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Guide to Financing, Leasing, and Refinancing a Car

[ Edited ]

All discussion related to this thread here, please: http://ficoforums.myfico.com/t5/Auto-Loans/Discussion-of-The-Definitive-Guide-to-Financing-or-Leasin...

 

Financing or leasing a car can seem pretty complex for someone who has not spent a lot of time reading up on it. The purpose of this guide is to allow anyone to understand the ins- and outs- of financing or leasing a vehicle. Hopefully this helps people avoid dealer traps and negotiate the best deal on their new (or used) car. Feel free to suggest modifications; this is meant to be a "living and breathing" post.

 

Also feel free to copy/paste the information to other boards. Just link back to here, please. If linking back is prohibited by the other forum, please mention that you have copy + pasted from an outside forum. Use of this material without linking back or noting that it is copy + pasted from an outside forum is strictly prohibited. I (Remember0) reserve all rights to this material. Only within myFico Forums, feel free to copy + paste without acknowledgment of source to help other members here!

 

Table of Contents:

 

Introduction...Post 1, Intro

Tips on Negotiating Price Itself...Post 1, Intro

 

Part I: Financing

 

Part I.I: Qualifying for a loan...Post 2

Part I.II: Dealer Extras...Post 2

 

Part I.III: Dealer Participation...Post 3

Part I.IV: Miscellaneous...Post 3

 

Part II: Leasing

 

Part II.I: The Moving Parts of a Lease & Lease Approval...Post 4

 

Part II.II: How to Get the Best Terms for Leases...Post 5

 

Part II.III: Dealer Extras...Post 6

 

Part II.IV: Dealer Participation...Post 7

Part II.V: Lease Termination...Post 7

Part II.VI: Miscellaeous...Post 7

 

Part III: Refinancing (Section TBD)

 

Part III.I: Refinancing Approval and Tips...Post 8 (TBD)


Changelog...Post 9

 

 

Intro:

 

What is the deal here? I thought I was good if I negotiated the best price?

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This is true, but only if you pay in cash. If you finance or lease a car, the loan/lease brings in a whole new set of parameters which allow the dealer to make more profit off of you. As a savvy consumer, you must understand the process and watch out for any ripoffs.

 

I won’t mention too much in detail how to negotiate a good price here as that is already covered by another thread stickied in this forum. Look there for some good tips on negotiating price, but the gist is negotiate with a bunch of dealers via email. The further you are willing to drive, the better your deal. For my last car, I shopped all dealers within a 250 mile radius of my home (which covered 6 states). I saved ~$2k over buying the car from a dealer in my state. It's all about finding that one dealer that needs to make the sale to meet a month end/year end dealer incentive.

 

Link to thread on how to negotiate price itself: http://ficoforums.myfico.com/t5/Auto-Loans/How-to-buy-a-car-for-the-first-time-buyer/td-p/1923289

 

Any tips beyond the link above on how to negotiate price?

===========================================================================================

 

Well, I'll mention how I do it for new. Used is similar. But you should find multiple similar models at different dealers and play them off of each other over email.

 

I set my target price by going to TrueCar to see what TrueCar says is the price making sure I've selected/otherwise taken into account any possible incentives. Do NOT use your your real name and address/email/phone on the TrueCar site if you want to negotiate on your own. Depending on the car (helps to know what others are buying for), I'll set my price $1k-$2k below TrueCar and see if I can get a dealer to bite...though I have sometimes seen TrueCar be higher by >3k even on a 25k car. If dealers don't bite, move up your target price. Also be sure to tell dealers what incentives you do or don't qualify for and tell them to only include those in the quote.

 

I NEVER accept out the door prices. Insist on broken down prices. They should quote you car+destination/freight-incentives you qualify for+doc fees+any options/extras you want+sales tax+tags. Any dealer that refuses to give you exact prices broken down is fishy and should be treated as such.

 

Refuse to pay for unwanted options...they tend to back down and remove those (off the price, the options tend to be so worthless, they often don't bother uninstalling them from the car). If they won't remove some options they've added, move on to another dealer.

 

Also before going over there, try to insist they send you a buyers order. It's the only way to guarantee they won't play games when you get there and nobody likes driving 200 miles to have a bait & switch done on them. Tell them exactly why you want a buyer's order (you're driving long distances and don't want games + know the buyers order is the only way to not have games played).

 

I seriously don’t have this much spare time. I only want to [insert finance or lease here] and would like to skip anything that’s not about [insert financing or leasing here]

===========================================================================================

 

This guide is going to deal with both in two separate sections. You’ll gain the most insights if you read both. But I understand if you don’t want to. Financing will be covered by the rest of this and the next two posts. Leasing will be covered by the posts after these three. Just skip to the second part (the fourth post in this thread) if you don’t want to read about financing a purchase.



