Financing: Sometimes Less Can Be More
Buying a car involves more than choosing make, color and price. Picking the correct financing is equally important: A slip can cost hundreds, perhaps thousands, of dollars. But just as people have their own tastes in cars, so too do they have individual requirements when it comes to financing.
The big choices are between leasing and purchasing. The primary difference is that leasing leaves the risk of the market--the car’s residual, or trade-in, value at the end of the lease period--with the dealer or other lessor, while buying places the risk squarely on the buyer.
If you don’t drive excessively, don’t want the hassle of selling a used car when it is time to make the next new-car purchase or simply want to reduce your monthly car payments, leasing is a good alternative. But if saving money is the goal, buying usually is a better deal.
Let’s assume you’ve decided on a car and a price: a 1998 Ford Taurus for $20,000. The dealer tells you that the manufacturer will give you 2.9% financing or $2,500 cash back. Which do you take? And do you lease or buy?
Here’s a simple formula to help you choose: Multiply the monthly payment by the number of payments to find the payment total. Add the down payment and the sales tax (with a lease, only the down payment is taxed) to get the total cost. Then subtract any cash rebate and the residual or trade-in value of the car. The grand total will be the comparative cost.
In the accompanying sample, which is for a three-year term, the numbers make it clear that while the factory-backed 2.9% lease rate sounds great, it ultimately is more expensive than a privately financed lease or purchase loan at an 8.5% rate, although the monthly payments on the 2.9% lease certainly are low.
Kenneth C. Wanek is president and chief executive of Rate.Net, which updates more than 100,000 interest rates weekly for 11,000 banks and credit unions nationwide. Rates and quality rankings for local institutions can be found at no cost at https://www.rate.net .
* The latest auto loan rates are also available online at https://www
.latimes.com/highway1.
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Lease-Buy Comparison Chart
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Dealer’s Private Dealer’s Private 2.9% Lease 8.5% Lease 2.9% Loan 8.5% Loan Monthly payment $380.40 $446.64 $551.71 $599.78 x Number of payments x 36 x 36 x 36 x 36 = Total payments 13,694.40 16,079.04 19,861.56 21,592.08 + Down Payment 1,000.00 1,000.00 1,000.00 1,000.00 + Sales Tax (7.5%) 75.00 75.00 1,500.00 1,500.00 = Total cost 14,769.40 17,154.04 22,361.56 24,092.08 - Cash Back 0.00 -2,500.00 0.00 -2,500.00 - Residual 0.00 0.00 -7,410.00 -7,410.00 Comparative Cost $14,769.40 $14,654.04 $14,951.56 $14,182.08
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Source: Rate.Net
