Contributing Author: Vehicle Nanny
The cost of new vehicles is increasing pretty rapidly. The average cost of a new vehicle recently surpassed $40,000 and is likely to continue to climb. A used car might be a better option for you, but several choices exist for those who want a new vehicle.
For a guy who spent 32 years at a car company, you may find it odd that I would suggest a used vehicle. You can get so much more enjoyment from buying a used vehicle knowing that you did not overspend AND you can make it your own through customization. The path you take will depend on your personal needs and wants–car buying can be an emotional experience, so be conscious of your surroundings!
I’ll talk about used cars another time. For now, I want to spend some time talking about your options when seeking a new vehicle. There are a number of ways to do this, which I discuss briefly below.
One way to buy a car is by financing the purchase through a loan. It is a good option if you drive a lot of miles each year, want the protection of the new vehicle warranty, and/or just gotta have the newest car in the market. You can do this through your bank, credit union, or through the dealer.
Shop around for the best rate–new car dealers can offer the convenience of several sources (including the manufacturer of the car you are buying) or local banks that they have a relationship with. Just understand that the dealer is going to make some money off any loan they provide you. They do this by marking up the rate of the loan by a certain percentage. In many cases, this is the only way a dealer makes money on the car they sell you. It is not a bad thing, as long as you are comfortable with the rate and monthly payment.
Check with your bank or credit union for their rates before signing that loan with the dealer. A good source for rate information is Bankrate.com.
There will be times when the manufacturer (OEM) of the brand you are buying will pay to lower the interest rate in order to sell a certain model. They may also include a rebate to go with that financing. A good dealer will do a great job explaining your options. Be sure to demand this explanation.
This is a good option if you like to acquire a new vehicle every 2-3 years and do not drive a lot of miles. You are essentially renting a vehicle for a monthly payment based on the following factors:
- Residual Value of the Vehicle, or the projected resale value of the vehicle after the term of the lease. This is typically represented as a percentage of the Manufacturer’s Suggested Retail Price (aka the window sticker amount). This will vary greatly by the model you are shopping for. In general, the more popular the vehicle, the higher the residual value.
- Residual values can also be supported by the manufacturer as a way to boost sales of certain vehicles. Essentially, they are paying down the interest rate and/or propping up the residual value. This is not cheap for a manufacturer to do, and is why you won’t likely see smaller companies like Tesla offering low lease deals.
- Rate or Money Factor is the interest you will pay as part of your monthly payment.
- Annual Miles are factored into any lease. The average is typically 15,000 per year, but if you can commit to driving less you can see a lower payment. Before agreeing to that ultra-low mileage 10,000-mile lease, be sure that is realistic for you. Otherwise, you will pay a penalty for every mile you put on your vehicle beyond the agreed amount.
As I said, leasing is essentially a long-term rental. You will be financing the difference between the Manufacturer’s Suggested Retail Price and the Residual Value. The higher the residual value, the less you are financing. Many times you will be able to lease a full-size pickup for less than a mid-size car because of the OEM’s financial support of the residual value and/or lease rate. It depends on how each manufacturer chooses to go to market and which vehicle they are focusing on.
If you have the means and prefer to own the vehicle you drive, buying without financing is an efficient way to go. You do not end up paying interest on a car loan and you have a new car free and clear of any lending institutions. If your investments are returning a rate greater than the loan rate, you may need to look at the cost of tying up your money in a depreciating asset. When in doubt, check with your financial expert for advice!
Now, there’s a third alternative to buying or leasing: car subscription services. They’re operating in a number of places in the U.S., with one nationally available service so far. Edmunds.com provided an overview back in January 2019, with this summary below.
PROs of a Car Subscription Service
- Convenience. Most let you set up the subscription online and manage it via a smartphone app. The company usually delivers the car to you.
- Flexibility. You can change cars more frequently than with leasing or buying.
- Potential cost savings. There are no down payments or financing charges.
- No negotiating. The fees are set.
- Less commitment. Some subscription services can be for as short as a month.
- Some shoppers with damaged or light credit may find it easier to be accepted into a subscription service than getting approved for a traditional finance contract or lease program.
CONs of a Car Subscription Service
- Ownership is important to you. You want to buy a car, pay it off, and be free of a monthly payment for a few years.
- Restrictions on car use. Most car subscription programs impose rules on drivers, and a number use vehicle tracking.
- Switching cars holds no appeal.
- Again, no negotiating. If you’re someone who waits for car sales or you’re good at driving a hard bargain when leasing or buying, your skills will go unused with subscription plans.
I have used everything except a subscription service in my new vehicle acquisitions over the years. For me, the method used was determined by my needs at the time. I think you will find the same true for you. Hopefully, this information will help you make a better-informed decision.
The Vehicle Nanny is actually Bill Taylor, a 34 year veteran of the automotive industry. Bill spent 32 years at General Motors in a variety of sales, service, and marketing leadership positions. After retiring from GM, Bill spent two years at Digital Air Strike supporting their growth in new segments. He then created VehicleNanny.com, where he places a focus on nurturing the automotive interests of young car enthusiasts.
Learn more about Bill and his current activities at VehicleNanny.com.