Part I: Financing

 

What are the biggest things I need to watch out for when I’m financing?

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When financing, the process is pretty much the same for both new and used cars (as well as pitfalls). Mainly you want to watch out for the loan approval process, dealer participation, LTV, term of loan, and dealer extras.

As I am very busy with work these days, I am participating in the forums less than I would like to. Please feel free to email me directly remembermyfico //at// gmail /dot/ com if you would like me to respond to a specific question you have.
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Re: The Definitive Guide to Financing or Leasing a Vehicle

[ Edited ]

Part I.I: Qualifying for a loan

 

How does the loan approval process work in general for financing? What are lenders looking at?

===========================================================================================

 

Lenders are looking at a variety of factors when reviewing an auto loan application. Here are the biggest things:

 

Income - Prime banks and CUs generally want to see monthly gross (pre-tax) income of $2k/month or higher. Always put down pre-tax income on a finance application unless it explicitly asks for post-tax income (I’ve never seen one that asks for post-tax). Certain subprime lenders such as Santander Consumer USA will approve if income is $1,200/month or higher. However this is usually coupled with higher interest and lower chance of approval. There is a chance some lenders approve with less income, but I don’t know of any offhand (any thoughts guys?)

 

DTI - The formula for DTI is: (Aggregate minimum monthly payment across all credit cards/personal loans + rent/mortgage + estimated new car loan monthly payment - monthly payment of trade(s)) / monthly pretax income

 

Generally lenders look for DTI to be lower than 35-45%. As it gets higher, the harder it is to get approved. If you can bring on a co-signor, it can greatly help your DTI.

 

FICO Score - Should be self-explanatory, but the higher the FICO, the better the terms. The caveat is some lenders use Auto Enhanced FICO, which is influenced more heavily by prior auto loans and to a certain extent, other installment loans and mortgages.

 

If your FICO for one bureau is higher than another by a significant margin, look for lenders that skew toward using your good bureau.

 

Collateral - You wouldn’t secure a loan against an asset that’s worthless and neither will a bank. Many banks will not write loans on cars older than x years with greater than y miles. X is usually around 6-8, y is usually between 60k and 85k. Some lenders also exclude entire manufacturers like Suzuki, etc… that have high depreciation.

 

LTV - Stands for Loan to Value. Equation is Loan/Value. Typically for value lenders use MSRP for new cars and NADA Retail for used. Lenders love to see this below 100%. For new cars, I’ve often seen up to 120% without issues. Some lenders will also do 120% for used, but some may balk at 120% for used.

 

Existence of simultaneous car notes - This doesn’t really apply to prime customers unless we're talking 3+ simultaneous loans. But subprime lenders hate to lend when there’s multiple open auto loans even if DTI is fine with two loans. If the other car will be traded, no problems. But if 2+ cars are going to be financed at the same time, they ask the question, “Why the second car?” You need to have a good answer. Usually one of way to solve this is to say my [insert family member here] needs a car. Sometimes finance companies will want the other person to co-sign, other times, they'll just accept your story.

 

I qualify for a loan. What should I do to get the best rate?

===========================================================================================

 

First, don’t walk into a dealership and just apply there hoping for the best rate. The only people who are going to get away with this is those buying a new car with an APR incentive they know of and want, with a solid (740+) FICO with no auto or installment baddies, and whose profile matches all the other things lenders look for solidly.

 

For the very few of us who don’t fall into the above requirement, get an approval from the local bank/CU first before walking into a dealership. This sets the baseline APR and forces the dealer to compete. Then go to the dealer, and say can you beat the rate I got? I often “round” the rate I got down by 1%-2% (unless it’s already like <2%) and tell that to the dealer. :smileywink: If the dealer can’t compete, you can use your pre-approval!

 

Currently, I'm recommending BofA to prime customers (those with FICOs 680+). I do not have enough data from people who have applied to BofA yet to get a complete picture of how their approvals work, so consider this a recommendation with serious reservations. Please try to report back if you do apply to BofA with results. Also if you have a different kind of credit profile or want a better recommendation for your specific profile, please post your own thread in the auto loans forum. BofA might be good for a subsection, but for plenty of groups like super primes (750+) and subprimes (<620), BofA is probably not a good match...again post up a thread requesting suggestions with the info from the "Do I qualify for a new auto loan?" thread:

 

http://ficoforums.myfico.com/t5/Auto-Loans/Do-I-qualify-for-an-auto-loan-Info-that-is-needed/td-p/22...

 

Cool, got the pre-approval. What else should I be worried about?

 

===========================================================================================

 

A couple things: dealer participation and dealer extras.

 

 

Part I.II: Dealer Extras

 

Let’s discuss dealer extras first...

