The dealership is not the only place to finance a car. Go to your local bank, credit union or finance company to see if they will lend you money before you talk to the dealership. You can negotiate with the quote you get from the bank and may be able to get a better deal. The Consumer Financial Protection Bureau has a Auto Loan Toolkit to help you compare auto loans.
Watch this video from the Federal Trade Commission.
You know it will be expensive, but you have decided to buy a car. You have planned out what you are going to say to the salesman and think you know what questions you want to ask to make sure you get the best deal. You even know what price you want to pay and what the going interest rates are. But when you walk into the dealership the salesman tells you about how you can lower your monthly payments by leasing and also that you will not have to worry about selling or trading-in the leased car in the future. What should you do?
Is leasing really a better deal and less hassle? Often it is not. Negotiating a lease is more complicated than buying a car because often the terms and price calculations are confusing or not fully disclosed. It is very easy to be fooled into signing up for a bad lease, and very difficult to know whether you are getting a good deal. Even if your monthly payments are less, it may be a worse deal than buying the car on credit, and you may never figure this out. Bear in mind that after making all the payments, you will still not own the car at the end of the lease unless you then chose to buy it and the lease lets you buy it. If you terminate the lease early for any reason, your liability may also be astronomical. Below are a few key points to remember before investing money in a car you may never own:
* Whether you lease or buy, you still have to pay for the car's selling price one way or another. When you buy, the dealer tells you the car's price. But when you lease, the dealer often hides from you how much you are paying for the car, and this price may even be higher than the car's sticker price. It may be hard, but try to find out upon what car price the lease payments are based. You will have to find out the net amount the dealer is giving you for your trade-in (after paying off any outstanding car loan), calculate in the amount of your down payment, adjust for any state taxes. After all the adjustments are made, are you paying more for the car by leasing or buying?
* Ask the dealer what your early termination obligation will be if you terminate in three months. If he cannot tell you because he does not know what the car will be sold for at early termination, ask for the amount before the sale price is credited. If he still will not tell you, walk away. The number (before the sale price is credited) will often be more than the car's sticker price, and the sale price at a wholesale auction may be only a fraction of the car's value. Anticipate huge losses if you terminate early because you want a different car, you get in an accident, your family or financial circumstances change or for any other reason.
* If you feel confused and pressured to lease or buy, walk away. If the dealership has taken your car to value it for a trade-in but you want to leave, demand your car be returned to you. Do not let salesmen trap you m the store, wearing you down into signing a contract to either lease or buy. Just call the police!
* If you trade-in your car for the lease, make sure the money for the trade-in is clearly written into the lease and have the dealer show you how that money is calculated into the lease. The computation of how much you pay can be very complicated, and the rebate you thought you were getting for your old car can be easily left out. It may be safer to sell the car yourself than to risk losing your rebate.
* If you want to have the option to purchase the car after the end of the lease term, have the lessor show you the purchase option price. Federal law requires disclosure of the actual dollar amount. Add this money in when comparing a lease and a purchase on credit.
* Lessors will not tell you the interest rate you are paying on the lease, even though the lease payments are computed based on an interest rate. Insist on being told this number. For a lease to match up with a sale, the amount the lease uses for the car's initial value must be no higher than the amount you would buy the car for plus the implicit interest rate must be no higher either.
Is leasing a better option than buying for you?
The advantages of leasing are frequently outweighed by its disadvantages. If you lease, you will put less money up-front, may have lower monthly payments, and will not have to later trade-in or sell the car. Weighed against these pluses are the following. Unless you buy the car at the end of the lease, you will never have any equity in a car and may fall into the pattern of interminable monthly leasing payments without ever owning any vehicle. You may be paying taxes on the car twice -- once if the lessor must pay a sales tax to buy the car for you and once if part of your monthly payments go to pay taxes. Your liability if you end the lease early is usually greater than if you turn the car into a creditor. You also may not know how much you are really paying for the car or what the real interest rate you are being charged. Leasing also usually adds in more extra charges -- many of them hidden from view.
