Benefits of Leasing a Car versus Buying

People who don't want to spend several years paying off a car loan can benefit from the cost savings associated with leasing a vehicle. Consumers who lease their cars can save money on auto maintenance and repairs and make lower monthly payments than they would if they purchased a vehicle.

Costs

According to the Edmunds auto information website, prices for new cars have risen faster than most people's incomes. As a result, it's taking some consumers as long as six years to pay off their car loans, which can make leasing a vehicle more appealing to some people. Consumers who lease cars also gain the advantage of making low monthly payments. Lease payments are usually less than loan payments because the lessor only pays for a car's depreciation during the lease term instead of financing the vehicle's total purchase price.

Value and Maintenance

Leasing is especially appealing to people who prefer to drive newer cars because they can turn in a vehicle and lease another one about every three years. Lessors also don't have to be concerned about resale values, since they don't have to sell their cars to get money to buy another one. Leased cars also have low maintenance costs if consumers keep them for three years. Edmunds notes a lessor may only need to pay for oil changes and a brake job during that time period. Other repairs would usually be covered under the car's warranty.

Mileage

People who don't drive a lot can benefit from the lower costs associated with leasing a car. According to Consumer Reports, lease terms usually limit the number of miles the lessor can drive each year to 12,000 or 15,000 miles. That may be sufficient mileage for people who don't drive to work every week or take long road trips. Lessors can ask for higher mileage limits, but that will cost extra. According to Edmunds, lease terms can include charges of 15 to 30 cents per mile for each mile that a lessor exceeds a mileage limit.

Considerations

People who use their cars for business purposes may be able to claim a bigger tax deduction if they lease their vehicles. A "Smart Money" magazine article titled "To Buy or to Lease" says taxpayers can deduct depreciation along with implicit financing costs for leased vehicles when they're used for business purposes. Interest charges paid on loans to buy cars aren't deductible even if the cars are used for business. Ensure that any lease you're considering includes gap insurance coverage. Gap insurance pays the difference between the cash value of your leased car and the balance on your lease if your vehicle is stolen or totaled in a collision. Gap insurance covers lessors if their auto policies don't pay for all expenses associated with thefts or severe collisions.

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How to Calculate Annual Vehicle Interest

The interest rate that the lending bank or car dealership presents to you upon purchasing an automobile is a simple interest loan. While the interest does add to the total amount of your purchase, it does not compound, which adds to the complexity of the time value of money. Determining the amount of interest that you must pay each year can help with budgeting and deciding if it is beneficial to pay off you car early.

Instructions

1

Determine the principal amount of the loan at the beginning of the year for which you are calculating the amount of annual interest. The remaining amount can be found on the first car payment bill you receive for the year. You can also determine the amount by subtracting the principal you paid on the last car payment for the previous year from the amount of the loan remaining. This information is included in every bill from your auto loan lender.

2

Multiply the remaining principal by the interest rate on your loan and divide by 12 to determine your first interest payment. For example, if $25,000 remains on the loan and your interest rate is 4.2 percent, then your first interest payment for the year is $87.50 (($25,000 x .042)/12).

3

Subtract the interest payment from your total monthly car payment to produce the amount you are paying on your principal for that month. For example, in the above example, your car payment is approximately $462.67 per month. Subtracting $87.50 from this amount gives a total of $375.17 that you are paying toward your principal.

4

Reduce the total principal amount by this monthly contribution toward your principal. So, subtract the $375.17 from $25,000 to show that $24,624.83 still remains on the loan. This number is used to determine the subsequent monthly interest payment.

5

Repeat the first step using the new principal balance over the life of the loan. So, you multiply $24,624.83 by 4.2 percent and divide by 12 to give you an interest payment of $86.19 for the second month. You have now paid a total of $173.69 in interest for the first two months of the year.

6

Repeat or the remaining 10 months, until you have done so for all 12 months of the year. Add together all of the monthly interest payments for each of the 12 months to determine the total for the year. Therefore, in the example, the total interest for the first year would be $962.32.

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Prime Credit Scores for an Auto Loan

Your ability to get a car loan depends largely on your credit score. Whichever financial lender you go to for a loan will check your credit score and if it's not a prime rate, you're not likely to get the loan. Or, if the lender is willing to give you the loan, you will be charged a higher interest rate. Your goal should be to keep your credit in the prime range to get the best deal you can from your financial lenders. This applies not only to car loans but other types of loans as well.

