Consumer Reports Article Comparing Leasing To Financing A Car:
The Money Lab determined that buying a car—in this case, the best-selling 2008 Honda Accord EX, at $24,495—would cost $4,597 less over five years than closed-end leasing for exactly the same model.

Consumer Reports calculated that it would cost the average consumer nearly $4,597 more to lease a Honda Accord than to finance the same car over a 5 year period. Assuming that you get an average loan rate of 7%, the final cost of the Honda Accord is $29,100. That is $4,500 more than buying the vehicle outright. What about buying a used car instead of a new one. Can you guess how much you would save by buying a 3 year old Honda Accord with cash, instead of financing a new one? According to Kelly Blue Book, a 2005 Honda Accord EX in excellent condition with 45,000 miles should retail for $18,095. It would cost $15,890 if you bought it from an individual.

Lets recap, shall we:

• Brand new Accord: $24,495
• Brand new Accord with loan: $29,100
• Brand new Accord with lease: $33,697
• Used Accord with 45,000 miles: $18,095

By choosing to buy a used model with cash, instead of leasing a new model, you can save $15,600. You could buy a second car with that.

photo by flickr user mjmyap

This is the first post in a series of posts on how to buy a car. I won’t give you tips for haggling with salespeople, but I will tell you how to pay for the car and which cars you should look for.

In the United States of America there is an unwritten law that says every car commericial must end by telling the consumer about the APR (Annual Percentage Rate) on the car loan -or- the cost to lease the vehicle. I have not seen a commercial in years, if ever, that advertised either a dealership or a specific brand of car without mentioning auto financing. This is endemic of the mindset of American car buyes; which states, “No man, woman, or child can purchase a vehicle without first obtaining a loan or a lease.”

In America, you’re weird if you pay cash. It’s just unheard of. My wife drives a fairly new car (2006 model year) and when she bought it, the most common question we had was, “did you get a good interest rate?” Needless to say, they were blown away when we said that we paid cash for it. While not paying cash is one of the worst sins that most people make when shopping for a new car, it isn’t the only one.

The Rules Of Buying A Car

A coworker of mine purchased a brand new Minivan not too long ago, and they managed to break every rule in my car buying book. The first rule that they broke was that they bought a vehicle the first time they went looking. Except in very interesting circumstances, I would never recommend buying something as expensive as a car or a house the first time you go out looking. I especially would not buy at the first dealership I visited, as there are many others that might offer a better price.

The second rule they broke, which is more like a guideline, is that they purchased a new car. In his brilliant book The Millionaire Next Door Dr. Thomas Stanley surveyed and interviewed thousands of millionaires living in the United States to determin what qualities they had in common. One of his most surprising discoveries was that the average millionaire is not who you think he is. He doesn’t flaunt his wealth by spending a lot of money on material goods, which is probably how he became a millionaire in the first place. The average millionaire buys used cars with cash, and doesn’t drive a recent model car. They don’t behave like this because they have poor taste, it was this behavior that made them rich in the first place.

The third rule they broke, was they did not read their contract. They had a verbal deal with the salesperson to purchase the van for one price, lets say $25k, but when the salesperson brought them the contract it was for $32,000. Honest mistake or ruthless trick, I have no idea- but it doesn’t matter, because it cost my coworker $7,000 either way. I believe that people spend less time and energy researching and purchasing their car, than they do their HDTVs. People get the idea that they need a new car (usually when their existing 2-year old car is still working fine), and then let the salesperson talk them into buying something they don’t need and can’t afford. It is just the wrong way to operate. Always do your research, and always read the contract.

The fourth and final rule they broke was that they financed the entire thing. They didn’t really care how much they paid for the vehicle because it didn’t cost them a dime when they left the store. Sure, they’ll have $500 car payments for 7 years, but it didn’t cost them a dime that day. It’s a pretty sweet racket for the car dealers, signing people up for long term financial commitments with practically no short-term consequences, all while showing them beautiful new cars. Who could resist? The truth is that getting a loan on a car is way more expensive than buying it with cash, because the dealership doesn’t make much money on the sale of the car - they make money on interest. Leasing is just a more profitable method of loaning money for a car. In a future article I will break down the cost differential between buying with cash, getting a loan, and getting a lease.

Realign Your Expectations

A big part of shopping correctly for the right car, is to realign your expectations to something reasonable. If you make $40,000 per year, then buying a $20,000 car is probably not the right move. In this situation, you can get a very nice used car that will last 5 or more years for less than $10,000. Today I saw a car for sale for $4000 that had only 60,000 miles on it, and appeared to be in great shape. If you are desperate for a car, one like that would last you many years. Changing your expectations for your next car could be the best financial decision you’ve made in a decade.