Minnesota Attorney General's Office
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St. Paul, MN 55101
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Chapter 6: Considering an "Experienced" Car
The Car Handbook
The good thing about buying a used car is that it has a history. The bad thing about buying a used car is that it has a history.
Experience can be a good teacher. When you buy a used car, it's possible to know the reputation of the make and model better than you would for a new car, especially a freshly minted model. But you won't know if the vehicle was treated properly, unless you're a good gumshoe detective. Learn to be one.
To start your research, take a trip down to the local library where books and magazines provide comparative information. Every April Consumer Reports publishes a detailed report of repair and maintenance frequency for used cars. The publication lists cars by price and provides important safety and fuel efficiency information. But don't stop there. Road and Track, Motor Trend and Car and Driver have automotive reviews, too.
What's a Used Car Worth?
Even those who know next to nothing about cars will tell you to consult the blue book to find out what a used car's value is. But don't be thrown when you discover that the blue book is orange. The book's actual title is the "National Automobile Dealers Association's (NADA) Used Car Guide," and it's pocket-sized. Other guides also exist, including "Edmund's Used Car Prices." NADA's blue book can be found at the library but not at most bookstores. Edmund's may be found in both places. Car prices may vary between these books, but the dealers and most loan officers go by NADA's guide, so it's your best bet. If you have Internet access, try Kelly's Blue Book on-line. The Web site will ask you questions about the car, and then give you a likely price. The Web site address is: http://www.kbb.com/.
The blue book shows the average trade-in price, average loan price and average retail price for each model car by year. If the car is older than seven years, look it up in the "NADA Older Used Car Guide."
The guides offer estimates only. Naturally, if the car you're purchasing was stampeded by elephants escaping the zoo, its value will be lower than what NADA lists. And don't buy the first car you look at. Comparison shop to get a feel for prices in your market.
Three Ways to Get What You Pay For
When buying a used car, you need to be even more diligent about making sure you're getting your money's worth than when you're buying a new car. New cars are expected to work perfectly. Used cars come with a history of accidents, repairs, rattles, dents and dings.
Following these three important steps will help protect you from being fleeced when buying a used car:
- Check the reputation of the seller,
- Obtain the title information, and
- Have the car inspected by a mechanic and a body expert.
Although you can't guarantee that you'll know everything about the car if you take these steps, you'll have gone a long way toward it.
Check the Reputation of the Seller
Although it isn't possible to check the reputation of a private individual, you can check out a dealer. You should find out the following:
- How long has the dealership been in business?
- How does the Better Business Bureau rate it?
- Has it been sued by the state Attorney General? If so, why?
All these questions should be answered to help you feel secure that the dealer will honor any contract you sign.
Obtain Title Information
The title is like a résumé of your car's life, indicating how many miles it may have on it and if it is a prior salvaged vehicle. To get title information, contact the Department of Public Safety Driver and Vehicle Services Division, Motor Vehicle Records, at (651) 297-2126 and the TTY number is (651) 282-6555. The Department of Public Safety can verify if the car was salvaged and the odometer reading. You can also demand this information from the dealer. When a care is sold to a dealership, that dealership takes control of the title. Nothing prevents the dealership from showing you that title.
If the car was totaled
By Minnesota law, the title must be stamped "prior salvage" if the car was totaled and then rebuilt anytime after June 1993. If this is the case, you'll want to check that everything was put on the car when it was rebuilt. A previously totaled car may not be as structurally sound as another car. Have the car checked at a body shop before you decide to buy it.
The lower the mileage, the higher the price for the seller. It's no wonder billions of dollars are bilked from consumers every year by sellers who turn back the miles on odometers.
Have Questions? Contact the Previous Owner
You are entitled to contact a car's past owner. If any seller says that the owner's name can't be provided or even that the Attorney General doesn't allow it show them this! You have a right to contact the owner.
Because about 90 percent of odometers that are rolled back come from other states, you should research out-of-state vehicles thoroughly. To get a copy of the title, you'll need to contact the Department of Motor Vehicles in the state where the former owner lives.
Have a Complete Maintenance and Body Check
Even if the previous owner and dealer seem trustworthy, and say there's nothing wrong with the car, have the car completely inspected by a qualified auto repair shop. Salespeople aren't mechanics.
You can take the car to a gas station mechanic or to a diagnostic center. A body shop is also a good place to stop to see if the car has had body damage or has been in an accident. If the owner won't allow you to have the car inspected, take your business elsewhere.
Your Personal Inspection
Your inspection will not replace a mechanic's inspection, but you can eliminate obviously poor vehicles with a few tools and a little know-how.
You'll need to get down and dirty to do this inspection, so wear old clothes and work gloves. If that isn't your style, find a mechanically-minded friend to go with you. It's also a good idea to bring a friend to help you check the lights and exhaust when you start the car, to offer opinions on seat comfort and for moral support.
Your Tool Kit
When you're used-car shopping, you'll need to carry the following to make your own inspection:
- Flashlight to look for rust in dark places such as wheel wells and for inspecting under the hood.
- Rags to check the oil and other fluids and to clean your hands.
- Magnet to detect panels filled with plastic body filler, indicating the car was in an accident. The magnet will not be attracted by plastic.
- Notebook and pen to write down your findings so you can compare the cars you're considering.
What to Look at
- Look for leaks.
With the engine off, check the pavement under the car. A wet black stain means leaking oil. A reddish stain is transmission fluid or power steering fluid. If the stain is colorless or green, it could be a leak in the cooling system. A colored stain could also mean leaking break fluid. A clear leak that smells like gas probably is gas and could signify a fuel system leak. Don't linger over the spill because gas is toxic to breathe and highly flammable.
