To buy or not to buy, that is the question

Marli Shuler

In an era of zero percent financing, it' s difficult to choose whether buying, leasing or a balloon option is your best bet. That depends on your purpose. You must first determine what your needs are and what you want to accomplish.

Ask yourself these questions: how much cash do I have available now? How much will I have in the future? How many miles will I drive each year? How many years will I drive this vehicle? Do I have a major life change ahead of me, such as retirement or starting a family? Will my financial situation change drastically in the next three to five years?

Buying is strictly that--buying the vehicle outright. Zero percent financing options are widespread since interest rates are lower in the present state of the economy. Zero percent financing piques the interest of cash buyers because they may make some interest investing the cash that they originally reserved to purchase the vehicle. Zero percent and a factory rebate is a rarity. Usually the format is a sub vented OR zero percent financing rate offer, OR a rebate, OR a higher sub vented rate with a lower rebate combination.

Here' s an example of 0% versus a $2500 rebate on an $18,000 loan for 48 months:

That's a savings of $883 with bank financing and a rebate.

Always check your figures and select what is best for your situation.

Keep in mind that most states use simple interest financing methods for contracts. Actuarial and Rule of 78s financing methods are becoming less and less common. A frequent mistake made by consumers is trying to run an amortization schedule for simple interest financing with your home computer software. Amortization schedules are designed for actuarial and Rule of 78s financing, since those two methods use pre-computed decimals, and simple interest does not. Something vague and frustrating is the best result you will get when trying to run simple interest amortization schedule on your home computer. Financing companies use rounding formulas in their software and most loans are written so that the first payment is due forty-five days from the date that you sign the contract. The average consumer does not know to put forty-five days to first payment in the schedule, so their numbers never match the Dealership's numbers and they become frustrated.

Successful buyers expect to put more than 15,000 miles per year on their vehicles, expect to keep their vehicles for four years or more, expect to utilize tax deductions for their vehicle, and expect to have a reason to own their vehicle outright at the end of the contract.

Leasing is a 12-60 month contract for the monthly rental payment for a vehicle. Most leases are 24 or 36 months in length. Most leases allow for a purchase option at the end of the lease term. Standard industry mileage on a lease is 15,000 miles per year and most plans charge $.15 per mile for any mileage over the plan amount. Low mileage leases are generally 12,000 miles per year with a higher charge, usually $.20 per mile over the plan amount. Recently, ultra low mileage plans with 10,000 miles per year have become available, with a $.25 per mile charge over the plan amount.

A frequent source of confusion is that leases do not have an APR, or annual percentage rate. Leases utilize a lease factor. The lease factor can best be described as a two-fold "time value of Money".

The first segment is the cost for the dealership to take the vehicle off the lot and assign the contracted lease payments to a finance company. The second segment is for the finance company to determine the estimated purchase price at the end of the lease, also called the residual value. A formula is used to determine the depreciation and the "time value of money" for the leasing process. The factor is usually decreased if the customer utilizes a lower mileage option or pays all of the payments in one lump sum, which is called a prepaid lease. Ask if the rental tax has been applied to the payment figures. Some states require a rental tax for the state, the county, and the city. Luxury vehicles with an MSRP over $40,000 generally require a luxury tax. Insurance requirements for leases are more stringent that purchase requirements.

At the end of the lease, you have four options: extend the lease term, usually for up to twelve more months for the same payment, return the vehicle to the dealership and pay any excess mileage and/or damage fees, purchase the vehicle for the purchase option price, or refinance the purchase option price. Most programs will not charge you for any excess mileage if you purchase or refinance the lease. Extending the lease may or may not allot more mileage for the period extended, depending on the leasing program used.

Successful leasing customers are usually low mileage drivers, people who require a frequent trade cycle, people who like to drive the newest models, and people who desire a lower payment for a vehicle that is more expensive or has more options than they would normally buy.

Balloon programs are sometimes considered lease-to-purchase programs. Balloons are actually purchase-to-purchase programs. Balloon programs are usually 12 to 48 months of a set payment with a balloon option. Like purchase programs, they are usually simple interest loans and they have an APR. They have a purchase option or balloon option. Most balloon options have three choices: return the vehicle at the end of the payment term and pay any excess mileage and/or damage fees, pay the balloon portion in full, or refinance the balloon portion. Usually there is a special incentive to allow the consumer to keep the original interest rate and/or payment for the refinancing of the balloon. There are mileage limits imposed that are similar to those of a lease. Most balloon programs will not charge you for any excess mileage if you purchase or refinance the balloon.

Successful balloon option buyers are able to enjoy a lower payment than a regular purchase, are able to make changes to their loans if their personal situation changes, and are able to take advantage of a renewable APR for refinancing that would be competitive in the future.

All of the options are good options. It's up to the consumer to determine their own needs, wants and values. Many states have state-specific "quirks" and every financing company has different programs, penalties, and fees, so read the fine print and ask questions.