IFMA Auto Network

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Now that you have decided on what to buy and where you're buying it and ... aaaaahhh! The Finance Manager is asking a bunch of questions...Now what??? Be careful. Again THINK!

It is amazing how many folks decided to pay the extra $55 per month before they go to Finance, and come out paying $110 more. A little here and a little there, it adds up. Again, before you go to the dealership and start this process, decide on how you are going to pay for the vehicle as well. Cash, Loan or Lease. Let's go over these.

Cash
Many people think that the cheapest way to buy a car is to pay cash. If you were to talk to your investment counselor, she/he would probably say no. Think about it. You are purchasing a depreciating item. The value declines. What if you make money by purchasing the vehicle with a low interest loan? If your money can make more interest than you pay, would you still pay cash?

This is not for everyone. You do have to be able to make payments. Some fixed income individuals do not have monthly income to afford a car payment, so in that case, cash is probably best. Here's how it works:

First, make sure your loan is "simple interest", like your Credit Union offers.
Second, find a "compounding interest" account, like a CD, to invest the money you're about to spend on a vehicle.
Now, place the money you were going to spend in the interest bearing account and don't touch it for the term of the loan.

If you spent it on a vehicle, it's no longer available anyway, right? At the end of this term, compare the interest earned to the interest paid. You will have earned more interest than you have spent. Now compare the value of the CD to the value of the vehicle at the end of the term and you will be glad you did it this way.

Loan
When choosing the loan for your vehicle, the choices are as varied as the choices of vehicles. Auto manufacturers, Banks & Credit Unions are the main sources of auto financing available. The Auto Manufacturers like GMAC and FORD Motor Credit, and so on, often offer supported interest rates of 2.9%, 4.9% and 6.9% and so on. Let's discuss these for a moment.

In most cases the manufacturer will be offering a rebate or this supported finance rate. They advertise the interest rate much more than the rebate for a reason.

The average owner only keeps a vehicle and a loan for 28 to 30 months!

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If you have a 36, 48 or 60 month loan for a discounted interest rate, odds are in the favor of the lender that you will not keep that loan for the full term and thus forfeit the full discount! If you take the rebate, even if your payments are a small amount higher, you are getting the discount up-front and no matter how long you possess the vehicle, you have received the full discount!
So, my advise, get a low interest loan from your Credit Union & take the rebate!

Lease
Leasing is very popular and for only one reason --

A seller can structure a lease to allow a buyer to "hit a payment" and buy the car of their dreams.

Before you sign, think about it. Leasing is NOT for everybody. A business person may lease a car for tax purposes. There are little to few tax advantages to leasing a car by a private party. In the long run, you pay a great deal more in finance cost to lease. It is simple "pay now or pay later" scenario.

Leases are expensive because you are using a lot of someone else's money. Also, many use a "money factor" rather than an interest rate. Some manufacturer leases are shown as an interest rate and it is usually higher than a regular loan rate.

With a money factor, a good rule of thumb is to add 9 to this number that is quoted you. If they tell you the money factor is 4.9, add 9 and the equivalent is a cost to you of 13.9%.

RULE OF THUMB:

MONEY FACTOR + 9 = REAL COST

The residual at the end of the lease term is also something you will have to finance, so calculate the interest you will pay then also. It can really add up.

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