- Check the radiator.
Never take the cap off a hot radiator. If the radiator is cool to the touch, remove the cap and inspect the water or coolant. If it looks rusty, that could mean corrosion in the cooling system. Next, look for oil in the radiator. It usually appears as a shiny film floating on top of the water or coolant. If you see oil in the radiator, the car probably has an extremely serious problem such as a cracked head or head gasket leak.
- Check the battery.
Look for cracks and leaks. Find out how old the battery is. You can check the cell's fluid level in older batteries. If the plates in the battery aren't covered by fluid, the battery hasn't been properly maintained. This is an indication that the rest of the vehicle may not have been well-maintained, either.
- Check the dipsticks.
Look at the engine oil dipstick. A low oil level could mean the previous owner didn't maintain the car regularly. Or it could be a sign that the car burns too much oil. If the oil is gummy or dirty, it hasn't been changed often enough and the engine could be badly worn out.
Next, check the transmission dipstick while the car is idling. A low fluid level may indicate a leaking transmission. New fluid is red. Discolored fluid could indicate a transmission problem, but it doesn't always mean trouble. If the fluid smells burnt or is discolored, have a mechanic check it out before you buy the car.
- Test the shock absorbers and struts.
Push down on each corner of the car. The car should not bounce more than twice. If it does, the shocks and struts need to be replaced. Remember that they are installed in pairs, so even if only one corner of the car fails the bounce test, you will have to buy at least two new shock absorbers or struts.
- Check the tires.
Make sure the "wear bars" in the tread depressions don't show through. If they do, the tires must be replaced immediately. If the tires are worn unevenly, particularly if one side of the tread is more bald than the other, the car probably needs an alignment. Be sure to check the spare tire. Often, a seller puts an old tire in the trunk, so even if the mounted tires are new, you can examine the wear patterns on the spare. If you think the car needs to be aligned, consult a mechanic before buying it. The problem could be minor, but it also could indicate the car has been in an accident and will never align properly, or that other important parts such as the tie rods and ball joints need to be replaced.
- Check the tailpipe.
Run your finger around the inside of the tailpipe. Assuming the car does not have a diesel engine, it probably burns too much oil if the residue inside the pipe is greasy or sticky. White or gray powder, however, is nothing to worry about.
- Watch the dashboard lights.
Now you're ready to turn the ignition key to the first position. Make sure the alternator, oil pressure and "check engine" lights go on. If they don't, it could mean a bulb needs to be replaced. Or it could mean that the seller has deliberately disconnected the lights to prevent them from signaling mechanical trouble. Start the engine. Now the lights should go out. If they don't, the car could have a problem with the systems indicated.
- Let the engine idle.
With the car in park, raise the hood and listen to the engine. If you hear a loud noise that sounds like a sewing machine, the car may need a valve job. Step on the accelerator and rev the engine. If you hear a rumbling or hammering sound, the rods or bearings may be bad. Either way, that can spell expensive repairs.
- Look at the exhaust smoke.
With the engine warm and running but still in park, press down on the accelerator and look in the rearview mirror. If the smoke from the exhaust is white, it's generally a bad sign. It might be only water vapor, but it could be a warning of a cracked engine block, head or head gasket. Likewise, blue smoke can mean the car has bad piston rings or needs an expensive valve job. Black smoke means a too-rich mixture of gas to air, sometimes fixable with a simple adjustment, other times requiring an expensive sensor or computer repair. Under normal weather conditions, the smoke should be clear and colorless when the engine is warm.
- Test the exhaust system.
A rumbling noise from under the car but not under the hood is an indication of a substantial exhaust leak. Have a mechanic check to see if the exhaust system needs work or if the muffler needs replacement.
- Test the brakes.
If the car has power brakes, step down on the brake pedal with the engine running. You should not be able to push the pedal all the way to the floor. It's a bad sign if there is less than a 1 1/2-inch clearance. Don't just tap the brakes. Hold your foot in place for a minute or more to be sure the brakes don't give way or feel mushy.
Test Driving a Used Car
Don't let the owner take you for a ride! Insist on getting behind the wheel yourself for the test drive. Drive over hills, on city streets and on freeways. Make sure the car doesn't pull to one side. Brake the car and check to see that the brakes don't lose pressure when you press hard on them.
If the car has an automatic transmission, see if it shifts smoothly. Drive forward and backward in an empty lot to see if there's any noise or slippage. And be sure to turn off the radio while driving so you
Can You Read Between the Odometer's Lines?
Let's say you answer an ad for a 10-year-old car with only 50,000 miles. That's considered a "cream puff" in the industry because it has far less mileage than you'd expect for a car its age. Mr. Al Smiles, who's selling the car, is looking to grease his palm. He tells you the car was driven by a little old lady who just went to the grocery store and back. How would you check out his story?
First of all, realize that by rolling back the odometer, also called "whipping" or "busting" miles, Mr. Smiles can make a big profit. An average of more than $1,000 is added to the price of cars with rolled-back odometers, according to the National Highway Traffic Safety Administration. Odometer fraud rips off customers by as much as $3 billion a year.
By law, all sellers, private or otherwise, are required to verify that the odometer reading is accurate to the best of their knowledge. If Mr. Smiles knows the mileage is higher than the odometer reading either because of the odometer's mechanical limits or because of odometer tampering, he must disclose this. The law states that the seller must provide this information for all vehicles, except those that are 10 years old or older, exceed 16,000 pounds or are not self-propelled such as trailers or other pulled vehicles.
