Lease Vs. Buy for New Cars

Leasing and buying are two methods of new car financing. Leasing is a way to finance the use of a car over a period of time. Buying with a finance contract is a way to purchase a vehicle over a period of time. Each method has drawbacks and advantages. The choice depends on a combination of personal preferences and financial priorities.

Buying Summarized

Typically, when you finance the purchase of a new car, you arrange to pay for the vehicle regardless of how many miles you intend to drive it. You usually make a down payment. Sales taxes and registration fees are charged, and you are likely to have them rolled into the loan. You will pay interest. The rate of interest may be determined by the lender and the lender's determination of your credit worthiness. If you decide to sell before the loan contract is completed and paid off, you can do so by arranging to pay off the loan and transferring the title to the new owner.

Leasing Summarized

When you lease, you may not be required to make a down payment. You make a lease agreement to pay a monthly amount for the use of the car during a specified period of time. Depending on your state of residence, you may pay only sales tax on the monthly payment. You pay a rate known as a money factor, which is similar to loan interest. The lease agreement may also contain additional fees. When the lease period expires, you usually have options. You may be able to return the vehicle and, provided you have not exceeded the mileage portion of your agreement, you walk away. If you have exceeded the mileage, you will be charged for the additional miles as stated in your lease agreement. Another option would be to keep the vehicle, purchasing it at the lease end. If you terminate the lease before the end of the contract, you have the responsibility for early termination charges written into the agreement.

Reasons for Leasing

For some drivers, driving a car that is never more than two or three years old is important. The car may remain under manufacturer's warranty and have a low risk of breakdown and need for repair. With leasing, monthly lease payments are commonly lower than monthly loan payments. When you lease, you are paying for the car's depreciation and the use of it. You own no interest in it.

Reasons for Buying

For other drivers, ownership is important. While the initial cost to enter the loan may be high and monthly loan payments including interest may be higher than a lease payment, after the loan is paid in full, the vehicle belongs to the owner. Its value will have depreciated just as the leased car's value has depreciated, but no further payment will be required from the owner who has paid off the car.

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What Is a Tier Two Automotive Credit Rating?

In purchasing a new or used car, credit counts. While most people realize this, what they don't know is that a regular FICO score is not the only criteria auto dealers use. In fact, many auto dealers do not use standard credit scores at all, but rather a proprietary credit score which divides prospective buyers into tiers. A tier two automotive credit rating will affect the rate of financing available to a car buyer.

What Are Auto Credit Scores?

Auto credit scores are generated in a similar fashion to regular credit scores. The difference is that auto credit scores consider criteria related to prior auto purchase and leasing, in addition to a regular credit history. This means it is possible for someone to have a very high regular credit rating, but a much lower or even no auto credit score if he has never purchased or leased a car in the past.

Criteria for Auto Credit Scores

Auto credit scores are based on a number of criteria: income, past auto purchase and payment history and overall credit history. Important considerations include the amount of car payment as a percentage of overall income and total debt to income ratio. Residence stability also plays an important part in determining auto credit scores.

Tier Two Auto Credit

Different auto dealers have different names for tier two credit: 2 Tier Credit (Ford Motor Credit); B Tier (GMAC Financial); Gold Tier or Tier 2 Credit. This tier roughly corresponds with a FICO score of 600 to 699. Slow payment (especially on auto loans), too many recent credit inquiries and small collections are the criteria which divide tier two credit from the top tier credit.

Leveraging Tier Two Credit

One way to obtain more favorable lending rates with tier two credit is to obtain your regular credit reports, and take them with you to the dealer. Allow the dealer to report the credit scores she has received for you, and if they are higher than the scores you have, allow her to use those scores to determine your financing. If they are lower, offer the scores you have obtained and ask her to consider those instead.

Considerations

Auto credit ratings are not available to the consumer at any price. However, some auto dealers only use regular FICO scores. If your regular FICO score is high, you can finance a car with a dealer that uses them, and maintain good payment practices to increase your auto credit rating.

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Is it Better to Have a 36 or 39 Month Lease on a Car?

To decide between a 36 and 39 month lease option, consider your monthly payment amount, warranty coverage, maintenance schedule and vehicle needs. While three months may not seem like much of a term difference, you may find yourself outside of the vehicle's factory warranty period. Vehicle repairs and maintenance are your responsibility while leasing.

Payment

Sometimes the payment for a 39 month lease is cheaper than an alternative 36 month option. Your monthly leasing payment is based on expected depreciation of the vehicle, which depends on the mileage and term that you choose. The manufacturer calculates the car's value at the end of your lease contract, and sometimes the extra three months makes a difference. If you want a lower monthly payment without providing an extra down payment, you may have to pursue the 39 month term option.