Do not be swayed by promises of easy credit or no credit checks. These tend to be hype and it is no easier to get a car lease than to buy a car on credit. If you are a bad risk, the lease may hide in all kinds of extra costs that make it really a bad deal.
Some consumers are especially poorly suited to leasing. If you tend to be hard on cars or put a great amount of mileage on them, you should reconsider before leasing. At the end of the lease you will probably have to return the car in perfect condition or pay to restore it. Also, leases typically have a set number of miles you can drive before being charged for excess mileage. Both the reconditioning and the excess mileage can add up to a substantial amount of money. If you expect to put a lot of mileage on the car, you may be able to negotiate a better deal by getting the dealer to raise the set number of miles allowed or lower the penalty for the extra miles.
You may also want to consider leasing a used car. Depending on your state, licensing, registration and insurance premiums may be lower for a used car than for a new one. Pre-paid or one-payment leases may also be less expensive than a lease with periodic payments.
Usually leases allow 15,000 miles per year before penalizing for excess mileage. Michelle Krebs, Your Complete Guide to Auto Leasing, 33 Consumers Digest 18, 20 (May/June 1994).
A few guidelines for negotiating a lease
Look at a car's full sticker price and bargain it down before discussing monthly payments. But then you have to make sure that your lease is in fact based on this number. This is hard to guarantee and one of the reasons why many people should avoid leasing if they do not get a straight answer. Get in writing that the total initial lease value is a certain amount. It is important to keep this amount as low as possible, and certainly the same price as you thought you were paying for the car. The lower the price of the car, the lower will be your monthly payments. Remember that any manufacturer's rebates which would apply to buying the car will also apply to the initial cost of leasing it.
Find out the leases's internal financing rate. You want the financing rate to be as low as possible, and certainly comparable to what you would pay if you bought the car on credit.
The Federal Consumer Leasing Act
The Consumer Leasing Act is part of the law known as the Truth-in-Lending Act.The Federal Reserve Board Regulation M on Consumer Leasing and its official commentary further explain the Consumer Leasing Act.
These laws are designed to protect the consumer who leases for more than four months, for less than $25,000, and not for business or commercial purposes. Regulation M requires that certain lease terms and charges be written clearly in the lease and disclosed to you. Nevertheless, Regulation M does not require disclosure of all information that you will need to make a good leasing decision.
If the lessor has violated the Consumer Leasing Act, the lessor owes you $1000 plus any damage you suffered because of the violation plus all of your attorney's fees.
References for consumers
"Or Should You Lease Instead?" 59 Consumer Reports 259 (1994 Annual Auto Issue) (April 1994).
Ed Henry, "The Pros and Cons of Leasing." Kiplinger's Cars ‘95 57-60
Jane Bryant Quinn, "Save Money. Lease Your Wheels" 122 Newsweek 49 (November 1993).
Jane Bryant Quinn, "Should You Lease Your Next Car?" 57 Woman's Day 18 (July 19, 1994).
Michelle Krebs, "Your Complete Guide to Auto Leasing" 33 Consumers Digest 18, 18-23 (May/June 1994).
Facts for Consumers: "Truth in Leasing" (November 1994) and "A Consumer Guide to' Vehicle Leasing" (February 1992), Federal Trade Commission Office of Consumer! Business Education, Washington, D.C. 20580.
Senior Consumer Alert: "Deals on Wheels" (Winter 1992/3) AARP Fulfillment, 601 E Street, N.W., Washington, DC 20049.
Mike Burke, A Consumers' Guide To Automobile Leasing (1989).
Richard L. Kaye, Lease Your Car For Less: The Consumer's Guide to Vehicle Leasing (1989).
Gregory Stewart, The Smart Guide To Auto Leasing (1990).
References for lawyers
National Consumer Law Center, Truth in Lending, Chap. 9 "Truth in Leasing" (2d ed. 1989 and
National Consumer Law Center, Unfair and Deceptive Trade Practices, Chap. 5.4 (3d ed. 1991 and
Copies of the Consumer Leasing Act, Regulation M and the Official Commentary to Regulation M
can be found in Truth in Lending Appendix P, and can also be ordered free from Publication
Services, Board of Governors of the Federal System, Washington, D.C. 20551.