===========================================================================================

 

So you’ve negotiated your price and have financing from someone like a local CU for a really good rate. What can go wrong?

 

Watch out for the F&I office. They’ll try to sell you things like GAP insurance and warranties and life and disability protection.

 

Generally speaking, life and disability tend to be overpriced for the protection you need. Often one can get these from a third party (term life) or through an employer (disability) for MUCH cheaper. Also the unemployment insurance if offered is restrictive in terms. Read it carefully, often self-employeds are exempt making this “protection” worthless for them. Even if employed, it typically only makes so many payments. Weigh it carefully as to whether the premium for it is worthwhile.

 

GAP also tends to be overpriced. Ask you current car insurance company how much GAP costs through them. I was recently quoted $1/month (not a typo) and the dealer asked for $300 (after I negotiated it down from $500). You can guess which one I took…

 

Warranties may be worth it to you. I prefer self-insuring for smaller risks such as my car breaking down, but you may be more risk averse. Do know that you can often buy warranties elsewhere on used cars (online sources, though quality of warranty and reviews vary wildly). For new cars, one can often purchase a warranty THROUGH ANY DEALERSHIP after buying the car. For Hondas, for example, it’s almost always cheapest to buy afterwards online from Hyannis Honda! Research this carefully.

 

Oh great. Now you tell me this. I just bought a car and got ripped off by dealer extras.

===========================================================================================

 

Read your contract carefully. Often you can cancel dealer extras within x days of buying your car (and get the refund applied to the principal of your loan). X is usually between 30 and 60 days.

 

Any thing else about dealer extras?

===========================================================================================

 

Watch out for the actual price printed. Often dealers change it from what’s negotiated. Why you should negotiate by email and get it in writing.

 

Also watch out for charges the dealer calls mandatory state charges, but really aren’t. In CT, for example, dealers love to say a “dealer conveyance fee” is mandated by the state. MY A**. The only fees mandated by the state are typically sales tax (look up your sales tax rate online) and registration and titling fees (look these up at the DMV’s website). Destination is a manufacturer fee on new cars and should be included when negotiating for price. Destination itself is non negotiable.

 

All other fees like Prep fees, Doc fees, Conveyance fees, etc… are dealer fees and go straight to his bottom line. You CAN negotiate this. Don’t forget it’s PURE PROFIT for the dealer.

 

I save a special paragraph for VIN etching. Some dealers say this is state mandated. Others say it greatly reduces chance of theft. Maybe it does reduce theft a bit (not a lot in my opinion). But a kit costs ~$25 to DIY. Dealers charge like 200 for this. I’ve really only seen this at bad dealerships, but this is PURE PROFIT for a dealer. If they tell you it’s state mandated, ask them to point out the statue which says so. I know of no state that requires it (and if they did, think, wouldn’t the manufacturer have to do it)? Like a manfacturer doesn’t expect the dealer to also install special emissions equipment in CA, do they?

 

Also make sure they don’t inflate state mandated fees. I’ve seen it happen sometimes. Independently look up/call the DMV and ask how much sales tax and registration should be.

As I am very busy with work these days, I am participating in the forums less than I would like to. Please feel free to email me directly remembermyfico //at// gmail /dot/ com if you would like me to respond to a specific question you have.
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Re: The Definitive Guide to Financing or Leasing a Vehicle

[ Edited ]

Part I.III: Dealer Participation

 

I have my pre-approval from a local bank/CU, have negotiated my price via email, have the price in writing, made sure to watch out for dealer extras, and made sure the fees are good. I’m set now, yes?

===========================================================================================

 

Almost, but not quite...Obviously you’re going to have the dealer compete on the rate you got from your local bank. Note that this does cause inquiries to show up on your credit so if you don’t like that, I recommend freezing reports, and insisting they use your pre-arranged financing. If you don’t freeze, dealers will often pull as they want to get commission from financing.

 

Okay, inquiries, whatever. I’m set now?!

===========================================================================================

 

I promise, one last concept you need to understand to get a great deal: dealer participation.

 

Participation is the term industry lobbyists coined for what we consumers may call dealer rate-jacking. I like the term participation better (you have to admit it does sound more professional), so I’ll be using that.

 

How it works is the lender sends to the dealer a “buy rate” based on your creditworthiness and any promos they are running (if a new car). The lender has a cap typically for participation depending on lender policy and if they are running any incentives in the case of a captive lender (I've heard 1.5-4%, these days usually no more than 2%).  The dealer can jack the buy rate from the bank upto this number.

 

The lender pays the dealer a split of the extra profit they expect to collect through interest. Think something like 75% of the extra goes to dealer, 25% to lender. This number varies by lender.

 

The dealer also earns a "flat" even if they don't jack up the rate, but this is as the name suggests flat. Around 50-350 (typically 100-300) depending on things like captive lender promos, credit tier of borrower, lender policy, blah, blah.