Signs of Odometer Tampering
If Mr. Smiles isn't forthcoming with information, check the following for signs that the mileage shown on the car is wrong:
- Numbers on the odometer look misaligned or the odometer doesn't work.
- Missing screws or loose parts on the dashboard, indicating the odometer has been disassembled.
- Unusual wear on the brake pedal, carpet and driver's seat, suggesting more extensive use of the car than the mileage reading indicates.
- Non-original or mismatched tires on cars with odometer readings under 30,000 miles. Such vehicles should have the original tires and all the tires should be of the same brand and model.
- Old dated oil-change stickers on the door jambs showing mileage inconsistent with the current reading.
- Old dated repair orders or inspection certificates in the glove compartment, under the seat or in the trunk, showing mileage inconsistent with the current reading.
- A recent title, a title stamped "duplicate" or a title issued in another state.
- A short ownership time of perhaps a month or less. The "date issued" section on the title will tell you how long the last owner had the car. Short ownership may indicate that a dishonest dealer put the car in a spouse's or friend's name and then rolled back the odometer before reselling the car. The spouse or friend will most likely verify the false reading if you call to inquire about it.
can listen for strange sounds coming from the engine. Finally, if the test drive was scheduled ahead of time and the owner warmed up the engine, be suspicious. A warm engine can conceal many flaws.
If you've decided on a car you want, then make a bid. It's a good idea to review the strategies in Chapter 5 before negotiating the sale.
If the car comes with a warranty, check it over. Read about used car warranties in Chapter 8. Finally, get ready to sign the contract. The car may soon be yours!
Signing the Contract
Before you sign, take out your magnifying glass or whatever it takes to help you read the fine print on your purchase contract. Sure, sure, everyone says that. So what specifically should you look for on a used-car contract?
See if the warranty is noted and that you receive a completed copy of the buyer's guide.
Make sure any agreements you made with the seller to repair the car as a condition of the sale are written into the contract.
Check that it's in writing that the dealer has completed all federal government safety recall service needed for the car.
Make sure all blank lines are filled in on the contract.
Remember, there is no three-day cooling-off period for car sales!
Chapter 7: Get a Lease on Leasing
The Car Handbook
With all the newspaper and TV ads devoted to auto leasing lately, you'd think leasing was a brand-new concept. It's not. What's new is that manufacturers and dealers are promoting leasing more than ever before. And it's working. Today about 30 percent of the people who drive new cars are leasing instead of buying. That's a jump from 2.5 percent a little more than a decade ago.
Why has leasing grown? Is it a fad? Are people simply being influenced by well-produced ads? Or has leasing become as good a deal as buying or even better? There's no easy answer. That's partly because leasing terms and calculations are complicated and partly because comparing buying to leasing is like comparing apples to oranges. Which one is better depends upon individual finances, circumstances and desires. We'll try to help you sort these out for yourself, so you can judge if leasing makes sense for you.
What Is Leasing and Why Is It So Popular?
Leasing is basically long-term car rental, usually lasting two to four years. You agree to pay a leasing company a fixed amount each month to drive the car, which the leasing company owns, and you also pay for insurance and routine maintenance such as oil changes. You receive a warranty, as you would for a car you'd buy. And, as with a car you own, if you damage a leased vehicle, you and your insurance must cover repairs.
It's important to note that, unlike buying a car, leasing may mean that you will always have monthly payments. When you buy a car, the car loan is typically paid off long before the car is worn out. In contrast, leasing usually means endless payments. Although you may be able to buy the car at the end of the lease, most people who lease turn in the car at the end of the term and lease another. So the payments continue. In the long run, leasing may be more costly than buying, despite the lower monthly payments.
Then, you may wonder, why is leasing so popular? There are several reasons. With the prices of cars climbing, it has become harder and harder to afford monthly payments that will pay off a car in three years or less. And with new cars averaging about $20,000 today, loans are being stretched over four to six years. By the time you truly own a car, it may not be worth a whole lot in the marketplace. It still may be worth a lot to you, however, if it gets you where you're going and allows you to drive a car without making payments. That's something to keep in mind as you learn more about leasing.
Leasing is also popular with people who don't like driving older vehicles. They can always drive a new car needing relatively little maintenance and fewer repairs than most older cars. If you lease a new car every couple of years you can always drive a fairly new car. Although you will never escape monthly payments, the payments will be lower than they would be if you were buying a new car every two years. This is leasing's main attraction.
Is Leasing a Good Deal?
Does the fact that you're making lower monthly payments when you lease mean you're
getting a better financial deal than if you'd bought the car? No to
properly evaluate the deal, you need to look at the long-term financial outcome and all the terms of the lease.
Who Typically Leases?
Leasing is a decision based on personal choice, as well as personal finances. For some people, leasing is a good idea for many reasons. For others, it's like a spin on a race track: It offers a short-term thrill, but doesn't get them anywhere in the long run. See whether or not you resemble one of the following drivers.
The Drive for Success
If you're like Maria Lopez, image is extremely important to your success. And if, like Maria, you're just starting your career, you might not yet be able to afford to buy the car that gives your clients the confidence that you're a "winner." By leasing, Maria has decided she can impress her clients by taking them out to lunch in a smooth-handling, mid-sized car with ample passenger room. And she can make the monthly payments required without straining her finances.
The Family That Stays Together
Becky and Harvey Gilbert are in their late 30s and have three young children. They want a car roomy enough to comfortably fit the family, a few friends and various toys, bikes and camping gear for their summer vacations in Minnesota's scenic parks.
