Cheap Cars

The Big Three auto makers in the U.S. are in trouble. Sales have declined steadily over the past few years. Financial losses are mounting. Foreign car makers are taking over.

What does this mean for us as automobile consumers?

It has become largely a buyers' market when it comes to most American-made cars, trucks, and minivans. Manufacturers and dealers are desperate for our business. Prices have been slashed and deals are easily negotiated, especially for slow-selling models. Rebates and other incentives are everywhere.

In times of high gasoline prices, prices for fuel efficient cars go up, especially small used cars. However, SUV and minivan prices go down. So if gas mileage is not a major concern, some great bargains are available on larger, less fuel-efficient vehicles.

In short, these are good times to buy American. See the following article about finding cheap cars.

Leasing Still Misunderstood - Part III

In Part I and II, I discussed the concept of car leasing and how it works, using a simple example. Here, I'll discuss some of the common problems of leasing.

Nearly all the problems experienced by people who are leasing cars are the result of not understanding how leasing works. Some problems, however, are the result of unfortunate changes in personal health or finances.

Generally, car leasing problems fall into the following categories:

1) Customer was talked into a lease by car salesman because it offered the lower payments. Customer doesn't understand leasing and regrets the decision.

2) Customer wants/needs out of lease early and finds it problematic. Customer doesn't understand why and is looking for an easy and inexpensive way out.

3) Customer gets to end of lease and finds that they are over mileage and have excessive wear and damages. Customer wants to understand options.

Generally, these problems arise out of unwise or unfortunate circumstances and are not easily solved. Many of the problems could have been avoided in the following ways:

1) Understand how car leasing works (see www.LeaseGuide.com) BEFORE you make a decision to lease. Don't get your leasing advice from a friend or car salesman. Make sure that leasing is right for you and your life situation. Otherwise, don't lease, even if payments are lower.

2) If you want out of a lease early, know that it's not cheap or easy. It'll cost you. Therefore, decide if you REALLY want or need out of your lease. In nearly all cases, it's better to stick out the lease until the end. If you understand how leasing works, you know that leases are designed to be completed, not ended early.

3) If you get to the end of a lease and you are over mileage or have excessive wear, know that you can't cheat the lease. If you drove the miles and created the damage, you will pay, which is only fair. You could exercise your option to buy the car to avoid the charges, but the price you pay assumes that you're buying a vehicle with average miles and no damage. Either way, you pay.

Leasing Still Misunderstood - Part II

In Part I, I described a typical lease scenario that helps explain how leasing works and how it benefits the lessor (party providing the leased vehicle) and the lessee (part driving the leased vehicle).

However, it was not quite complete in that it's lease companies, finance firms, and banks that provide leases, not individuals. That means there some extra rules and fees.

A car lease is a legal agreement. Lease companies make the rules and set fees. When a lessee signs a contract, he or she agrees to the terms of the lease and the specified fees.

There is nearly always an acquisition fee, or bank fee. This is usually several hundred dollars and is much like "points" in a home mortgage. It's a kind of administration fee or lease initiation fee charged by the lease company, not the dealer. This fee is included in the cost of the vehicle and is paid along with the lease. There may be a security deposit of a few hundred dollars, which is returnable at the end of the lease.

Then there's usually a lease-end disposition fee, usually about the same as a single monthly payment. It's billed after a leased vehicle has been returned and is an administration fee for handling the return and getting the vehicle ready for auction. The lessee may also be billed for unusual damages, excessively worn tires, and extra mileage. The details are always spelled out in the lease contract.

Sales tax is typically (in most states) less for leased cars than those that are purchased. That's because only the monthly payment is taxed, not the entire value of the vehicle.

In Part III, I'll discuss some of the most common problems of leasing.

Leasing Still Misunderstood - Part I

I'm amazed at the number of automotive consumers who don't understand leasing. Of course, I have tried to help in my small way with the Lease Guide and Lease Kit at LeaseGuide.com, established over 10 years ago. But I can't reach everybody.

Some people seem to think they understand leasing, but don't. They often think it's like apartment leasing or car renting. It's not. They tend to give other people misinformed advice, which perpetuates the problem.

Leasing is somewhat more complicated than a conventional car loan, to the extent that many people try to understand it in more simple terms. That's what I'll try to do here.

Imagine that you have $20,000 that you would like to invest. A friend tells you he's looking for a way to drive a nice car for about three years, with the lowest possible monthly cost. He proposes to you that if you buy a certain car that he likes, for $20,000, and let him drive it for three years, he'll pay you interest on the money you have tied up in the car. Then at the end of three years, he'll give you the car back, in good shape, so you can sell it and get your $20,000 back. It's been a good investment for you because you made good money from the interest paid by your friend. It's been good for him because he had no desire to own the car, and only paid interest for the use of your money, thereby avoiding the high cost of car loan payments.

However, there's one thing wrong with your friend's proposal. We all know that the car won't be worth $20,000 at the end of three years, and you won't be able to recover your entire investment. In fact, your experience tells you that the car will have depreciated to only half it's original value - $10,000 - assuming it's driven only average miles (about 15,000 miles per year) and is returned to you in good condition.

