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Cochrane Toyota - Car Buying 101 (The Insider's Guide)
Ok, so you've done your research, found the perfect vehicle, slected your dealership and you're finally ready to buy a vehicle... what happens next?
- Do I want to lease or purchase my next vehicle?
- Where does the money come from?
- How much can I borrow from the banks?
- Am I getting competitive financing and rates?
Our expert Financial Services team will help you work through all your options and get you the answers you need! But to get you started, here are some basic terms and definitions to help you feel more confident in your purchasing decisions.
What's the BEST way to buy a car? Really.
The answer, quite simply... it depends. It's not possible to simply say that one way of purchasing is always better than the other because the answer depends on the specifics of each individual situation; YOUR situation. Sometimes following the advice of what worked best for a trusted friend or family member, might not be what works best for you or your situation. This is one reason why so many people often end up feeling frustrated with their purchase and why Cochrane Toyota is focused on earning a reputation for being open and upfront with all our customers, every time. So if you're looking for options and a clear explainantion on how each one works and what it means to your bottom line, you've come to a great place to start. Let's break things down...
Leases and purchase loans are simply two different methods of automobile financing. One finances the use of a vehicle; the other finances the purchase of a vehicle. Each has its own benefits and drawbacks and each will offer several versions. So ask yourself...
1.) Is having a new vehicle every two or three years with no major repair risks more important than long-term cost?
2.) Or are long term cost savings more important than lower monthly payments? Is having some ownership in your vehicle more important than low up-front costs and no down payment?
3.)Is it important to you to pay off your vehicle and be debt-free for a while, even if it means higher monthly payments for the first few years?
As you can see, making a lease-or-buy decision is not so cut and dry. There are some specific things you need to consider. Let's take a look at some of these things now.
Buying and Leasing are VERY different
When you buy a new vehicle, you pay for the entire cost of a vehicle, regardless of how many miles you drive it. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company, based on your credit history. You make your first payment a
month after you sign your contract, just like paying a mortgage on a house. Later, you may decide to sell or trade the vehicle for what ever is still owing on it (its depreciated resale value).
When you lease, you pay for only a portion of a vehicle's cost, which is the part that you "use up" during the time you're driving it. You have the option of not making a down payment, you pay sales tax only on your monthly payments (in Alberta), and you pay a financial rate, called money factor, that is similar to the interest on a loan. You may also be required to pay fees and possibly a security deposit (usually refundable) that you don't pay when you buy. You make your first payment at the time you sign your contract - for the month ahead, just like renting a home. At lease-end, you may either return the vehicle, or purchase it for its pre-determined resale value.
With leasing, you may have the option of putting your monthly payment savings into more productive investments, such as mutual funds or stocks that have the possibility of increasing in value. In fact, many experts encourage this practice as one of the benefits of leasing, though most people will typically find other uses for the money they save by leasing - such as paying the mortgage or buying groceries.
To summarize, the real reason a buyer has equity at the end of his loan is that he purchases that equity by making higher monthly payments. Part of each payment funds the equity. Leasing = lower payments, little to no equity. Buying = higher payments, partial equity. This holds true whether you're purchasing new or used.
- Do I want to lease or purchase my next vehicle?
- Where does the money come from?
- How much can I borrow from the banks?
- Am I getting competitive financing and rates?
Our expert Financial Services team will help you work through all your options and get you the answers you need! But to get you started, here are some basic terms and definitions to help you feel more confident in your purchasing decisions.
What's the BEST way to buy a car? Really.
The answer, quite simply... it depends. It's not possible to simply say that one way of purchasing is always better than the other because the answer depends on the specifics of each individual situation; YOUR situation. Sometimes following the advice of what worked best for a trusted friend or family member, might not be what works best for you or your situation. This is one reason why so many people often end up feeling frustrated with their purchase and why Cochrane Toyota is focused on earning a reputation for being open and upfront with all our customers, every time. So if you're looking for options and a clear explainantion on how each one works and what it means to your bottom line, you've come to a great place to start. Let's break things down...
