THURSDAY, FEBRUARY 15, 2018
JIM: To lease or to buy; that’s a question that we’re asked all the time from our clients when considering the purchase of a new vehicle. Joining us today is Jessica Anderson, associate editor of Kiplinger’s Personal Finance where she heads up Kiplinger’s annual automotive rankings to discuss with us it is better to buy or to lease a car. Welcome Jessica.
JESSICA ANDERSON: Hey, how’s it going?
JIM: It’s going fantastic and I’m really looking forward to today’s conversation because it hasn’t been since this week that I’ve had a client ask me should I be buying or should I be leasing and I know the dynamics of leasing versus buying keep changing. I know there are differences whether you’re a business owner or personally but I think for most of our listeners they’re not buying or leasing for a business, a lot of them are just doing it personally and I know you just did an article about what’s better, so what’s your opinion? Is it better to buy or lease today?
JESSICA ANDERSON: Well which is better is going to depend largely on you. What kind of driver are you? What’s your financial philosophy? For example, do you like to have a new car every few years, if so leasing really makes sense because it keeps you just paying the depreciation on what you use so the payments will be lower than if you purchase the car and financed it for the same term for finances. Are you more of a buy and hold kind of person? Buying instead of leasing means you’ll benefit financially by having no car payment once you’ve paid off the loan. If you’re going to hold the car for 5, 6, 7, 10 years or just do like I do and run it into the ground then you’re going to have a lot of payment free years after you’re done paying off your loan. Kind of back on the leasing side; do you hate having unexpected car expenses that just drive you up the wall? Leasing terms are such that they’re typically about three years so you’ll always be covered by the vehicle’s warranty and some companies may even include routine maintenance costs.
TONY: What about the issue Jim kind of mentioned at the outside of the show of buyer being a business owner versus just a personal to use. It seems like at least in our practice we have a lot more retired people asking the question, who aren’t working, they obviously can’t deduct the cost of the lease like let’s say a business owner can. The personal retiree who arguably, at least this generation used to paying for things in cash and owning it and not paying over time, do you have any council in that area as far as whether you’re a business owner or a person, whether it leans one direction or another?
JESSICA ANDERSON: Certainly if you’re a business owner you can deduct your payments as a business expense. There are tax breaks for regular owners as well because the majority of states you’re just going to pay taxes on the total amount of your payment for the life of your lease rather than when you buy you’ll pay taxes on the entire purchase price of the vehicle. There are several states, maybe eight to 10 where you do have to pay tax on the entire price of the vehicle even if you lease though.
TONY: So that’s regarding the sales tax side of it?
JESSICA ANDERSON: Uh-huh.
TONY: Okay. Does it also make a difference if let’s say in the past a lot of people would lean toward leasing because of that concept; well I don’t have to make a big down payment. I can get into a lease many times and you see many different marketing promotions, just a single payment to get started or even in some cases incentives are deferring that for a month or two, but on the flip side I’m seeing a lot of marketing where lease payments are being kind of dialed down on a monthly basis and then the fine print kind of mentions that there might be $3000, $4000 or $5000 due at lease inception which almost now becomes a down payment. Obviously the math matters depending on what your objective is.
JESSICA ANDERSON: It absolutely does because as credit has become more available as more manufacturers, especially mainstream manufacturers get into the leasing game you’re seeing a ton of these subsidized leases out there and yes, the leases that are advertised on TV sound very attractive but you do have to read that fine print because those capitalized cost reductions are essentially your down payment. That’s just exactly what it is. It takes the capitalized costs. Leasing is essentially the price of the car so that capitalized cost reduction is just; okay, we’ll give you a break on the “price” and that’ll bring your monthly payments down but you’re really paying that anyway.
JIM: One thing I was thinking about knowing that you were coming on this morning, when someone buys a car you’re paying the sales tax on the whole purchase price where a lease you’re paying the sales tax on the monthly payments. One disadvantage of buying I’ve heard people complaining about this is yeah, now if I want to avoid the sales tax I have to trade in otherwise I don’t really get credit for what I’ve already paid if I want to sell outright. That sometimes limits the choices and there’s maybe a little bit of inefficiency when you’re buying as to what you’re ending up paying for sales tax. Do you find that to be true?
JESSICA ANDERSON: Generally yes. I think that as far as the sales tax goes there definitely is going to be an advantage to trading in rather than selling outright; however, as I was mentioning before with the availability of credit you’re finding reduced loan amounts because you are generally getting a better loan rate these days so that may be kind of balancing some of your sales tax out essentially.