Why are Monthly Payments Lower When You Lease?
The monthly payments may be lower when you lease a car than when you buy it because you're mainly paying for the car's depreciation. Depreciation is the value the car loses over the time you drive it. If a car is worth $18,000 new, and you lease it for three years, during which time it depreciates by $7,000, you pay $7,000 to lease the car (plus interest and other fees listed on your leasing contract).
If you were to buy the car, your monthly payments would have to be higher to pay off the full price of the car. Loan payments to buy a car are often spread over four to six years to bring the monthly cost down. Still, the monthly payments may not be as low as they would be if you were leasing.
What If I Want Out?
There is no three-day cooling-off period when you lease, just as there isn't when you buy a car. So carefully consider what you're signing when you sign a lease, because you're promising to make lease payments for the full term of the lease.
The Gilberts are trying to make ends meet on a limited income, yet they want a car that's safe, preferably with built-in child seats and both driver and passenger air bags. They fear having to pull off the road with a carload of kids, so they also want a car with a low probability for mechanical failure.
Their wants and needs add up to a new minivan that they can't possibly afford to buy. Recently they decided to lease a new safety-equipped minivan when the dealer told them about the low monthly lease payments they could make. For once, they didn't bat an eye at the price.
Living the Good Life
Bob Jacobson has never been one to save. His income is steady, but it doesn't afford him the lifestyle he wants. He was turned down for a loan to buy the four-wheel-drive truck he wanted. When he found out he could lease the same truck for less each month, he nearly jumped at the chance, but he didn't feel right about it. By the time the lease was up, he reasoned he'd still have to finance the truck in order to own it. Or he'd have to keep making payments to lease another truck and possibly come up with another downpayment, too.
Bob decided to buy a less expensive car rather than leasing the truck he couldn't afford to buy. After four years of making loan payments he can afford, he's guaranteed he'll own a car and then have a few years of payment-free driving in which to save money for the truck he really wants.
The Pride of Ownership
Jim Merriman made the final payment on his hatchback three years ago. His wife ribs him about driving a "beater," but in truth the car's body has held up well. Jim also has tuned up the engine on schedule and replaced a few parts. All in all, the money Jim saves by not having monthly payments makes him gleefully happy every time he sits on the sun-bleached seats.
Take a Second Look . . .
What are your reasons for considering leasing? Did you fall in love with extra accelerating power, smooth handling or a leather interior and "moon roof" on a car you can't afford to buy? If so, rethink your decision to lease. You may be better off buying a less expensive car now and saving your money to buy the car you really want later.
He's even started a bank account to put away the money he'd be paying every month if he were leasing. It's growing so big he plans to use some of his savings to fly his family to Florida in the dead of winter, and he'll still have a sizable downpayment left when he wants to buy a new car.
Beyond Monthly Payments
Even though leasing ads often emphasize low monthly payments, it is critical to look beyond the monthly payment to understand the total cost of a lease. Examine the up-front and back-end fees included in the lease. And, if you don't mind doing a little math, learn how the monthly fee is tabulated to ensure you're getting a good deal. (See "Raise Your Leasing I.Q." in this chapter.) Sometimes the low payments that sounded so good in an ad can conceal hidden costs that add up to a poor deal. Check your lease for these important disclosures:
- The car's price. Make sure the price of the car is listed on the lease. This figure, also called "capitalized cost," is similar to the sale price you would pay if you were buying the car. It is important to know the capitalized cost because it will determine how much you will have to pay each month.
- The trade-in value. If you're trading in a car, make sure the amount you're receiving for the car is shown on the lease. It should be listed separately and subtracted from the car's price (capitalized cost), if you have "positive trade equity."(See "Trade-ins and Outs.")
If you have "negative trade equity," then you owe more on your loan than you will receive in credit for the trade-in. In this case, the amount you still owe, minus the amount the dealer is giving you for your trade-in, will be added to the capitalized cost and will increase your monthly payment. The dealer will then pay off the balance on the loan for the car you trade in.
Trade-ins and Outs
The value of your trade-in vehicle should be shown on your lease separately from the price (capitalized cost) of the car you are leasing. If the dealer is giving you more for the trade-in than you still owe on the loan, then you have "positive trade equity." In such a case, the positive trade equity should be applied in one of the following ways:
- Subtracted from the capitalized cost, and shown as such on the lease; or
- Subtracted from the up-front payments you're making to lease the new car; or
- Given to you in cash; or
- Some combination of these.
When you trade in a car, double check that the contract shows the correct price (capitalized cost) of the car you're leasing. If it's higher than you expected, don't hesitate to point this out to your dealer and get the price you had negotiated.
Examples of Negative and Positive Trade Equity
Owe Money on a Loan?
Do you owe money on a loan for your trade-in vehicle? If so, you may have "negative trade equity." You have negative equity if you owe more on your loan than the dealer is giving you in credit for your trade-in.
$13,000.00 balance owed on loan before trade-in
- 10,000.00 trade-in credit from dealer
$3,000.00 total "negative trade equity"
By trading in your old vehicle, you won't receive a discount on your leased car, but you will reduce the amount you owe on your loan. In this example, the $3,000 in negative equity will be added to the capitalized cost of the car you lease. The dealer will then pay off the outstanding loan on the trade-in.
If you have no payments left to make, or still have a few payments to make on your car but the dealer will pay you more to buy your used vehicle than you owe, you have "positive trade equity." The dealer should subtract that positive trade equity from the price (capitalized cost) of the vehicle you're leasing.
