Some customers insist that paying cash for their new vehicle saves them money in the long-run. This is not necessarily true in every case, and I’ll explain why.
First of all, in times of economic uncertainty like we face now, why would you tie up a large amount of expendable cash on a depreciable asset like a vehicle? Unless you are purchasing a rare car that is projected to have a higher resale value in years to come, you will most likely lose money in depreciation alone.
Second, most manufacturers offer significant “incentives” or “rebates” to customers who lease. In some cases, this could be worth between $5,000 and $10,000 depending on the make and model you choose.
“But I don’t want a monthly payment.” Fair enough. For this customer, I suggest a “prepaid lease” that offers all the rebate offers of a traditional lease except you pay the entire 24 or 36 months upfront instead of monthly payment. Here is an example:
The total drive off to pre-pay a 24-month lease for a $39,450 vehicle is $11,126.06. They have no monthly payments for two years as if they had paid cash for the car. An added benefit to a prepaid lease is that at the end of the lease they have two choices: 1) turn in the keys and take delivery of a new vehicle or 2) purchase the vehicle at a reduced residual value that is locked in at the start of the lease.
For customers who want to build good credit, paying cash for a vehicle does absolutely nothing for their cause. In fact, when the time comes to make a large purchase on credit like a house, “no previous auto credit” becomes a disadvantage.
I’ve run across several cases where the parent wants to shield their son or daughter from a car payment. In one instance, the 23 year old son is actually going to make monthly payments to the parent, but it’s “interest free.” In the long run this is really doing the young adult a disservice because they are robbing him from the opportunity to build credit. He’s making steady payments, but he’s not getting credit for it. Where cash is available at the time of purchase, I suggest that instead of paying for the entire car upfront, go ahead and finance it with one of the parents as a co-signer. Then put the money in an interest bearing checking account and set up automatic payments. This way the customer is building auto credit, there’s no chance of late payments and the assets are still liquid in the event of an emergency.
Let’s get back to leasing. Here is a real-life lease situation from December 2008. This customer chose a 36-month lease and wanted her payments to be less than $350 a month. This is how it worked:
Vehicle MSRP: $31,150
Customer cash down: $ 2,000
Manufacturer Rebate and Incentives: $ 5,750
Monthly Payment including tax: $ 344
At the end of 36 months, Ms. Customer can purchase her vehicle at 43% of the MSRP or $13,394.50 plus tax! Or not. At the end of three years, she has the option to turn it in or purchase it. Either way, she paid a total of $14,384 (36 monthly payments plus her cash down) to drive a $31,150 car for three years. Not bad, huh?
If she had paid cash for the car, she would not have qualified for the $5,750 manufacturer rebate and dealer incentive, and she would have paid thousands of dollars in upfront sales tax based on the total sale price of the vehicle. Not to mention that a good portion of her available cash is no longer available.
I’m not claiming that leases are for everyone. Some manufacturer rebates are better than others. They change the rebate and incentive programs each month, and they are only offered on certain models. Each customer has individual needs when it comes to owning or leasing a vehicle including their personal preferences and driving habits, so the “deals” vary depending on the manufacturer, the model you are considering and, most importantly, your credit score.
That being said, leases are definitely worth thinking about.
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