Prime Scores

Credit scores are a summary of your credit history and credit worthiness. Scores range from 300 to 850. According to Leaseguide.com, the U.S. average is around 720. However, a prime rate is considered above 680 to 700. The number that will get you the best loan interest rate varies somewhat by lender. Subprime rates are generally below 640. Credit scores in this range are likely to bring about a rejection of your loan or a higher rate. People with credit scores below 500 can figure that they probably won't be approved for a loan.

Know Your Score

Know your credit score before you begin shopping for a car; this will help you avoid paying an unnecessary rate. Obtain a free copy of your credit report from the Annual Credit Report website and check to make sure it is accurate. If you spot an error, contact the creditor and the credit reporting bureau to have it fixed. Buy access to your credit scores online from Trans Union, Experian and Equifax.

Shop Around

Lending rates vary among lenders. The break points for considering you credit score prime may, too. If your score is in the 680 to 700 range, check with lenders to find one that will consider your score prime and give you the better rate. Speak with a loan officer about lending guidelines. Check with your own bank; it may be willing to look more favorably upon scores that are on the bubble.

Improve Your Score

Improve your credit score by improving your credit history. Don't overextend your ability to pay your bills on time. Pay off accounts with balances on them, but leave the accounts open. The fact that you have been given credit by someone else will help your credit score. If you qualify, open other accounts, but you don't need to use them. Do not allow loans to default because that will drive down your score and remain on your credit history for seven years.

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What Is a Zero APR Car Loan?

If you want to save money when buying a new car, do your homework first. Check your credit, set a budget and research models within your price range. Consider factors that can significantly increase the cost of ownership, such as fuel mileage and insurance costs. Finally, look closely at financing options. If you see dealer advertisements for zero APR car loans, definitely investigate, but do not automatically assume this is the best option for you.

Identification

Annual percentage rate (APR) is the cost to finance your car. When you have an APR car loan, the sticker price of the car and interest on the loan determine your monthly payment. A zero APR car loan has no interest charge, leaving only the sticker price to determine the amount of your monthly payment. For example, if you purchase a car for $25,000 at an APR of 3.99 percent for 48 months, your monthly payment will be $564.36 and the total cost of your car will be $27,089.28. At a zero APR, the same car will cost $520.83 per month and the total cost will be the sticker price.

The Facts

Zero APR car loans are a marketing tool automakers use when new cars sales are down. Because the objective is to increase sales on slower moving cars, this type of dealer financing is usually make and model specific, often excluding compact or fuel-efficient models according to SmartMoney.com. In return for a zero APR, dealers are often unwilling to negotiate on the price of the car, and most often you are not eligible for additional incentives, such as a cash rebate.

Requirements

Unless you have a good credit rating, it can be difficult to qualify for a zero APR car loan. In general, you need at a minimum a credit score of 680 to 700, according to SmartMoney.com. In addition, most also require a down payment of at least 10 percent with good credit and up to 20 percent if your dealer will consider a zero APR car loan with a credit score of below 680. On a new car costing $25,000, your down payment could run between $2,500 and $5,000.

Considerations

A zero APR car loan can be, but is not always, the best option. This is especially true if the dealer is offering a cash rebate option. It is a good idea to calculate the overall cost of both options before making a decision. For example, say you are considering a car that costs $20,000, you have a trade-in worth $4,000 and your options include a zero APR loan for 36 months with no rebate or a 3.99 percent APR for 36 months with a $2,000 rebate. If you choose the zero APR option, your monthly payment will be $444.44 and the total cost will be $16,000. Alternately, if you choose the rebate option and apply the rebate to the cost of your car, your monthly payment will be $413.27 and the total cost will be $14,877.85, saving you $1,122.15.

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What Are My Legal Rights to Getting My Repossessed Car Back in Utah?

Under Utah's Uniform Commerical Code, a creditor has the right to dispose of your repossessed car or sell the car at auction or private sale to a third party. If you want to buy back your vehicle, the creditor must inform you of the sale within a reasonable amount of time.

Buy-Back Rights

In Utah, you may buy back your repossessed car by paying the outstanding amount due, such as your most recent bill statement, plus any repossession charges. However, you must pay before the creditor sells the car at auction. The creditor is required by law to give you notice of the auction sale date, but you are not permitted to participate in the auction.

Post-Auction Rights

If you cannot pay the amount due before the auction takes place, the creditor will apply the car's sale price to your remaining loan amount. If the car sold for more than you owe, your creditor must provide you with the surplus amount. Conversely, if the car sold for less than you owe, your creditor will bill you for the difference, plus any repossession charges, which is known as a deficiency. However, if you voluntarily surrendered your car, Utah's Uniform Commercial Code states that your creditor cannot force you to pay your deficiency unless you owe more than $3,000.