$10,000.00 trade-in credit from dealer
- 7,000.00 balance owed on loan before trade-in
$3,000.00 total credit toward your leased car, or "positive trade equity"
With the trade-in, you can pay off your loan and also get a discount toward your lease. Be sure the positive trade equity is shown on your lease contract and is applied to reduce the capitalized cost.
Consider selling your vehicle yourself rather than trading it in. That way you know exactly what you're getting for it and you may get more than a dealer will give you.
Get the Credit You Deserve
See that the amount of your positive trade equity is subtracted from the current price (capitalized cost) of your new leased car. If the trade equity isn't subtracted from the capitalized cost, you may not be receiving the credit you are entitled to!
Who's Who in Leasing?
Who are the players in the leasing game? While your dealer makes all the arrangements to lease you a car, the dealer is a liaison between you and the leasing company that owns the car. You make your payments to the leasing company, not to the dealer.
The front end. Remember that the cost of a lease includes more than just the monthly payments. For starters, it includes the up-front payments. One of these, the security deposit, is usually refunded at the end of the lease (unless there is damage to the vehicle). Others, like a downpayment, aren't refunded.
Before you get too excited about monthly payments of $200 on a 24-month lease, for example, check to see whether you will have to make a significant downpayment. If the downpayment is $2,400, that's the equivalent of paying another $100 each month you'll be driving the car.
The back end. Fees tacked on when you turn in the vehicle at the end of the lease can add a big chunk of money to your leasing bill. Know your driving habits before you lease, so you'll be able to predict these back-end fees.
Charges that generally add the most to the cost of leasing are extra mileage and excess wear and tear, but there are a few others to watch for, too, such as a termination fee for ending the lease early.
- Extra mileage: You can usually drive a fixed number of miles annually (often 12,000 or 15,000) without incurring extra charges. Any more than that may cost you between 8 and 15 cents per mile. If you're not careful about this item, you can owe a lot at the end of the lease: an extra 2,000 miles a year on a 3-year lease could cost you $900. You can sometimes get this charge reduced by paying for extra mileage up front, but you won't get a refund if you don't drive the added miles.
- Excess wear and tear: Damage you do to the car beyond what's expected by the leasing company can dent your pocketbook. Many people who lease are frustrated when they get hit with a large bill for "wear and tear" at the end of the lease, especially if they feel the car is in good condition. Read the lease and understand what it says about excess wear and tear. Ask the dealer for a clear and thorough explanation of the standards that will be used to measure "excess" wear and tear, and write those standards into your lease.
- Early Termination Fee: Watch out for the termination fee, or penalty, if you decide you want to stop leasing the vehicle before the lease term is up. This penalty can be substantial several thousand dollars in some cases.
Another potential surprise is that under many leases the early termination penalty can be triggered if you "total" your car in an accident. Because the car is no longer drivable, your lease is automatically "terminated," and you're obligated to pay off the lease. While your car insurance should cover the cost of damages, it won't cover the cost of paying off the lease. You'll need "gap insurance" for that. You can purchase gap insurance when you lease your vehicle.
Finally, be sure you understand the details of the lease. Insist that the dealer walk you through it slowly. Don't be fast-talked into a deal you don't fully comprehend. Dealers currently aren't required to tell you all the elements they use to arrive at the monthly fee, but a customer-friendly dealer will.
If you feel pressured to sign a contract or are unsure of what you're signing, walk away. A good deal should still be available if you decide to return to the dealership to buy or lease a car. So take your time. Remember, there's no three-day cooling-off period! Once you sign the lease, you must abide by its terms.
Leasing vs. Buying When Ownership is the Goal
It's not always easy to figure out if you'd be better off leasing or buying from the start if you ultimately want to own the car. Even so, it's a good idea to try to determine which makes the best financial sense for you.
To figure out what you'd pay for a car at the end of the lease, ask for the "purchase option price," or the amount you'd pay to buy your leased car at the end of the lease. Then, add in monthly interest for financing the purchase after the lease is up. While the purchase option price may be negotiable, it's what dealers plan to charge based on the estimated value of the car at the end of the lease.
Now compare leasing to financing. First, how much of a downpayment could you make to lower your monthly payments if you buy the car? When you decide the size of the loan you'd need to buy the car, check loan interest rates offered by your banks or credit union, as well as those offered by your dealer, to make sure you're comparing leasing with the best financing deal you can get.
Buying the Car at the End of the Lease
When the lease period is over, you can usually opt to buy the car. To decide if buying makes good financial sense, revisit the purchase option price discussed above. How does it compare with the price for a similar used car?
Sometimes the purchase option price is actually less than you'd pay to buy a similar car from a used-car dealer. If that's the case, consider yourself lucky.
Trucks, for example, were unexpectedly popular in the early '90s, and many people leasing them were able to buy them at the end of their leases for a much lower price than the same truck bought from a used-car dealer.
If your car holds its value better than was anticipated when you signed the lease, it's obviously smart to buy the leased vehicle for the purchase option price. If you don't really want to own the vehicle, but don't mind a little work, you can sell it immediately and pocket a profit.
On the other hand, if the purchase option price is higher than the market value of the car, buying it is not a sound financial option. If you want to buy the car anyway, you may be able to negotiate with your dealer to lower the price. But if the dealer won't match the market price, walk away.
How to Get a Good Deal
You can get a good leasing deal by taking a few simple steps:
- Choose a make and model that traditionally holds its value. Lease payments will generally be lower on a car that sells well after the lease is up.