 

What does this mean for you when the dealer is saying you are approved at x%?

===========================================================================================

 

Keep in mind the dealer might be raising the rate he tells you. This is why it is SO important to have a pre-approval from a place like  your local CU! It gives you leverage.

 

Even without a preapproval, you can try to say I was really looking to only pay x% (I would pick a x 1.0 or maybe 1.5% below what they dealer says) and ask him if he can work that APR? Physically walking away helps get dealers moving, and if not you could always walk back lol.

 

You could also just make up that you have a preapproval at that mystical rate and ask him to see if he can beat it. If he says he can’t beat your rate and you want to backtrack without getting egg on your face, ask him what bank it’s with and pretend you’ve had better customer service with that bank than your pre-approval bank or something.

 

Any other implications of dealer participation?

===========================================================================================

 

YES! Especially if you plan on refinancing the car or paying off soon after you purchase.

 

Both the participation and flat get reversed (aka finance company sends an invoice to dealer) if you pay off the loan or otherwise default before two or three month's payments. After this threshold, if you pay off, the dealer keeps both the flat and participation, it's the lender that loses out. So if you plan to do this, and there's some promo tied to financing with a captive or in general, don't be stupid and say you're going to pay off ASAP. Just sign the paperwork, then let the bank know you're paying off immediately.

 

Also don't believe any dealer that says you'll face a penalty if you pay off immediately. Almost all car loans have no prepayment penalty (read your contract or call the finance company, not dealership), it's just the dealer loses profit, but why do you care?

 

Whew, I’m good now yes?

===========================================================================================

 

That’s all I can think of for prime loans. This post will be kept up-to-date/edited and so it may change.

 

For subprime loans, you should know that subprime turns the concept of participation on its head. Many lenders such as Santander Consumer USA charge dealer's so-called acquisition fees to buy the loan from the dealership. Depends on collateral and credit history of the borrower. This can range from 0 (typically for prime only) - upwards of 4k. The dealer still technically gets flat and participation, but it just cancels out the appropriate part of the acquisition fee. So the dealer still has to PAY the lender in many subprime deals.

 

Note that in subprime loans, this acquisition fee can change how much the dealer charges you for a car. Aka he may not be willing to sell at your rock-bottom negotiated rates.

 

In these subprime cases, Carmax can sometimes help. If you get financed with one of their lenders, they will not raise your car’s price no matter how much in acquisition fees they need to pay (because they have those negotiated down, naturally). I’m not a fan of Carmax personally, but in these cases, can yield a pretty good deal.



Part I.IV: Miscellaneous

 

Yeah, I’m having trouble getting approved at dealerships and I need a car to [insert get to work, take care of kids, etc… here]. What do I do?

===========================================================================================

First look into a cosigner. If you can get someone to co-sign for your loan, it may be approved. Also post your situation on these forums. We’re a helpful bunch and maybe someone can come up with something creative. Often times the combination of RoadLoans + Carmax or Carmax directly works for even low FICO scores and can help you avoid BHPH car lots where you’ll have the same high APR, but also overpay on the car.

 

Often, the only companies who approve those who can’t get approved elsewhere and can’t provide a co-signor are buy here pay here dealers. They are really last resort lenders. They often have ridiculous terms (VERY high price on car + high interest + weekly/biweekly payments). When I say you’ll be VERY underwater and will NEVER be able to refi, I mean it in most cases on a BHPH deal. For most cars at these dealerships, be prepared to PAY OFF that note one payment at a time. If you need a car, you need a car, but I STRONGLY encourage you to look at all other avenues before going into a BHPH dealership (the ones on the street corners that advertise “BHPH, We approve everyone,” or even firms like Drive Time and JD Byrider).

 

I have some financing/car buying question not covered?

===========================================================================================

Create a thread and post in the auto loan section of our forum. There are many experts here glad to help and we don’t bite, we promise. In fact we promise to pass no judgment on your prior credit (mis)steps or what car you buy or whatever. We’ll just help you try and get financed (though we may point out that a particular purchase may be unwise if the financial picture you post merits it).

As I am very busy with work these days, I am participating in the forums less than I would like to. Please feel free to email me directly remembermyfico //at// gmail /dot/ com if you would like me to respond to a specific question you have.
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Re: The Definitive Guide to Financing or Leasing a Vehicle

[ Edited ]

Part II: Leasing

 

I want to lease. What the heck goes on in leasing?

===========================================================================================

 

Well a lot of things haha. Arguable leasing is a little more complex than financing, but it does have many of the same elements. The thing about leasing is there are more variables in the lease for a dealer to manipulate.