Leases and purchase loans are simply two different methods of automobile financing. One finances the use of a vehicle; the other finances the purchase of a vehicle. Each has its own benefits and drawbacks and each will offer several versions. So ask yourself...
1.) Is having a new vehicle every two or three years with no major repair risks more important than long-term cost?
2.) Or are long term cost savings more important than lower monthly payments? Is having some ownership in your vehicle more important than low up-front costs and no down payment?
3.)Is it important to you to pay off your vehicle and be debt-free for a while, even if it means higher monthly payments for the first few years?
As you can see, making a lease-or-buy decision is not so cut and dry. There are some specific things you need to consider. Let's take a look at some of these things now.
Buying and Leasing are VERY different
When you buy a new vehicle, you pay for the entire cost of a vehicle, regardless of how many miles you drive it. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company, based on your credit history. You make your first payment a
month after you sign your contract, just like paying a mortgage on a house. Later, you may decide to sell or trade the vehicle for what ever is still owing on it (its depreciated resale value). When you lease, you pay for only a portion of a vehicle's cost, which is the part that you "use up" during the time you're driving it. You have the option of not making a down payment, you pay sales tax only on your monthly payments (in Alberta), and you pay a financial rate, called money factor, that is similar to the interest on a loan. You may also be required to pay fees and possibly a security deposit (usually refundable) that you don't pay when you buy. You make your first payment at the time you sign your contract - for the month ahead, just like renting a home. At lease-end, you may either return the vehicle, or purchase it for its pre-determined resale value.
With leasing, you may have the option of putting your monthly payment savings into more productive investments, such as mutual funds or stocks that have the possibility of increasing in value. In fact, many experts encourage this practice as one of the benefits of leasing, though most people will typically find other uses for the money they save by leasing - such as paying the mortgage or buying groceries.
To summarize, the real reason a buyer has equity at the end of his loan is that he purchases that equity by making higher monthly payments. Part of each payment funds the equity. Leasing = lower payments, little to no equity. Buying = higher payments, partial equity. This holds true whether you're purchasing new or used.
Potential "Options" to Watch For
The "60/96" or "84/96" Plan
Though it's common perception that leasing is much more complicated than financing, there is a new purchase plan that buyers need to be on the lookout for. The increasingly popular "60/96" or "60/84" finance plans have become the ultimate "payment bait" for many car dealers and payment buyers today. The goal is to make every
product affordable by promoting the absolute lowest payment possible for any given vehicle. For many buyers today, budget rules the roost and no one wants to sacrafice comfort, features or benefits if they don't have to. Manufacturers and dealers KNOW this and it's become necessary for them to keep their products within the buyer's budget.Now, as we are all familiar with the recent economic conditions right here in our own backyard, you've seen and possibly felt first hand, the cost of being overextended. This is the biggest risk of entering a payment plan like this. The 60/96 was designed to spread your purchase over the longest possible term (96 months). Your payments are kept as low as possible this way, but your cost of borrowing (interest and depreciation) are at their highest... sound familiar? Many customers who enter a contract like this are SHOCKED to find out they still have a "balloon payment" (buyout) left after making 5, 6 or 7 years of payments and yes the interest rate to finance that balance is going to be higher. Now if you need a low monthly obligation for a shorter period of time - this could be the perfect solution. The point is, every buyer should know exactly what their options are. What benefits a plan like this offers as well as its short comings.
For some,this really is the right option (or only option) and that's o.k... as long as your dealer has been completely upfront about how it works and what it costs you as a buyer.
NOTE: Dealers should always provide you with a couple of alternatives to consider along with this plan.