Legal Remedies

You may be able to reverse or lower your deficiency if the repo man disrupted the peace while taking your car or the creditor failed to notify you of the auction day, sold your car in a commercially unreasonable manner or did not calculate your deficiency (or award you a surplus) correctly. Consult a consumer lawyer to discuss your options.

Bankruptcy Options

Filing Chapter 7 bankruptcy can prevent a repossession and Chapter 13 can both prevent and reverse a car repossession after the fact. If you file Chapter 7 before the repossession takes place, your creditor may not repossess the car, but you must resume making full payments. If you file Chapter 13 before repossession, the creditor may not repossess your car and your future payments (and total amount due) will be lowered if you owned the car for a minimum of 2 1/2 years. Chapter 13 also reverses an existing repossession after the fact.

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How Old Do You Have to Be to Take Out a Car Loan?

In order to obtain a car loan, an individual must sign a legally binding contract. There are laws in place that govern who can be legally bound to a contract. For that reason, banks have established guidelines that require loan applicants to be a certain age. Beyond age, banks also look at other factors to determine who can take out a car loan.

Age Requirement

By law, with a few exceptions, an individual cannot sign a legally binding contract unless he is 18 or older. Therefore, an individual must be at least 18 in order to take out a car loan. Though an individual meets the age requirement, it does not mean the banks will approve him for a loan.

Good Credit

Banks will run a credit report to determine if the loan applicant has good credit. Because an 18-year-old is just getting started in life, he likely won't have a lot of opportunities to build his credit score. However, an easy way to build his score before he turns 18 is to "piggyback" on the credit of his parents or a close relative. In order to piggyback, an adult agrees to add the teenager's name as an authorized user on one or more of his credit accounts. When the teenager is listed as an authorized user, each time the adult makes a payment to the creditor, the payments are also reported to the teenager's credit profile. Before piggybacking, be sure the adult consistently makes payments on time. Otherwise, the late payments will damage the teenager's credit.

Sufficient Income

The teenager must have a steady income stream in order to take out a car loan. He must be able to prove his income level and employment. Without an income stream and steady employment, the bank has no way of determining if the individual is financially able to pay back the loan.

Co-Signer

If the teenager does not have a good credit history and sufficient income, the banks will still allow him to take out a loan. However, the loan must have a co-signer. A co-signer is an individual who signs his name to the loan contract. The co-signer promises to be financially responsible if the teenager defaults on the loan.

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Can Someone Take Over Payments on a Financed Vehicle?

You cannot transfer your car payments and loan to another person unless your lender allows it. Because most auto loan providers do not allow loan or payment transfers, you must actually sell your vehicle to the person who wants to take over your car payments. Unless someone simply wants to pay your payments for you, expect to sell your vehicle for your loan's payoff amount.

Contact Your Lender

Call your lender to find out more about its loan payoff process. Obtain your loan's payoff amount, which is the amount of money your buyer will have to provide to your lender to satisfy your loan. This is necessary to transfer ownership; most states and lenders do not release a title unless its lien is satisfied. Find out from your lender how long it will take to process the payoff paperwork and title or lien release and let your buyer know. Make any payments due during the sales process so you don't default on your loan.

Loan Term Differences

Your current loan terms were based on the information provided by your credit report, your income and your vehicle's value at the time you initiated the loan. The person you want to transfer payments to likely has different credit and income than you. For this reason, lenders cannot transfer payments or loan balance and offer the same payments, as rates or lending requirements may differ. Also, your car's value may have changed. If you are upside down in your car loan, or owe more than your car is worth, your buyer may have to provide a down payment to obtain his own loan.

Considerations

State required fees for the transfer of vehicle ownership may also alter your buyer's loan amount. Most states charge taxes on a vehicle purchase. Some states charge tax on the vehicle's value as determined by the state's appraisal method, not the sales price. Gifted vehicles may also require tax. The buyer can expect to pay state applicable title and registration fees to transfer ownership. State fees and taxes are in addition to your vehicle's loan amount, so your buyer may need a down payment.

Time Frame

Your buyer can apply for your loan's payoff amount through your lender, which can simplify the sales process; your lender can pay off your loan quickly and process the title for the new owner. Your buyer can use any auto loan provider she'd like. The loan approval process can take up to one week, which doesn't include the time required by your bank to process paperwork. Once your buyer is approved, arrange for him to pay your loan by accompanying him to your lender or calling in to authorize your buyer to pay toward the loan.

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