 

So this is VERY important: when you want to lease, do NOT tell a dealer that. Negotiate the price by email like the other thread mentions, just say you’re buying it. And work on reducing PRICE of car as MUCH as possible. After you have price down in writing, then bring the lease parameters into play.



Part II.I: The Moving Parts of a Lease & Lease Approval

 

So yeah, I’ve heard these terms like MF, capitalized cost, residual, etc… What on Earth is going on?

===========================================================================================

 

A couple things go into leasing:

 

Net Capitalized Cost - Think of this as your purchase price because that's essentially what it is. Only difference is it includes some things like taxes (some states) and a lease acquisition fee (amount depends by manufacturer). A down payment reduces net capitalized cost for our purposes.

 

Money Factor or MF - It'll look like a small decimal. To convert it to APR, multiply it by 2400. This is the lease equivalent of an APR. This is effected by many things. The most common is your credit and incentives by the manufacturer for a particular model.

 

Term - This should be obvious. It’s how long the lease is for aka how long you can drive around in the car.

 

Good so far?

 

Okay, now what makes a lease different than buying? You only pay for the depreciation of the car (you need to give it back at the end of the lease).

 

So our final factor will be residual - this is how much the car is worth at the end of your lease term. Effected by the exact car trim, mileage per year (obviously), as well as # of months of lease (obviously). Usually shown as a %'age of MSRP. Like 63% on a 23k MSRP car means after x months, the car will be worth 14.49k. Obviously the HIGHER the residual, the more the car is worth at the end of the lease. This means your payments will be lower (less depreciation)! But if you buy the car at the end of the lease, you'll have to pay whatever the residual is (yes, if you qualify, you can get a loan for it).

 

Combine these things into a leasing calculator -- Net Cap cost, MF, Residual, and length will give you a monthly payment. Really just another math formula. Roughly calculates depreciation (Net Cap cost-residual value), adds interest (MF), divides into # of months of lease.

 

So what goes into approving a lease or what do lenders look for before approving?

===========================================================================================

 

Much the same as what they look for when approving a financing contract for an outright purchase. This is essentially copy + pasted from the financing section (with a few differences) because for our purposes, there’s very little difference.

 

Income - Lessors (mostly captive lenders, I refer to them as lessors) generally want to see monthly gross (pre-tax) income of $2k/month or higher. Always put down pre-tax income on a finance application unless it explicitly asks for post-tax income (I’ve never seen one that asks for post-tax).

 

DTI - The formula for DTI is: (Aggregate minimum monthly payment across all credit cards/personal loans + rent/mortgage + estimated new car lease monthly payment - monthly payment of trade(s)) / monthly pretax income

 

Generally lenders look for DTI to be lower than 35-45%. As it gets higher, the harder it is to get approved. If you can bring on a co-signer, it can greatly help your DTI.

 

FICO Score - Should be self-explanatory, but the higher the FICO, the better the terms. The caveat is lessors almost exclusively use Auto Enhanced FICO, which is influenced more heavily by prior auto loans and to a certain extent, other installment loans and mortgages.

 

If your FICO for one bureau is higher than another by a significant margin, look for lenders that skew toward using your good bureau.

 

Existence of simultaneous car notes - This doesn’t really apply to prime customers, but may if one buys an expensive car or is pushing DTI limits. With subprime, lessors hate to lend when there’s multiple open auto loans. If the other car will be traded, no problems. But if 2+ cars are going to be financed at the same time, they ask the question, “Why the second car?” You need to have a good answer. Usually one of the only ways to solve this is to say my [insert family member here] needs a car and have them cosign.

 

As I am very busy with work these days, I am participating in the forums less than I would like to. Please feel free to email me directly remembermyfico //at// gmail /dot/ com if you would like me to respond to a specific question you have.
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Re: The Definitive Guide to Financing or Leasing a Vehicle

[ Edited ]

Part II.II: How to Get the Best Terms for Leases

 

Practically, how do I get the best terms for leases?

===========================================================================================

 

So this isn’t as easy as for financing. I’m going to break this down into steps.

 

Step 1: Like I said before, don’t state that you want to lease before you have the price in writing (preferably on a buyer’s order)! If you mention this before, the dealer will refuse to discuss anything other than monthly lease payments and you’ve set yourself up for a bad deal. If a dealer asks, just say you are buying cash to keep it simple.

    -Refer to the other stickied thread here on negotiating price via email. Don’t negotiate out the door prices, insist on broken down prices aka Car + destination + doc fees + taxes + title.