- Shop around. Visit several dealers and compare their offers. If you don't compare leases you'll never know if you're getting the best deal possible. Also, look beyond the monthly payment at all the other fees and terms to be sure you're comparing "apples" to "apples."
- Negotiate the price of the car as if you were buying it. (Refer to the tips in Chapter 5.) It's important to note that if, during negotiations, you switch from buying a car to leasing the car, the dealer should still base your lease payments on the same price you negotiated for the purchase. However, in some cases, when you switch from buying to leasing, the dealer may figure your lease payment on the full "sticker price" not the lower price originally offered when you were going to buy the car. Therefore, make sure the price (capitalized cost) you negotiated is shown on the lease, and is the same as the price you negotiated if you first discussed buying the car.
- If you trade in a vehicle and were promised a trade-in credit to reduce the cost of your leased vehicle, double-check that the trade-in credit is subtracted from the price (capitalized cost) of the car. (See "Trade-ins and Outs" in this chapter.) The trade-in credit, as well as any factory rebates or discounts you were offered, should be subtracted from the price of the car you are leasing.
- Be wary of the extras. Does the lease include a charge of hundreds of dollars for rustproofing on a brand-new car you only plan to drive for two or three years? How about an expensive extended warranty? Remember you don't own the car, and you already have the benefit of the factory warranty that comes with the car. Don't pay for extras that won't benefit you.
- Two- and three-year leases are standard in the industry. If you sign a longer lease, remember that you still have to buy the car at the end of the lease if you want to own it. Furthermore, the warranty runs out after a few years and so does that "new-car feeling."
Turning Over Your Engine
Many people who lease like the fact that the length of a lease is usually short, allowing them to frequently turn in one car for another. But if you lease, plan to keep the car for the entire length of the lease or you'll most likely pay a substantial penalty for breaking the lease.
Because the formulas for calculating these penalties are complex, ask your dealer to give you a detailed example using real numbers. Ask specific questions, such as: "What will the penalty be if I end the lease next January?"
Leasing terminology is confusing and intimidating. To add to the confusion, not everyone uses the same terminology. Take the following glossary with you when you shop for a lease so you have the meanings of all the terms right at your fingertips.
- Acquisition fee, or assignment fee: An additional fee charged by the leasing company. This fee usually ranges from $350 to $650 and is often included in the monthly payment. Sometimes, however, you are required to pay the fee up front.
- Adjusted capitalized cost, or net capitalized cost: The "capitalized cost" (car's price), minus any deductions to reduce the price of the car. Common deductions are the downpayment, trade-in credit and manufacturer's rebate. The adjusted capitalized cost is used to calculate your monthly payment. It is similar to the "amount financed" in a purchase transaction.
- Capitalized cost: Equivalent to the price of the car, including any add-ons, extra warranties, insurance, rustproofing, or other options that you've agreed to pay for.
- Capitalized cost reduction: Anything that reduces the capitalized cost before the monthly payment is calculated. It usually includes your cash downpayment, trade-in credit and manufacturer's rebate.
- Depreciation: The value that a car is projected to lose over the period of time you drive it. It's the difference between the adjusted capitalized cost and the residual value.
- Disposition fee: A charge by the leasing company to take the car back and fix it up for sale after the lease is up. Not all leasing companies charge this.
- Downpayment: An amount you pay up front to lower your monthly payment. It should be subtracted from the car's capitalized cost, or price, before the monthly payment is calculated. It lowers the monthly payment.
- Early termination fee: A penalty payment that may be added to the amount you owe if you terminate your lease early. This could amount to several thousand dollars.
- Excess mileage: Most leases allow for a maximum number of miles per year. Any miles driven over the limit are usually billed at between 8 and 15 cents a mile.
- Excess wear and tear: Damage done to the car beyond the expected wear and tear from driving. Excess wear and tear is usually determined by the leasing company.
- Gap insurance: If your leased car is stolen or totaled, your insurance will pay for the damage or loss. It won't help you make payments still owed to the leasing company. Gap insurance makes up the shortfall, or gap, between the value of your car and the amount you still owe on your lease, including a possible penalty for early termination of the lease.
- Gross capitalized cost: This is the capitalized cost for the leased car, plus the amount of any "negative trade equity" that is added to the capitalized cost.
- MSRP: Manufacturer's Suggested Retail Price, or "sticker price."
- Money factor: A number that dealers use to arrive at the interest charge for your monthly payment. Unfortunately, the number looks nothing like an interest percentage. It will be something like ".00375." For many leases, the general rule is that 2,400 multiplied by the money factor is the interest rate. Working this equation out, we see that a money factor of .00375 gives us about a 9 percent interest rate. However, not all lease companies use the same conversion factor to convert the money factor to an interest rate.
- Monthly payment: The monthly lease payments made over the term of the lease. Generally, it includes your depreciation, interest and taxes.
- Net trade-in allowance: This is the amount of credit the dealer is giving you for your trade-in, after taking into consideration the loan balance on your trade-in. Depending upon the amount of your loan, you will have either "positive trade equity" or "negative trade equity." (See "Examples of Negative and Positive Trade Equity" earlier in this chapter.)
- Purchase option price: What you'll pay for the car if you buy it at the end of the lease. The purchase option price is often tied to the residual value. If it is, then the higher the residual value, the more you'll pay to buy the car, should you decide to do so, at the end of the lease period.
- Rent charge: In a lease, this is basically the total amount of interest you are paying. It is also known as the "lease charge."