Since your friend will be putting mileage and wear on the car, he should be expected to pay you for the depreciation caused by his use of the car. It's only fair. Furthermore, even though you, the owner of the car, would normally be responsible for insurance, maintenance, and repairs, those costs should also rightly be paid by the friend.

So, your friend agrees to have you buy the $20,000 car, let him drive it for three years, pay for all taxes, tags, insurance, maintenance, and repairs, and then return it to you in good condition. For this, he agrees to pay you both interest on the money used to buy the car, AND pay you for three years of depreciation. You agree to spread out the total cost into three years of equal monthly payments. The payment amount is a fraction of a normal car loan payment.

Your friend also agrees that if he returns your car with more than normal wear and tear, or more than normal mileage, he will compensate you for the extra depreciation you'll suffer when you sell the car to recover the remainder of your original investment.

This is leasing.

I'll continue this example with some additional details in another post.

Leasing is Not Renting

Car leasing is often confused with renting. The two are very different.

Much of the confusion comes from the fact that many people are more familiar with apartment renting and leasing, which are essentially the same thing.

Car leasing is not like apartment leasing. Car leasing is a financing method that is based on paying for the depreciation in value of a car that occurs as it ages and is driven. All cars depreciate in value from the moment they're driven off the dealer's lot.

Lease companies estimate the future resale value of car, called "residual", by looking at past resale history or from standard tables prepared by companies such as ALG. Residual vary by make and model, and by time. The residual value for a vehicle at the end of three years will be less than the value after just two years.

The difference between current value and residual value is called depreciation. This is the primary factor that determines the cost of a car lease. The lease company, who owns the vehicle, is simply getting reimbursed for the loss in value created by the fact that their vehicle is being used by another party.

Some people have asked me if leasing would be free if there was no depreciation -- if a car held it's original value thoughout the lease term. Seemingly, if there was zero depreciation, then the lease should be free.

This is unfortunately not the case. In addition to depreciation there's a form of interest (called money factor in leasing). The lease company used their money to purchase the vehicle from a dealer. That money is tied up in the vehicle and is, in effect, being loaned to the leasing customer. The lease company expects to be paid for the use of their money, just like with any other type of loan.

In summary, car leasing is a special type of financing that is composed of two parts: a depreciation recovery charge and a financing charge (money factor).

Keep Insurance in Mind When Buying a Car

Most car buyers don't consider insurance cost as part of their buying decision. However, insurance rates can vary considerably between different makes and models. A car that seems like a bargain can be expensive to insure.

Car insurance rates are particularly important for young drivers. Rate variations are greatest for this category of drivers. Selecting the right make and model car can make the difference between affordability and impossibility.

Generally, vehicles with the lowest insurance premiums are those that are inexpensive to replace, inexpensive to repair, have excellent safety equipment, have good crash-test ratings, have lowest accident rates, and are not stolen often.

For example, looking at the Insurance Institute for Highway Safety's statistics for 2003-2005 makes and models, the Mitsubishi Lancer Evolution, a popular car among teenagers, has a much higher than average insurance loss rate in all measured categories: collision, injury, and theft. Therefore, insurance premiums for this vehicle will be very expensive, especially for teens.

By contrast, the Ford Crown Victoria, a favorite with older drivers, has very low loss statistics and will be relatively inexpensive to insure.

Therefore, before making a decision about buying a specific vehicle, check with your insurance company first to determine what you'll have to pay.

Used Car Advice

I participate in a number of auto consumer discussion boards where I seem to answer some of the same questions over and over. That's a great way to pick topics for this blog. I know the "hot" topics that are of interest to a lot of people.

This post will be related to a question most often asked by young people buying their first car: "Where can I buy a used car for less than $5000 [or some other relatively low price]?"

Behind the question is usually someone who has no experience with selecting cars, buying cars, or financing cars.

Depending on the details of the question, I usually suggest some places to look for inexpensive cars, such as the local newspaper classifieds, free "auto trader" magazines at the supermarket, online at craigslist.com and eBay, and local consignment lots.

I suggest staying away from independent used car lots, especially "buy here, pay here" lots until they have enough experience to recognize the potential pitfalls.

I also stress the importance of test driving, not taking a seller's word about a car's condition, and getting a qualifed mechanic's inspection. I point out that used cars are generally sold "as-is" and that there is usually very little recourse if problems are found after the sale, even if purchased from a large dealer.

First time buyers generally have no established credit history, so getting a loan can be a problem. Most such buyers get a family member to co-sign the loan. I then point out the importance of making payments on schedule and not defaulting on the loan because building a good credit history is very important to their financial future.

Hidden Fee in Leasing

All car leases contain a fee that is much like the origination fee in a home mortgage. The fee goes by the name "acquisition fee" or "bank fee." It's perfectly legitimate but is rarely disclosed in lease contracts. It's usually simply added into the price of the car.

The fee can be in the range of $495 to $995, or more, depending on the lease company and the vehicle. It is set by the lease company and is usually not negotiable. The amount of the fee has been generally rising over the last few years.

The purpose of the fee, according to lease companies, is to cover the administrative cost of setting up and managing a lease.