 

Step 2: Given step 1 you have now nailed down cap cost. Cap cost in most states = Car Purchase price + Dest + Doc Fees (remember you have these down to the lowest possible in step 1) - Taxes (from step 1...but not in a few states) - Down payment + title + lease acquisition fees

    -But don’t forget about lease incentives! Many manufacturers give you extra “cash” if you lease. For some models, you can find this info online on other forums/sites (such as Edmunds, etc…). But for most, the best way is to anonymously call a couple dealerships (use google voice) and ask them if there is lease cash/incentives for your particular model. If one dealership plays hard to get/avoids the question, they are trying to scam you. Move on and be VERY careful with all future dealings with that dealership.

 

Step 3: Hypothetically you know how many miles you drive per year and how many months you wish to keep the car, but you may not as prices vary. Try to pick the most likely months you’ll want the car. These two factors determine residual. Like for lease incentives above, call up and see if you can get a couple dealerships to tell you what the residual given the exact model, miles, and months is. For some models, this information is readily available online (as an example for Hondas, Weymouth Honda’s calculator displays this info).

 

Step 4: MF is interest rate as we discussed before. You need to figure out if there are any promotions that the manufacturer is running. Otherwise, you need to figure out what the top tier MF is. Keep in mind, your final MF might be higher if your credit is less than stellar (<720 Auto enhanced FICO). Once again, use the anonymously call dealer trick. Or online for a few models.

 

Note on Steps 3 and 4:Dealers might be hesitant to give you this exact info and it may be hard to find online. This is why I recommend you negotiate price first! If dealers don’t want to play ball, email a couple of them (with a different email/phone as the one used for prices in step 1) and ask them to give you the whole terms of a hypothetical lease. Pretend you’re new, looking to lease, and say you are comparing dealerships. Ask for a net capitalized cost breakdown, but what you really want to get out of them is residual and MF! Plug the things they give you into a calculator to double check the quoted monthly payment. If it doesn’t check out, challenge them, but at this point they likely know they are dealing with an educated customer and won’t BS you unless they are clueless.

 

Step 5: Go to the dealer with the cheapest negotiated rate from step 1. I still recommend working over email (the original one used to negotiate price). Say thanks, I like the deal. But I'm going to lease. You know what goes into cap cost (your original negotiated price!) so don't let them add stuff on at this point. WALK away if they play games with any of the things that go into a lease.

 

How do you know they are playing games? Well if they offer a lower residual or higher mf than what other dealers quoted you in steps 3 and 4! If they offer to lower something like mf, fine. Make sure they don't jack up another part of the lease.

 

Walking away is a powerful tool. Leave them a phone number to reach you at if they change their minds. They’ll call back 99% of the time if you’ve been reasonable.

 

And don’t be afraid to go to you second, third, and fourth lowest dealers who haven’t quite offered the lowest price too. If they offer more favorable lease terms you could pay less anyways even if the car costs slightly more! A lease calculator is your friend and always insist on getting a broken down set of numbers (separate out the components of capitalized cost, mf, residual, mileage). Try not to negotiate by monthly payment amount...generally there’s too many ways to screw consumers who do that.

 

The Down Payment...anything special I need to do?

===========================================================================================

 

Down payments on leases can in theory bring down MF. But they are a TERRIBLE idea for leases.

 

Why? Simple. Say you drive out of the dealership and total the car. Sucks right. Sucks even more once you realize that insurance + GAP will only pay off the finance company. Yeah, your down payment just vanished.

 

I would personally only ever put down as a down payment first month’s payment and taxes plus maybe $500 at most. Be careful if you put a lot down. It’ll literally vanish if your car is ever totaled.

 

A trick if you want to lower MF, but not increase your down payment is to get the finance company to accept it as a refundable security deposit instead. Talk to the dealer about this. Even if you had to put down a slightly higher refundable security deposit, it’s worth it vs. a downpayment on a lease in my opinion.

As I am very busy with work these days, I am participating in the forums less than I would like to. Please feel free to email me directly remembermyfico //at// gmail /dot/ com if you would like me to respond to a specific question you have.
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Re: The Definitive Guide to Financing or Leasing a Vehicle

[ Edited ]

Part II.III: Dealer Extras

 

This is pretty much is similar to the financing part, so it’s copy + pasted for the most part with a few changes.

 

Let’s discuss dealer extras...

===========================================================================================

 

So you’ve negotiated your price and have an approval for a lease. What can go wrong?

 

Watch out for the F&I office. They’ll try to sell you things like GAP insurance and warranties and life and disability protection.

 

Generally speaking, life and disability tend to be overpriced for the protection you need. Often one can get these from a third party (term life) or through an employer (disability) for MUCH cheaper. Also the unemployment insurance if offered is restrictive in terms. Read it carefully, often self-employeds are exempt making this “protection” worthless for them. Even if employed, it typically only makes so many payments. Weigh it carefully as to whether the premium for it is worthwhile.