- Residual value: How much leasing companies have estimated that the car will be worth after your lease is up. The residual value affects the amount of your monthly payment. Dealers have books with charts estimating the residual value, which is usually shown as a percentage of the sticker price (MSRP), and determined when the car is new. The higher the residual value, the less you will pay each month to lease your car. (See also depreciation.)
- Security deposit: Usually the same amount as one month's payment paid up front. You'll get it back if the car is in good condition at the end of the lease.
What is $0 Down?
"Zero down" means that the only up-front fees you will have to pay are the tax and license fees. Thus, if a dealer offers a "zero down" lease, you should not have to pay any fees up front, such as a security deposit or downpayment.
What the Dealer Must Tell You
New federal regulations which take effect in October 1997 require dealers to disclose more information to consumers about the terms and costs of their lease. Fortunately, many dealers already provide most of this information. The information that must be disclosed beginning in October 1997 includes: (see the definitions above if you have questions about these terms)
- The amount of any up-front payments (downpayment, security deposit and first month's payment).
- The number, amount and due dates of your monthly payments.
- The total amount of your monthly payments over the course of the entire lease.
- The cost of the license, registration and taxes.
- The gross capitalized cost (see definition) for the leased car.
- The net trade-in allowance you are receiving for the car you trade in.
- Any capitalized cost reduction.
- The adjusted capitalized cost.
- Rebates and non-cash credits.
- The residual value.
- A description of the insurance provided or required under the lease.
- The warranty terms.
- Who is required to take care of the car and pay for maintenance.
- The standards for determining wear and tear (if the leasing company sets such standards).
- Penalties for default or late payments.
- Whether or not you can buy the car at the end of the lease, and at what price (purchase option price).
One lease term that dealers are not required to disclose is the money factor. However, if you decide that you want to do your own lease calculations or check the dealer's calculations, you will need to know the money factor applied by the dealer. If you want the information and the dealer will not give it to you, consider taking your business elsewhere.
Before you sign your lease, you should review it and ask yourself the following questions:
- Was I credited for my trade-in vehicle?
- Was I credited for other discounts from the car's price, such as any manufacturer's rebate and my downpayment?
- What are my mileage limitations?
- What is the penalty if I default on the lease or decide to end it early?
- Do I understand what "excess" wear and tear will mean when I turn the car in?
Raise Your Leasing I.Q.
The Nitty Gritty of Lease Calculations
Before you sign the contract, go over it with a fine-toothed comb or better yet a calculator. Checking the numbers is a little complicated but well worth the trouble. Everyone makes mistakes sometimes, and you'll pay, literally, for any wrong calculations used to figure your lease.
See the "Leasing Glossary" in this chapter for help in understanding the terms used in the following section. In this section, first you'll learn how to calculate a monthly payment, then you can fill in your own calculations. You'll also want to review the lease to make sure you understand the up-front and back-end fees, as well as any other terms that you agree to when you sign the lease.
Check Your Monthly Fee
The following formula will allow you to calculate your monthly payment within a few dollars of the actual payment. All you need is a pen, paper and probably a standard calculator, unless you like to do your math by hand.
Warning: These calculations will work for most leases. However, some lease companies
may use a different type of money factor and a different formula for calculating the
Figure Your Lease Payment
Example: Your Lease Payment:
(fill in your numbers)
Determine the following numbers:
MSRP (sticker price) $22,000
Capitalized cost $20,000
Net trade-in allowance $2,000
Adjusted capitalized cost $18,000
Residual value $11,800
Term of lease 36 months
Money factor .00335
In this example, the sticker price (MSRP) was $22,000, but the customer was able to negotiate a lower leasing price ("capitalized cost") of $20,000. In addition, the trade-in credit reduced the capitalized cost by another $2,000 to $18,000. (Make sure that your trade-in credit and any other discounts are included in the calculations arriving at the adjusted capitalized cost.)
The monthly lease payment is made up of three parts: the depreciation charge; the monthly interest, or lease charge; and the monthly tax. It is calculated as follows:
Monthly depreciation + interest charge + tax = Monthly payment
(If you want to know approximately what the interest rate on your lease is, in most cases you can multiply the "money factor" by 2400. This conversion works for most money factors, although some lease companies may use a different conversion factor.)
The total depreciation charge is calculated by subtracting the dollar amount of the residual value from the adjusted capitalized cost and then dividing by the number of months in the lease. This is a measure of how much the car's value is going down each month.
(Adjusted cap cost - residual value)/months in lease = Monthly depreciation
($18,000 - $11,800)/36 = $172.22
Monthly Interest Charge
This is what the leasing company charges you for using its money. It is sometimes referred to as the "rent charge" or "lease charge." The monthly interest charge is calculated by first adding the adjusted capitalized cost and the residual value. Then multiply the
result by the money factor.
(Adjusted capitalized cost + residual value) x money factor = Monthly interest charge
($18,000 + $11,800) x .00335 = $99.83
Add the monthly depreciation and the monthly interest charge. Then multiply the total by the excise tax. (We use 6.5% below, as is standard in Minnesota. The tax varies from city to city in Minnesota, however).
(Monthly depreciation + monthly interest) x tax rate = Monthly tax
($172.22 + $93.83) x .065 = $17.29
Total Monthly Lease Payment
The total monthly lease payment equals the monthly depreciation plus the monthly interest charge plus the monthly tax.
Monthly depreciation + monthly interest charge + monthly tax = Total monthly lease payment
$172.22 + $93.83 + $17.29 = $283.34
There you have it: your monthly payment. The calculation should be within a few dollars of the amount the dealer quoted. If it's not, insist that the dealer go over all the costs in the monthly payment. Are there any hidden costs? If the dealer can't explain all the costs to your satisfaction, walk away.