TONY: What about the consideration of mileage. I know that of course a lease you’re typically negotiating into the lease the number of miles that you’re going to use and it might be hard to predict over the course of a three year term how many miles. You know the consumer today doesn’t want to leave an ounce on the table. If you turn in the car you hate to think, gosh I had 5000 miles left; it’s almost like wasting money. You do have to be able to kind of predict your usage and in some cases if you’re going to go over be very aware of what that extra mile is going to cost you in the lease. You certainly don’t want to have to park it in the garage waiting for the lease to expire because you drove too many miles. That’s got to be a pretty important component to your analysis, right?
JESSICA ANDERSON: It is and sometimes you know if you drive a lot of miles you might just have written off the idea of leasing because you’re like; our loss, they only come with 10,000 or 12,000 miles a year and otherwise I’m going to pay these huge fees on the back end, but you can negotiate more mileage into your lease up front and pay kind of for that up front so that you’re not; and it may save you 5 cents or 10 cents per mile on the back end because of those fees but I think that people should consider just generally how much they drive. Take a month or two and just track it and then project outward from that and regardless of getting back to your point if you don’t want to be leaving something on the table the standard lease is going to come with 10,000 or 12,000 miles. You’re not going to be able to negotiate downward from that. Most people probably need all of those and then some, but you can definitely save yourself some money up front by including that in your negotiations if you think you’re likely to go over.
JIM: One thing I want to ask you; I think the notes that you sent us said that leasing had gone from 20% of the new vehicles to now 30% and I know from personal experience Tony and I for business vehicles we had leased in the past and it was so compelling because the deals were so good and then the next time we went in the deals weren’t so good and we ended up purchasing. One thing to take from today’s conversation is you should always do the math; don’t get into the rut where once a lease or always a lease or once a purchaser always a purchaser. What do you see right now where we’ve seen this upswing in leases? What kind of deals are out there and why is it more popular now than it was just a few years ago?
JESSICA ANDERSON: For car makers offering incentives on leasing like subsidizing the monthly payment it really works in their favor to bring used cars back into the market quicker. In the past several years we’ve had a dearth of used cars because of the really poor sales of 2008, 2009 so they weren’t bringing in trade-ins in those years, they weren’t selling as many new cars so we had fewer 3 and 4-year-old cars in the last couple of years so they’re really looking to pull those used cars back in for certified programs and just in general keep consumers returning to the showroom. As the credit spicket has widened you’ve gotten more mainstream manufacturers starting to offer lease deals and just more attractive terms overall because it costs them less to loan you that care for three years. On the consumer side leasing’s popularity has a lot to do with the economy. People are stretched further and further each month and leasing really gives you an easy way to get more for your money, plus I think people are kind of shifting their mindsets a little bit. We’re more comfortable with the pay as you go side. We expect no-contract cellphones and single song sales from I-Tunes. You’ve got locked into an entire album there; people are used to pay just for what they use and there’s no reason that that shouldn’t apply to your car as well.
TONY: That’s a great point. It really is kind of a mindset to shift. As the younger generations start to enter the marketplace they clearly are looking at things differently today and responding to how marketing is happening, so that’s a great point.
Hey let’s take a short break and when we come back let’s get some advice from you on the negotiating process. Arm some of our listeners on how best to negotiate when they’re in the dealership. Please stay tuned.
TONY: Welcome back as we continue a conversation today with Jessica Anderson who is an associate editor at Kiplinger’s Personal Finance. We were really addressing that age old question of is leasing a car better than buying. Of course we know before the break we talked about it depends on many circumstances but let’s say now you’re in the dealership Jessica; arm some of our listeners on some helpful hints and tips on the negotiating process.
JESSICA ANDERSON: You bet. Negotiating is important regardless of whether you choose to buy or lease. I think a lot of people look at those lease payments, they see advertisements on TV or online and say okay, the payment is $250 a month, sounds good. What you don’t realize is that you could be leaving money on the table just by taking the deal that they’re offering. Number one rule for any car scenario is don’t pay full price. No matter how you’ll be paying the first step is to negotiate the price of the car. As we talked about before in lease terms the price is called the capitalized cost. Regardless of buying or leasing do your research on what the car really should cost. Look at what others in your area are paying and use sites like truecar.com and Kelleysbluebookadd.com to help you really figure out what’s a fair price. Then once you’re in the negotiation process you want to really stick to talking about that overall cost. A lot of sales people will try and get you to talk about the monthly payment, especially if you mention that you’re leasing, so don’t feel like you have to commit either way right up front. Just say I’m looking to drive this car, not buy it, not lease it; I’m looking to drive this car and work on that map first. Because otherwise they can kind of play with the numbers to make it seem like a little bit better of a deal than it really is. They can tack on extras for just a few dollars a month that really add up to several hundred dollars over the life of your lease or loan.