 

Often GAP is included with the lease, but if not, GAP also tends to be overpriced. Ask you current car insurance company how much GAP costs through them. I was recently quoted $1/month (not a typo) and the dealer asked for $300 (after I negotiated it down from $500). You can guess which one I took…

 

Warranties may be worth it to you. I prefer self-insuring for smaller risks such as my car breaking down, but you may be more risk averse. For new cars, one can often purchase a warranty THROUGH ANY DEALERSHIP after buying the car. For Hondas, for example, it’s almost always cheapest to buy afterwards online from Hyannis Honda! Research this carefully. Also if leasing, why on Earth do you want a warranty when you have to return the car before the manufacturer’s warranty expires (unless you plan to buy the car out after the lease, in which case I’d suggest buying in the first place)?

 

Oh great. Now you tell me this. I just bought a car and got ripped off by dealer extras.

===========================================================================================

 

Read your contract carefully. Often you can cancel dealer extras within x days of buying your car (and get the refund applied to the principal of your loan). X is usually between 30 and 60 days.

 

Any thing else about dealer extras?

===========================================================================================

 

Watch out for the actual price printed. Often dealers change it from what’s negotiated. Why you should negotiate by email and get it in writing.

 

Also watch out for charges the dealer calls mandatory state charges, but really aren’t. In CT, for example, dealers love to say a “dealer conveyance fee” is mandated by the state. MY A**. The only fees mandated by the state are typically sales tax (look up your sales tax rate online) and registration and titling fees (look these up at the DMV’s website). Destination is a manufacturer fee on new cars and should be included when negotiating for price. Destination itself is non negotiable.

 

All other fees like Prep fees, Doc fees, Conveyance fees, etc… are dealer fees and go straight to his bottom line. You CAN negotiate this. Don’t forget it’s PURE PROFIT for the dealer.

 

I save a special paragraph for VIN etching. Some dealers say this is state mandated. Others say it greatly reduces chance of theft. Maybe it does reduce theft a bit (not a lot in my opinion). But a kit costs ~$25 to DIY. Dealers charge like 200 for this. I’ve really only seen this at bad dealerships, but this is PURE PROFIT for a dealer. If they tell you it’s state mandated, ask them to point out the statue which says so. I know of no state that requires it (and if they did, think, wouldn’t the manufacturer have to do it)? Like a manfacturer doesn’t expect the dealer to also install special emissions equipment in CA, do they?

 

Also make sure they don’t inflate state mandated fees. I’ve seen it happen sometimes. Independently look up/call the DMV and ask how much sales tax and registration should be.

As I am very busy with work these days, I am participating in the forums less than I would like to. Please feel free to email me directly remembermyfico //at// gmail /dot/ com if you would like me to respond to a specific question you have.
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Re: The Definitive Guide to Financing or Leasing a Vehicle

[ Edited ]

Part II.IV: Dealer Participation

 

I really recommend you read the section on dealer participation from the financing section. Else this may seem out-of-context. Also ignore anything about subprime from the financing section...leasing is mostly with captive lenders. Subprime lenders really don’t do leases.

 

What’s different about participation with leases?

===========================================================================================

 

Well the fun thing is dealers can “participate” in all of the various aspects of a lease (MF, residual, mileage, etc…). You need to be careful here. This is where getting multiple quotes helps. Also obviously read your paperwork carefully and make sure everything is right BEFORE you sign. DON’T let them pressure you to sign. Feel free to take up a whole day in the finance manager’s office reading everything or even request that you take the paperwork home and after reading you’ll sign. They’ll pushback, but be firm: I read or no deal. They’ll let you read.

 

 

Part II.V: Lease Termination

 

Anything about my lease ending?

===========================================================================================

 

Yes, several things you need to keep in mind.First thing is you need to decide if you want to turn in your car or buy it.

 

If you are over your mileage allowance or there's damage to the car, you can be liable for extra charges if you decide to turn in your car.

 

If your lease is ending because your car was abruptly totaled, I hope you are doing okay (I'm assuming it's totaled most likely due to an accident). Keep in mind that in this case, even with GAP insurance, your down payment vanishes. If you put down a security deposit (different than a down payment), you will most likely get the security deposit back.

 

I want to turn in my lease, what should I be aware of?

===========================================================================================

 

If you didn't like it or want a new car or it has depreciate more than what the residual value for the lease was, good reasons to turn it in. Keep in mind some leases have a lease termination fee if you decide not to lease again from the same manufacturer.

 

If you are turning it in and it's worth MORE than the residual value, try to see if Carmax or someone doesn't offer you a high enough number such that the lease can be paid off AND you're left with money in your pocket. I will warn though that this rarely ever happens and may not be worth a trip to a place like Carmax.

 

I liked the car and want to keep it. Anything I need to keep in mind?