Note: Another way to calculate your monthly payment is to follow the steps on a business calculator with a lease program. If you do this, you will probably need to convert the money factor to an interest rate before you do the calculations. As a reminder, the usual rule of thumb to obtain the interest rate is to multiply the money factor by 2400.
Following is a model leasing form prepared by the Federal Reserve Board. Dealers may use a form very similar to this.
Model Closed-End or Net Vehicle Lease Disclosure
Federal Consumer Leasing Act Disclosures
Amount due at
Your first monthly payment of $ ______ is due on ______, followed by ______ payment on
the ______ of each month. The total of your monthly payments is $ ______.
Other Charges (not part of your monthly payment)
Disposition fee $ ______
(if you do not
purchase the vehicle)
Annual tax ______
Total $ ______
Total of Payments
(The amount you will have paid by the end of the lease)
Itemization of Amount Due at Lease Signing
Amount Due at Lease Signing: How the Amount Due at Lease Signing will be paid:
Capitalized cost reduction $ ______ Net trade-in allowance $ ______
First monthly payment ______ Rebates and noncash credits ______
Refundable security deposit ______ Amount to be paid in cash ______
Title fees ______
Registration fees ______
Total $ ______ Total $ ______
Your monthly payment is determined as shown below
Gross capitalized cost. The agreed upon value of the vehicle is ($ ________ ) and any items you pay for over the lease term (such as taxes, fees, service contracts, insurance, and any outstanding prior loan or lease balance) $ ________
If you want an itemization of this amount, please check this box.
Capitalized cost reduction. The amount of any rebate, cash payment, net trade-in allowance,
or noncash credit you pay that reduces the gross capitalized cost - ________
Adjusted capitalized cost. The amount used in calculating your base monthly payment = ________
Residual value. The value of the vehicle at the end of the lease, used to calculate your base monthly payment = ________
Depreciation and any amortized amounts. The amount charged for the vehicle's decline in value
through normal use and for other items paid over the lease term = ________
Rent charge. The amount charged in addition to the depreciation and any amortized amounts + ________
Total of base monthly payments. The depreciation and any amortized amounts plus the rent charge = ________
Lease term. The number of months in your lease ÷ ________
Base monthly payment. = ________
Monthly sales/use tax. + ________
________________ + ________
Total monthly payment. = $________
Early Termination. You may have to pay a substantial charge if you end this
lease early. The charge may be up to several thousand dollars. The actual charge
will depend on when the lease is terminated. The earlier you end the lease, the greater
this charge is likely to be.
Excessive Wear and Use. You may be charged for excessive wear based on our standards for normal use (and for mileage in excess of ________ miles per year at the rate of ________ per mile).
Purchase Option at End of Lease Term. (You have an option to purchase the vehicle at the end of the lease term for $ ________ <with a purchase option fee of $ ________>.) (You do not have an option to purchase the vehicle at the end of the lease term.)
Other Important Terms. See your lease documents for additional information on early termination, purchase options and maintenance responsibilities, warranties, late and default charges, insurance and any security interests, if applicable.
(The following provisions are the nonsegregated disclosures required under Regulation M.)
Official Fees and Taxes. The total amount you will pay for official and license fees, registration, title, and taxes over the term of your lease, whether included with your monthly payments or assessed otherwise: $ ________.
Insurance. The following types and amounts of insurance will be acquired in connection with this lease:
________ We (lessor) will provide the insurance coverage quoted above for a total premium cost of $ ________.
________ You (lessee) agree to provide insurance coverage in the amount and types indicated above.
Standards for Wear and Use. The following standards are applicable for determining unreasonable or excess wear and use of the leased vehicle:
(You are responsible for the following maintenance and servicing of the leased vehicle:
(We are responsible for the following maintenance and servicing of the leased vehicle:
Warranties. The leased vehicle is subject to the following express warranties:
Early Termination and Default. (a) You may terminated this lease before the end of the lease term under the following conditions:
The charge for such early termination is:
(b) We may terminate this lease before the end of the lease term under the following conditions:
Upon such termination we shall be entitled to the following charge(s) for:
(c) The extent these charges take into account the value of the vehicle at the end of the lease term, if you disagree with the value we assign to the vehicle, you may obtain, at your own expense, from an independent third party agreeable to both of us, a professional appraisal of the ________ value of the leased vehicle which could be realized at sale. The appraised value shall then be used as the actual value.
Security Interest. We reserve a security interest of the following type in the property listed below to secure performance of your obligations under this lease:
Late payments. The charge for late payments is: ______________________________________
Option to Purchase Leased Property Prior to the End of the Lease. (You have an
option to purchase the leased vehicle prior to the end of the term. The price will be ($
________ / <the method of determining the price>.) (You do not have an option to
purchase the leased vehicle.)
pter 8: Words About Warranties
To warrant means to give proof, so when you get a warranty on a car, it's to give proof that certain mechanical and body parts are sound or will be repaired if they're not. Of course there are time limits on this.
But a warranty allows you to be comfortable knowing that you won't be stuck with major repair bills soon after you buy a car. It's a nice safety feature, especially if you're buying a used car and don't have a mechanical bone in your body. If that's the case, have a good technician check the car over. Even then, get a warranty if you can.
A car typically comes with a limited warranty, which offers less than full coverage. Read it carefully to find out what the limits and deductible costs are.
Next Page: Chapter 8: Words about Warranties