Most people simply turn in their leased vehicles when the lease comes due, even if they are under their mileage limit.  Did you know that you can SELL your leased car to a dealer and MAKE MONEY? 

Remember – leasing is just another form of financing a vehicle.  At any time during your lease, you can sell it to a dealer and buy or lease another car, as long as the market value of the car is greater than or equal to the payoff amount of the lease.  If the market value is less than the payoff amount, but you are not over your mileage limit, then you should wait and turn it in at the end of the lease.  The “negative equity” is then the leasing company’s problem, not yours.  However, if the market value is greater than the payoff amount, then you should sell the car and pocket the difference!  Most leasing companies don’t advertise this option because they want you to turn in the car so they can keep those profits!

If you are nearing the end of your lease, contact Women’s Automotive Solutions to see if you have any positive equity in the vehicle.  Why just turn it in when you can make money!

Nothing is worse than being in an accident that totals your beloved car.  Except perhaps the shocking realization that you owe more on the loan than your insurance company is willing to pay! 

Owing more on the loan or lease for a vehicle that it is worth is called being “upside down”.  Thanks to rising automobile prices, longer loan terms, and zero down payments, most people are upside down on their current vehicle.  The vehicle depreciates in value faster than you are paying it off. 

As we discussed previously in the newsletter (see “How Much is Your Trade REALLY Worth” – March 2007), the market value for your car is influenced by several factors:  year, make/model, mileage, condition and “the market”.  The older it is and the more miles you have driven, the lower the value.  If the car is dirty, has dents and scratches, has been in a prior accident or has not been maintained properly, it will be worth less than a more pristine counterpart.  The “market” for a particular type of vehicle will also affect its value.  Some cars just hold their value better than others for quality and reliability or simply “desirability” reasons.  Hondas, Toyotas and BMWs traditionally hold their values much better than their American counterparts.  Vehicle values may also be affected by external market factors.  For example, high gas prices have tanked the market for large SUVs.  Consumers are selling their gas-guzzlers in droves in exchange for smaller, more fuel-efficient vehicles.  As a result, the supply of Suburbans and Expeditions far exceeds the demand, and prices plummet.  
 
The realization that you are upside down is depressing enough when you go to trade in your vehicle, but still owing money after your car is totaled in an accident (especially if it wasn’t your fault!) can be devastating.  “But my insurance company has to pay to for my car!” you exclaim.  Not exactly.  Your insurance company must pay you what it feels is the current, fair market value of your vehicle based on year, make, model and mileage.  They insured the vehicle itself.  How you financed it, and how much you still owe on the loan, is your problem.   Fortunately, there is a simple and relatively inexpensive solution – Gap Insurance.

Gap insurance is an endorsement to your personal automobile policy that “fills the gap” between the amount you owe on your loan or lease and the actual cash value settlement paid by your insurance company in the event of a total vehicle loss.  For example, let’s say you total your 2 year old car that you originally financed for 72 months.   Your insurance company generously gives you $15,000, but you still owe $19,500 on your loan.  The gap insurance will pay the $4,500 difference, possibly less a small deductible.

Gap insurance has a relatively small, one-time cost and must be purchased at or close to the time you purchase your vehicle (usually within a week or two).   It can be purchased whether you are financing a new or pre-owned car.  Most leases today have gap insurance built into the lease, but be sure to confirm that with the dealer before you sign the lease papers.  Gap insurance is offered by car dealers, online vendors and some insurance companies, and the price typically ranges from $400 - $700.   Women’s Automotive Solutions also offers gap insurance with prices ranging from $260 - $360, depending on the length of the loan.   If you finance your new or pre-owned vehicle for more than 48 months and/or you do not make a significant down payment, then you need gap insurance.  It’s a small price to pay for the amount of risk that it mitigates.  And, for your peace of mind.

Do you know your credit score?  If you don’t, you should.  Your credit is the most important factor in obtaining any type of loan, including an auto loan.   Although most people don’t like to think about the subject of auto financing (they would much rather focus on the shiny new car), it is actually the most important part of car buying.  Your credit can not only make a significant difference in your interest rate and monthly payment, but it can even dictate what car you are “allowed” to buy!  So, how does your credit score affect your auto loan?

