear axle. Motocross bikes may need a particularly rough terrain -- most likely with jumps -- to exceed the capacity of their rear shock absorber.

3

Measure the distance between the top of the shock absorber's head and the bottom of the plastic tie. Record this measurement as R2.

4

Remove the nuts that attach the rear shock absorber to the final drive using a crescent wrench. Remove the axle and final drive from the shock absorber. Using your hand or a block, maintain the rear axle's position when you remove the shock.

5

Measure the distance from the bottom of the axle to the ground, and record it as measurement A1. Lift the axle to its highest point in suspension, recording it as A2. Calculate the axle's travel as A2 - A1. Record this number as R1.

6

Reaffix the shock absorber to the final drive using a crescent wrench and fastening hardware you removed from its moorings.

7

Calculate the swingarm's leverage ratio by dividing R1 by R2. Use this figure, R3, as the basis for ratio, R3:1.

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Car Finance Problems

For many people, obtaining financing is the only way they can afford to purchase a new or reliable used vehicle. Financing can be obtained from a car dealer, bank or credit union, and interest rates can vary based on factors like current economic conditions, the availability of dealer incentive programs and your credit rating. Financing a vehicle does pose some potential problems for the borrower.

Insurance Costs

Whenever you finance a vehicle, your lender also has a financial interest in the purchase. As part of the financing agreement, your lender will most likely insist that you carry comprehensive and collision coverage, which pays to repair or replace the vehicle if it is damaged or stolen. Comprehensive and collision can comprise as much as 50 percent of your total insurance premium. You'll need to maintain comprehensive and collision until you've paid off the loan.

Falling Behind

You don't officially take full ownership of the vehicle until you've fulfilled your obligation to the lender, which could take five years or more. In the meantime, a job loss or illness can create financial hardship for you. If you can't keep up with your payments, your lender can repossess the vehicle without your consent. When a lender repossesses a vehicle, it typically sells it at auction to get whatever value it can. You'll still be responsible for paying the outstanding balance, as well as the fees charged by the repossession company. Your credit score will also plummet.

Poor Credit

If you've had a history of late payments or a previous repossession or bankruptcy, expect to pay much higher interest rates than someone with favorable credit. To be able to afford the monthly payments, you may have to settle for a vehicle that does not meet your needs or may prove unreliable. Dealers may be reluctant to offer you financing unless you can make a large portion of the purchase in cash.

Upside-down Loan

If you still owe money on your current vehicle when you trade it in, the dealer may allow you to roll your existing loan balance into the new loan. As a result, you may immediately owe more money than what the new vehicle is worth, a condition commonly referred to as being "upside down." If the vehicle is destroyed in an accident or stolen, your insurance company will only pay to replace it based on its current value, and you'll be forced to come up with the difference. The only way you may be able to avoid this is to purchase gap insurance when you buy the car, which will cover the balance you owe.

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The Girl's Guide to Buying a Car

Buying a car can be an intimidating process, especially if you are a girl who is car shopping on her own. The media often portrays girls as being nave creatures who cannot fend for themselves when it comes to vehicles. However, with the right knowledge and information, any woman can confidently search the classified ads or swim with the sharks at dealerships.

Know How Much You Can Afford

When buying a new car, a car shopper should figure her budget so she knows exactly what she can afford. This is especially helpful if she needs to finance a car and make monthly payments. According to Consumer Reports, a car shopper should also take into account how much of a down payment she can make, as this will affect the monthly auto payment. A rule of thumb to follow, according to Consumer Reports, is to keep the monthly car payment and auto insurance price to less than 36 percent of the buyer's monthly income.

Seek Your Own Financing

Before setting foot on a car lot, a car shopper should have her own auto loan in place from a credit union or bank. Dealerships try to attract customers with attractive financing deals and incentives, but do not offer the same overall savings as other financial institutions.

Know Your Needs

A car dealer or private seller may try to make a small sedan in a girl's favorite color seem like the perfect car for her. This small car may not meet her needs if she has children or if she often drives over rugged terrain. Creating a list of reasons to purchase a new car can help the shopper stay focused, as well as help the dealer show her the most appropriate vehicles on the lot.

See the Vehicle History Report

When a girl is looking to purchase a used car from a private seller or a dealer, she should always look at the vehicle history report. These reports show the number of accidents a car has had, and the number of owners. Determined private sellers and reputable dealerships often have a vehicle's history report on file.

Test-Drive the Car to Your Mechanic's

Dealerships often have their own mechanics look at a car and print a report of their findings. Nevertheless, a car shopper should insist on making a pit stop at her own mechanic's garage during a test drive. If a private seller or dealer makes a fuss about a customer wanting to have her own mechanic look at the car, this is a cause for concern and a sign that this might not be the right car to purchase.

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