===========================================================================================

 

Previously you may remember how I said that you pay at the lease end the residual value if you want to buy. BUT this isn't always true if the car is worth less than the residual at turn in. :smileywink:

 

Some finance companies will negotiate it with you. If the residual is more than what the car is worth, it's beneficial to them if you buy it. I recommend calling your finance company maybe a month before lease end and seeing if they'll negotiate the price closer to what the car is worth. Might have to call a couple times to get the right agent haha. If you guys agree to a lower purchase price, it won't hurt your credit or anything (just ask them to make sure). Some captives refuse to play this game though primarily due to dealership pressure, and that's their right.

 

Even if they don't agree to a lower purchase price, when turning it in, ask the dealer at turn-in if they'd sell it back to you immediately for less than the residual. You can even call a bunch of dealerships and ask before choosing which to turn it in at...you're typically allowed to turn-in at any dealership and that dealership usually gets first pick of whether they want to buy the car from the finance company before it goes to auction.

 

With the dealer, try to aim for a price a little above wholesale. If you have a friend who's a dealer, try to get him to look up Manheim prices for you. Else a good approximation is KBB Good condition trade-in value for many cars. With the dealer, mention that you've seen Manheim prices and MMR (use that abbreveation) even if you haven't haha. You'll look like you know what you speak of even if you don't lol.

 

Of course if the captive and dealerships say no, you can still just buy it for whatever the stated residual in your lease is just as always.

 

Finally, remember to shop for financing if you need it to pay the residual. You can look at the same sources as for financing (captives at the dealership, banks, CUs). I recommend treating it just as if you were buying a car since it works in almost the same way (read the financing section).



Part II.VI: Miscellaneous

 

Anything else I should keep in mind?

===========================================================================================

 

You need to know that leases are just inherently more complex than purchasing with cash or financing. No reason to not lease. Just be careful AND SHOP AROUND for lease terms! Also remember when first discussing price, do not UTTER the word lease or anything that sounds close to it.

 

Ultimately if you want the absolute best deal on a car, leasing is probably not going to make it easy to achieve. But if you remain vigilant, you can definitely get a good deal.

 

I have some leasing question not covered?

===========================================================================================

Create a thread and post in the auto loan section of our forum. There are many experts here glad to help and we don’t bite, we promise. In fact we promise to pass no judgment on your prior credit (mis)steps or what car you buy or whatever. We’ll just help you try and get financed (though we may point out that a particular purchase may be unwise if the financial picture you post merits it).

 

All discussion related to this thread here, please: http://ficoforums.myfico.com/t5/Auto-Loans/Discussion-of-The-Definitive-Guide-to-Financing-or-Leasin...

As I am very busy with work these days, I am participating in the forums less than I would like to. Please feel free to email me directly remembermyfico //at// gmail /dot/ com if you would like me to respond to a specific question you have.
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Re: The Definitive Guide to Financing or Leasing a Vehicle

[ Edited ]

Section III: Refinancing an Auto Loan (TBD)

 

Completion Date Advisory: For those who are curious or waiting for this section, I regret to inform you guys that this section will not be done until at least mid-April. Most likely, it will take until mid-May for me to post because I've just been very busy. If you have any questions on refi'ing, just post them in your own thread in the auto loans section and I'm sure your question will be addressed by someone.

 

As I am very busy with work these days, I am participating in the forums less than I would like to. Please feel free to email me directly remembermyfico //at// gmail /dot/ com if you would like me to respond to a specific question you have.
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Re: The Definitive Guide to Financing or Leasing a Vehicle

[ Edited ]

Change log:

 

  • 03/17/2014: Edited title of thread. Added table of contents (1st post). Expanded the section on negotiating price itself in the intro (1st post). Updated DCU's rate from 1.99% for 65 months to 1.24% for 65 months (2nd post). Updated lease section to include lease end FAQs (7th post). Added change log (9th post). Changed font size from 13px to 12px (PM me or something if you preferred the larger font).
  • 04/07/2014: In light of the new DCU developments/experiences I have heard, all mention of DCU has been removed from the post. Added a blurb on BofA + asking on the forum for lenders that match one's credit profile. (Multiple posts).
  • 06/12/2014: Edited the first post a bit. Just added that negotiating the price on a new car is pretty much the same as a new car with a few, minor exceptions.

Future changes to come:

  • ~04/20/2014 or later: Add refi section (8th post). Add section on trading a car in (TBD post, probably intro). Add section on what to consider when deciding buy vs. lease (TBD post, probably intro).
As I am very busy with work these days, I am participating in the forums less than I would like to. Please feel free to email me directly remembermyfico //at// gmail /dot/ com if you would like me to respond to a specific question you have.
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Re: The Definitive Guide to Financing or Leasing a Vehicle

Thats sounds like a great idea but the matter in question is the security deposit generates some interest value that is refundable?


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