Let’s first take a minute to discuss what is meant by “good credit” and “bad credit”.  Your credit score can range from 300 to 850, and it is an indicator of how likely (or unlikely) you are to repay a loan.  Every lender looks at scores a little differently, but most consider 720 and above to be “excellent” credit.  With a credit score in this range, you are considered highly responsible and trustworthy and, therefore, qualify for the best interest rates available.  (Today, that’s around 6-7% for a new car loan.)  The average score in the U.S. today is 680.

Most lenders consider scores below 620 to be “subprime”, and consumers in this category must pursue what is known as “secondary financing”.  Secondary financing lenders charge higher interest rates (currently anywhere from 12% to 25%), depending on your score and the factors that contributed to it.  If your score took a hit due to a life event like divorce or becoming self-employed, but you are otherwise financially responsible, then lenders will still give you a decent rate.  If your score is low, but your income is high and you make a significant down payment, then you may also come away with a reasonable rate.  On the other hand, if you have a history of not paying your bills, then lenders will consider you “high risk” and charge you an equally high rate.

Lenders may also place restrictions on the type of car you can purchase if your credit is less than perfect.  Why do they care what kind of car you buy?  Since there is a higher risk that you will not repay the loan, the lender needs to be sure it can recoup its money by selling the car for a good price after repossessing it.  Therefore, most secondary financing lenders will restrict the borrower to a newer car with low miles (i.e., 2002 or newer with less than 70,000 miles.)   The lender may also require the borrower to purchase the vehicle from a franchised dealer (i.e. Heimlich Honda) instead of from a private, used car lot (i.e. Bubba’s Auto Sales).  Oddly, this often makes it easier for someone with bad credit to buy a newer, more expensive car than an older, cheaper car!  Strange, huh?

If your credit score is extremely low due to multiple repossessions or if you have no credit history and little income, then you may not qualify for a traditional loan at all!  Unless you can get a relative with perfect credit to co-sign the loan, you will have to purchase a vehicle from a “buy-here/pay-here” lot.  Buy-here/pay-here dealers use their own money to provide financing to customers with really bad credit.  They usually sell lower quality vehicles and charge interest rates as high as 30-40%!  The maximum loan term is 24 months, and most dealers report payment history to the credit bureaus to help you build credit.  Many buy-here/pay-here dealers are honest people, but there are still some unscrupulous, loan-shark types who take advantage of desperate consumers.  Hopefully, you won’t find yourself in the buy-here/pay-here space, but if you do, Women’s Automotive Solutions works with several reputable dealers in the Charlotte area.

Your credit can mean the difference between a low monthly payment on a swanky, new car or a high monthly payment on a piece of junk.  Be sure you know your credit score before setting out to purchase a vehicle (or anything else that you plan to finance)!  Thanks in part to the rising threat of identity theft, a plethora of services now exist (some of which are very inexpensive or even free) that allow you to stay on top of your credit.  You can get your online credit report by visiting the nation’s three credit bureaus:  Experian, Equifax and Trans Union at www.annualcreditreport.com.  If you need help understanding your credit report, talk to your financial advisor.  Don’t have a financial advisor?  Contact Women’s Automotive Solutions for a great referral!

Myth #1:  You have to pay sticker price when you lease.  Unless the dealer is offering a special advertised deal in which the price and other factors of the lease are already set to attract your business, the selling price of the vehicle is negotiable.  Since the selling price is the most important factor in determining what your monthly payment will be, you should negotiate the price of the vehicle with the dealer before discussing the financing.  Remember that the dealer is not the leasing company, but simply a broker acting on their behalf.  The leasing company may be the financing company owned by the manufacturer (such as Ford Motor Credit) or a traditional bank or other lending institution.

Myth #2:  You cannot get out of a lease.  Most people think that you are stuck in a lease for the full term.  This is not true.  You can get out of a lease the same way you “get out of” any car loan – you must sell the car for the amount of the lease payoff, cover the difference with cash or rollover the negative equity into a new lease or loan.  If you feel like you are stuck in a lease, contact a Women’s Automotive Solutions consultant to discuss your options.