Next time you see a really low payment for a for a BRAND NEW car or truck... ASK SOME KEY QUESTIONS:
1. What does 60/96 or 84/96 mean?
A 60/96 means you're financing your vehicle with payments
based on a 96 month repayment term. Your payments
will be locked in over the first 60 months. After that point,
you will return to the lender to re-negotiate a rate to finance
the balance of your loan.
2. What is the amoritization?
This is the BIG one, in the phrase 60/96 - 96 is the amoritization
period. Simply put, your rate and payments are locked in for 60
months (your term), but you're paying down at a rate of 96 mths
(amoritization). So while you only have a 5 year term you're
required to make payments for 8 years.
3. What is the payment term?
Bi-weekly terms have been made very popular by lowering
payment size (adding 2 more payments to your schedule, that's
26 payments over 12 months).
4. What's due at signing?
Typically, payments that are advertised are shown without taxes
and fees. These may end up being MUCH more than you
realize (destination fees alone are in excess of $1000) so be
sure the payment you agree on includes all the "extras".
Don't be afraid to ask any question!
5. Is cash down needed?
Cash down really helps to lower monthly payments but is
only necessary if a creditor requests it. Weak or bad credit, high
debt service (owing more than you make) and term may all be
factors that determine if and how much of a deposit is required
for financing approval.
Long Term Financing
When fitting a budget is a big part of your decision to buy, another alternative to the 60/96 (shown above), is long term financing. Using a fixed rate over 72 or 84 months may be something to consider. This option, while slightly more expensive, does offer one significant advantage; a fixed rate for the entire term of the loan. A good financial advisor will tell you that it's crucial to use a fixed rate loan when purchasing a depreciating assest (like a new vehicle). Eventhough this seems like a simple finance option, you'll still want to make sure you go through questions 3-5 above!
Using Your Line of Credit
Another popular option for car buyers recently, has been cashing in on lines of credit. Thanks to so many cash incentives offered by the manufacturers right now, people don't want to sacrafice getting the best cash price, but they rarely have the cash in hand to make a purchase. Many buyers end up turning to their own source of lending; lines of credit or equity lines. There are a couple of considerations you should explore before making a decision to purchase a car this way. Firstly, a line of credit should always be reserved for either a temporary loan or purchase that can be paid back (in full) in less than 6 months or secondly, to invest in something that will pay a respectable return on investment (value is intended to increase over time). Using a line of credit to purchase a car (especially in volitile economic state like we're experiencing) can actually end up costing you thousands more in the long run and take away your financial cushion just when you may need it most! Keep your leverage, control the interest (with fixed rates) and the ups and downs of a fluctuating ecomony and those big swings won't affect you quite as much.
So, which is better, lease or buy?
It depends on what's most important to you. All of us have different lifestyles and priorities - in cars and in finances. Car lease-versus-buy decisions must be made with your own lifestyle and priority attributes in mind. What's right for one person can be totally wrong for another.
LEASE - If you enjoy driving a new car every two, three or four years, can benefit from deferring taxes, like having a car that has the latest safety features and is always under warranty, don't like trading and selling used cars, aren't concerned about long term ownership,
have a stable predictable lifestyle, drive a low to average number of kilometers each year, like the safety of a guaranteed purchase price (closed ended lease), properly maintain your cars, and understand how leasing works, then you should probably lease your next vehicle. FINANCE - If you don't mind higher monthly payments, prefer to eventually build up trade-in or resale value (equity over time), like the idea of having ownership, like paying off your loan to be payment-free for a while, don't mind the unexpected cost of repairs after warranty has expired, drive more than average miles, prefer to drive your cars for years (5-10 minimum) to spread out the cost, like to customize your cars, expect lifestyle changes in the near future, and can't afford the risk of possible lease-end charges - then you should buy.
But before you make your buy-lease car decision, talk to the experts! Call Cochrane Toyota today at 403-932-9900 to book your complimentary consultation and we'll empower you to make a decision you can feel confident with!
Don't just buy.... know how and why!
8 River Heights Drive
COCHRANE,
AB
T4C 0N8