Warranty

During a lease, you are responsible for all vehicle repairs, so ensure you stay under the vehicle's bumper-to-bumper warranty period during the lease period. Manufacturers offer two warranties on vehicles; a bumper-to-bumper warranty, which covers just about anything that breaks or doesn't operate properly in your vehicle, or a powertrain warranty, which covers major components of the transmission and engine. Powertrain coverage often exceeds bumper-to-bumper coverage for many new cars. If your bumper-to-bumper warranty is limited to 36 months, choose a 36 month term. Otherwise, consider purchasing an extended warranty to cover possible repairs so you don't have to pay out-of-pocket if something breaks.

Maintenance

Check your vehicle's required maintenance schedule over to determine how much you'll pay to maintain the vehicle for the extra three months. Depending on the mileage you choose for your lease, you may have to pay several hundred dollars for an extra maintenance appointment. Check with the dealership's service department to obtain a maintenance schedule and determine costs. Also compare the price differences between the 36 and 39 month lease payment option. For example, if it costs $250 for the extra maintenance appointment required for a 39 month lease, but the 36 month lease option is $10 higher per month, it's cheaper to pursue the 39 month lease as you'll pay an additional $360 more over the term of the lease.

Pull Ahead Considerations

If you consistently lease a same-make vehicle, the three extra months probably won't tie you down to your lease contract. Many banks offer some kind of lease pull-ahead program, which allows you to end your lease up to one year early if you lease or finance through the same bank again. Many dealers are willing to work with buyers to end a lease three months early as well. If you want to lease or purchase a vehicle from a different-make dealer, the dealer may pay your last three lease payments to terminate your contract and sell you a new vehicle.

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Do I Still Owe Money If My Car Is Repossessed?

If your car is repossessed, you are still responsible for any balance due after the car is resold by the bank, as stated in your contract. While you may not have to pay right away, your lender is within its legal rights to sue you. Before a lawsuit is filed, you may have options to settle the remaining balance, make payments or pay the balance in full.

Upon Repossession

Once your vehicle is repossessed, you can get it back by paying fees determined by the bank. The amount you'll have to pay includes any payments and late payments due, as well as repossession, locating and towing fees. You can expect to receive a letter stating the total amount due and at which date your vehicle will be offered for sale. If you do not receive the letter, you can call your bank for details.

After Car is Sold

Once your vehicle is returned to the bank, it is usually resold at auction or by the bank itself. In the event the vehicle is sold at auction, it is sold at wholesale value. The wholesale amount is equivalent to trade-in value, which is thousands of dollars lower than retail value. After the vehicle is sold, you will be notified of its sale price and billed for any balance due after the sale. However, if your vehicle warrants the bank a profit, the bank must return the excess amount to you.

Collections

If you do not make arrangements to pay the balance due, your account will be turned over to a collections agency. You can expect letters and phone calls offering you a payment plan or an opportunity to settle the amount due for less than the original balance. Should you decide to ignore collection efforts, it is likely you'll be taken to court. In such an event, the bank will pursue a judgement, garnishing your wages for the amount due.

Warning

If you settle on an amount that satisfies the delinquent loan, the amount you do not pay is reported to the Internal Revenue Service, which considers the amount income. For example, if you owe $10,000 but settle for $4,000, you can expect to pay taxes on $6,000. Unless you claim bankruptcy to cancel the debt, you must claim the canceled part of the debt as income.

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How to Refinance a Wachovia Car Loan

Whether you are attempting to lower your monthly car payments or you are trying to get a lower your car loan interest rate auto refinancing might be right for you. Refinancing a Wachovia car loan can be time-consuming, but as long as you keep yourself informed and focused, the process can be fairly straightforward.

Instructions

1

Review your original auto loan documentation to see if you have any prepayment penalties or if there are any penalties for refinancing. If you are planning to refinance your existing Wachovia car loan with another loan from Wachovia, you should not have to worry about any penalties. You will also need these documents to record when your last payment was scheduled to be paid to Wachovia for your vehicle.

2

Obtain a copy of your credit report and credit score. Credit reports can be obtained once each year free of charge, but you will need to purchase your credit scores. Many companies offer free trials of credit monitoring services which will allow you access to your credit report for two weeks or one month.

Wait to obtain your credit score until shortly before you plan to call Wachovia to discuss you refinancing options. This will help ensure that you are up to date on your credit score and will help avoid any unpleasant surprises. Do not call Wachovia or any other bank without first knowing your credit score and any negative items that are listed on your credit reports.

3

Find out your current vehicles pay off amount. This amount will represent that amount that Wachovia has you owing on the vehicle. You will need to know this loan amount so that you know the amount that you are hoping to refinance. Do not guess at this amount and do not use your credit report to obtain this amount. Credit reports can be 30 or more days behind and, as a result, may not include a payment or two that have been made since your reports last update.

4

Call Wachovia dealer services and speak to a representative about refinancing your existing auto loan. Most representatives will try to get you to complete an application on the phone with them or will tell you to go online to complete an application. Before letting them complete and run an application on your behalf ask the representative for the minimum credit requirements.