That is the question many of my clients ask.  To answer it, we first must explain what leasing really is and dispel some of the myths surrounding it.  Despite all the special terminology and complicated formulas, leasing is just a different method of automobile financing.  A traditional loan finances the purchase of a vehicle.  A lease finances the USE of the vehicle.  Each has its own benefits and drawbacks.  Leasing has become increasingly popular over the last several years due to the rising costs of new automobiles.  Leasing can also have some tax advantages for business owners (don’t ask me - talk to your accountant!).  Approximately a fifth of all new vehicles are leased today.  So, what is leasing?

Simply put, a lease a method of financing where you only finance (and pay sales tax on*) the portion of the vehicle you intend to use over a certain period of time.  Instead of financing the entire cost of the vehicle, you only finance the depreciated amount.  That depreciated amount is the difference between the selling price and the estimated residual value, which depends on time and mileage.  For example, let’s say the car you want costs $40,000 (you have good taste).  If you purchase it, then you will finance $40,000 over a certain number of years (assuming you make no down payment).  Now, let’s say that if you put a total of 36,000 miles on the car over 3 years, it will have a residual market value of $25,000.  If you lease that car for 3 years with a 12,000 mile per year limit, you will only be financing $15,000 - the depreciated amount.  The higher the residual value of the vehicle (and the lower the selling price), the better the lease deal will be.  This is why you can often get good lease deals on BMWs, Lexus, and Hondas – they tend to hold their value well over time. 

Low monthly payments are a BIG attraction, but there are many important factors to consider before deciding to lease.  Most leases these days have a term of anywhere from 22 to 39 months.  At the end of the lease, you must either turn the car in or buy it out.  If you have exceeded the mileage limits of the lease, then you will have to pay for those extra miles (typically 15 – 30 cents a mile), or you will have to roll over that “negative equity” into the lease or loan on a new vehicle.  You will also have to pay for any excessive damage to the car, above and beyond the small scratches and chips in the paint that are expected on daily driver.  The leasing company may also charge a “disposition” and/or other fees that must be paid at the end of the lease.

So, should you lease or not?  Most experts will tell you that leasing is not a good option for most people, because most people cannot accurately predict how many miles they drive per year.  Even if you do know how many miles you drive, is your living and working situation stable enough that your annual mileage is likely to stay the same for the next few years?  If it is (or if you have another vehicle you can drive), then leasing could be a good option.   Otherwise, it’s not.  Sounds pretty clear cut, huh?  Well… may not.
 
Traditional loan terms have gotten longer and loan terms of 60, 72 and even 84 months are becoming common place.  Furthermore, interest rates are at historic lows.  This allows people to get lower monthly payments with traditional financing, closer or even equal to those of a lease.   Most people today are financing their vehicles for 60 months or more in order to get those low monthly payments, yet relatively few of these people actually keep their cars until that loan is paid off.   That means than when they go to trade in the vehicle for a new one, the trade in value is less than what they still owe.  They either have to pay the difference in cash or roll the negative equity into the new loan, just as if they had exceeded the mileage on a lease.   The advantage of traditional financing is that you have the OPTION of keeping the car and paying off more of the loan, until you no longer have negative equity in the vehicle. 

So, what’s the best option?  Well, the financially prudent thing to do when buying a car is to make a significant (10-20%) down payment, finance the vehicle for no more than 48 months, and keep it until it dies.  But what fun is that?  If you are like me and are seduced by the beauty of new cars every few years, then you might consider leasing.  Leasing may also be a good option if the vehicle is new in the marketplace, and you don’t know how well it will hold its value over time.  Leasing puts much of the depreciation risk on the leasing company, not you. 

The bottom line is that the decision to lease is not an easy one, and it depends on your unique financial and living situation, driving behavior and priorities, and prevailing interest rates.  Feel free to contact a Women’s Automotive Solutions consultant to help you decide if leasing is right for you, or try Edmunds.com “Decision Calculator” and see how much leasing or buying will cost for the same car.  If you do decide to lease, try to take at least some of the money you are saving on the monthly payments and put it into a savings or other short-term investment account.  Let that money earn a little interest!  At the end of the lease, you’ll have some extra cash if you need to pay for excess mileage, make a down payment on a new vehicle, take a vacation, or whatever else you are saving up for!
*In many states, including North Carolina, you only pay sales tax on the monthly payment amount when you lease.   In other states, the leasing laws are different.  Be sure to check the laws in your state before considering a lease.