JIM: I think that’s great advice and the thing is you’ve really got to crunch the numbers. Sometimes I have clients ask because there are incentives with the financing if you purchase. Right now we have low interest rates; it’s good to compare at the banks. I know I’ve seen just from advertised rates at some of the different banks that can vary widely. I think a lot of times people just get into that rut; well this is what I did for the last car so I’ll just follow that same procedure. What you’ve well stated today, manufacturers have different incentives, and banks have different rates. If you do your homework a lot of times people look at this; well I just want to do what’s easy. Well that easy path may end up costing you a lot of money, especially when you look at new cars today being $20,000, $30,000 even more. By spending a little time on it it really can make your dollars go a lot further. I’m sure you saw that when you’re looking at it all the difference in interest rates and incentives can make a big swing for people can’t it?
JESSICA ANDERSON: It can. You know you’ve got certainly different rates for prime borrowers and those that maybe don’t have as good credit; we’re going to assume that everyone listening to your broadcast has great credit, but you’ve got rates around maybe 2% or 3% with banks and credit unions for the top tier borrowers, maybe a 4% average rate there but manufacturers backing you can get a zero percent if you have perfect scores or close to perfect credit. A lot of those zero percent financing offers you can get with no down payment. You might have to put some down but just really investigate all your options because there are so many different ways that you can save.
TONY: It’s not like the old days where you kind of had to walk in, look at the sticker on the window and kind of hope to negotiate from there because now you can walk in with so much advance information. I remember just kind of at the outset of the internet being somewhat popular and I had an edge; I’ve always been lucky as one of my parents worked for a major auto manufacturer so I always got the privilege of a special prearranged price so whenever I walked on the lot I knew quite a bit about their pricing and their costs that dealerships don’t quite like you to know all that information and so it was an easier transaction for me but now with some of even the websites you mentioned you can arm yourself with truly dealer costs, you can know, like you said, what other consumers are paying. You can read so many reviews of people who have purchased that particular model and the fuel efficiency. You can really walk in armed as a consumer instead of just liking that model or color, now you can really understand the true value of it. It’s amazing the kind of information that comes out every year for the consumer to do analysis and obviously your publication does a lot of analysis. I think in January you were looking at most fuel efficient cars; the best new car, highest resale value, how you guys choose a new car value and all the best new values for 2014 so just in your month alone of January you guys are providing the consumer lots of information and data to walk into that dealership and be an educated consumer. There’s plenty of information, don’t ignore it and as we always tell our clients, you’ve got to crunch the numbers and if you don’t feel like you can do this alone there are some websites, I think you mentioned again, that could guide the consumer or naturally sit down with your financial advisor. We get this question asked all the time. I’ll even talk to the dealership on behalf of my client. When they know there’s someone doing the math then it’s not always about the payment. I think I remember you mentioning Jessica, if you walk into the dealership and the first question they ask is what can your budget afford or your payment; if you kind of let that out the door then they can back into that by selling you something that fits the payment versus determining what you want first and then uncovering whether it fits in your budget. Doesn’t that make sense?
JESSICA ANDERSON: Absolutely it does. You really want to avoid at all costs talking just about the payment.
TONY: Yeah, no doubt. At some point you have to know it fits in your budget but if you start negotiating there you’re already kind of putting yourself at a disadvantage.
JESSICA ANDERSON: Yeah, and if you’ve done your research like you said you’ve already figured out roughly what you might be paying for that car and there are tons of calculators online to calculate your monthly payment so you should already know whether it fits in your budget.
TONY: Exactly. I know a lot of our clients, especially older clients, don’t like that intimidating process of having to negotiate so sometimes maybe you just use all the data that’s out there. You walk into a dealership; there are how many in town; and just say here’s what I want, here are the options I want and here is the price I want to pay but that industry sometimes wants to move you through their process and not necessarily just say hey here’s my offer and that’s it but sometimes you even maybe have to be willing to walk away. If you set that tone at the outset I’ve certainly had luck with that. Here’s my offer, that’s it. If you don’t want it I’ll go somewhere else. Sometimes as a consumer you’ve got to take that stance because some dealers are willing to move a vehicle faster than the next depending on their inventory, flow and things like that so there’s a lot of moving parts here. I’m sure we can talk for hours, but we appreciate your input, glad to have you back from our last conversation and hopefully you can remain a resource for our listeners in the future.
JESSICA ANDERSON: Great, thank you so much.
JIM: Jessica, thanks again for joining us today.
JESSICA ANDERSON: Absolutely, have a good one.