Knowing the minimum credit score needed to be approved for refinancing will help you avoid being denied based on your credit score. If the minimum credit score quoted is higher than your current credit score, it is best to clean up your credit and try to apply later. Asking will save you an inquiry on your credit and will let you know if you should choose to seek financing with another finance company.

5

Complete an application on the phone with a Wachovia dealer services representative. If you meet the minimum credit requirements and your income to debt ratio are within reason you will be approved over the phone. If your credit report has a number of recent inquires or you have a high debt to income ratio your approval might be delayed.

Always get a number to call and record the name of the representative you are working with if you are asked to wait for a decision. Find out how long a credit decision should take and call back at that time to inquire. If you are refinancing application is denied ask for the reasons for the denial and ask for a reconsideration. In cases where your credit report is not reflecting current paid off debts or a considerable increase in income, you might be asked to fax additional documentation to verify any new information.

When you are approved, your representative will explain the new terms, including your new, lower, monthly payments and interest rate. New loan documents reflecting the changed interest rate, payment amount, and loan terms will be mailed, faxed, or (in a few cases) emailed to you for signature.

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Definition of Car Lease Residual Value

The residual value is the approximate value of a leased vehicle at the end of the lease period, which is often 36 months. The longer the term of the lease, the less residual value the vehicle will have. The residual value is based on the expected depreciation amount of a vehicle.

Meaning

The residual value is the amount you would pay for the vehicle at the end of the lease term if you decide to purchase it. The final amount is predetermined at the time the lease is executed and will not change. Generally, the higher the residual value of the vehicle, the lower the lease payments will be.

Importance

Residual value is considered the most important of the four factors that are used to calculate your payment, which also include the price of the vehicle, the length of the lease term and the money factor, meaning what you can afford. This is why when shopping for a lease, it often best to compare residual values offered by different financial institutions.

Calculation

Residual values are determined by the financial institutions that provide you with the lease agreement by taking into consideration factors such as the model of the vehicle and how much they estimate it will be worth at the end of the lease based on the model's history. The residual value is typically non-negotiable.

Example

Suppose you lease a $25,000 car for three years, with a 50 percent residual value. Since you would only be using 50 percent of the car's total value, your monthly payment (not including taxes, fees or interest) would be $347.22 (12,500 divided by 36 months). If you leased the car for four years and the residual value was 60 percent, you would have used 40 percent of the car's value, so your monthly payment would be $277.78 (10,000 divided by 36 months).

Best Value

As a general rule, luxury cars have a better residual value than other types of vehicles because they tend to depreciate more slowly, meaning that you will have used less of the vehicle's value during the lease, which can help to keep the payments lower. To find the residual value of a car you may be interested in leasing, visit https://www.alg.com/.

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How to Lower the Lease Buyout Amount

Lowering the lease buyout amount on your car can save you money. You may be happy with the car that you've been leasing and know that it's mechanically sound, so you would like to buy it when given the option. However, negotiating with the dealership or leasing company when your lease expires takes skill and knowledge. Before you approach the subject of buying the vehicle that you've been driving, you need to understand the terms of your lease and know valuable details about your car.

Instructions

1

Read your lease carefully to understand the terms of your buyout. Look for the residual value, which is how much your car is estimated to be worth at the end of the lease, and any fees associated with the purchase. If you return the vehicle and don't buy it, you may owe the leasing company money if the residual value is higher than the market value.

2

Check your odometer to determine if you have exceeded the mileage limit specified in your lease. Driving more miles than allowed on the lease increases the buyout amount. If you are in this situation, do not divulge your mileage during negotiations with the leasing company, because it can compromise your position to negotiate.

3

Check your car's current market value on a reputable website that allows you to enter the make, model, year, options and mileage. You will use the value to compare it to the buyout amount once you receive it.

4

Wait to contact your leasing company. You can call them for the buyout amount a few months before your lease expires, but knowing that you are eager to buy your car risks your posture during negotiations. If you are patient, the company may give you a buyout offer close to the date of expiration.

5

Research loans from various lenders once you know the buyout amount. You can save money by financing your buyout with a company other than the dealership or current lease holder. In addition, use the information as a bargaining tool when negotiating the terms of your buyout. However, many lease buyout loans carry higher interest rates than a standard car loan.

6

Offer or counteroffer the lease holder an amount less -- as much as 25 percent -- than the residual value of the car, depending on whether you contact the company first or the other way around. If you return the vehicle, the car dealer will not be able to sell it on the lot for a high residual value or, possibly, even market value, because it was leased. Therefore, it saves the dealership time and money if you buy out the lease.

7

Counteroffer at 15 to 20 percent less than the residual value if the leasing company does not accept your first offer, and it is less than a month from the expiration of your lease. Explain that, once the car is returned, the lease holder may not be able to earn as much as you are offering if it is sold at wholesale or auction.

8

Decide if it's cheaper to buy the car for the leasing company's final offer just before your lease expires or to purchase another similar vehicle. Ideally, you will not have to pay full residual value after negotiating the buyout amount.

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