 Personal Finance PowerPoint Presentation Large Purchase Process, Car, Lease or Buy Decision Get ready to get financially fit by practicing Personal Finance Remember that when we're purchasing larger items that have a bigger dollar amount that will have an impact for multiple periods into the future we typically want a more formalized decision making process than we might have on those day-to-day types of decisions those day-to-day types of decisions we can mold through habit and we can mold through basically trial and error as we make those day-to-day decisions those larger decisions where we're going to make like a one purchase item and that's going to be impacting us for multiple periods into the future we can't use the same kind of tools as the trial and error types of decisions this is the kind of thing where we can't really use the tinkering logic to figure things out, the trial and error method instead we've got the saying of measure twice cut once type of things types of decisions that therefore we want a more formal decision making process for the most part we've been grouping the process into the four categories of one the pre-shopping activities, two evaluating activities three determining the purchase price and four post-purchase activities now we're thinking specifically about a car which for an individual purchaser that's going to be one of the big type of items we often spend a lot of time kind of contemplating and thinking about one of the decisions specific to a car or pretty specific to a car would be do we want to lease the car or do we want to be purchasing the car that's what we'll discuss now we're getting this information from Investopedia which you can look up online and look up for information and references there should you lease or buy a car pros and cons by Daniel Kurt updated March 7th, 2022 reviewed by Thomas Brock should you lease or buy a car the pros and the cons for anyone facing and expiring lease it's decision time either buy the car from the finance company or return it and find a new set of wheels deciding what to do with your current vehicle is always a personal choice maybe you really like your current car and feel like keeping it so whenever we're thinking about the car and the purchase of the car it's something that's going to be personal as well as something that has a utilitarian purpose in other words we're buying it to get us from A to B but we also have enjoyment that we're deriving from the car and some of those things are easier to quantify than others so when we're putting together our formal kind of purchasing process whether we want to buy or whether we want to lease for example and what type of car do we want we want to quantify kind of the utilitarian use of the car and then we also want to somehow be able to quantify in our decision process the joy we get from the car do we feel better about owning the car versus leasing the car or leasing the car versus owning the car does that sense of ownership give us a sense of value these are things that are more difficult to quantify in a formal kind of process but things that we want to attempt to do so so that we can come up with a more kind of numerical decision making process for those bigger decisions that are going to have impacts multiple periods into the future otherwise we're driven kind of more on emotional types of decisions which again isn't that good often times for longer term decisions might be fine for short term decisions trial and error where we're fine tuning our habits so or perhaps you've decided to buy rather than lease your next one and are considering choosing a used car this time buying a leased car key consideration so key considerations if you're buying the leased car so if you do go through the leasing process of course and then at the end of the lease you often have the option possibly to be purchasing it at that point in time so you've got the question as to that point in time whether to buy the car or not and then of course if you're going into the purchasing process anew whether or not you want to be leasing in the first place or purchasing a car and then of course we can get into whether we want the new car or the used car so a whole lot of different factors and decisions with regards to the decision for the purchase of the car so the leasing firm's asking price is obviously a key factor there are also some overall benefits to purchasing your existing car for one you know the car's history which is an advantage most used cars buyers don't have so when you're purchasing if you were to lease the car and you were saying I'm going to lease it to buy it perhaps then you're kind of getting a nice test run to be able to test out the car and you know how well you took care of the car so if you're the type of person that takes care of the car then you're probably more likely to say I know the car has been cared for as opposed to someone who leases the car and likes to run it into the ground and it's like the big lines the whole time just because it is a leased car and they don't feel like it's an ownership of their car and again those are kind of things that you want to keep into consideration is the feeling of ownership of the car and like caring for the car so that it will be a long term kind of lasting thing something of value for you or perhaps the thing more of value for you is to get the most use out of the car to be able to almost abuse the car that for a shorter period of time you're not expecting the car to last a longer period of time so this is especially true if you've pampered the car while it was in your care so are you the type of driver who meticulously goes in for an oil change when it's due so if you're doing the upkeep then that makes a big difference in terms of how long the car is going to last and you really don't know what the upkeep has been for somebody else when you buy of course a used car do you keep your car in a garage year round to maintain an immaculate finish if so you'll be buying a car that you know is in excellent shape ironically buying the automobile can also be a plus if you haven't treated the car particularly well most leases include extra fees for unusual wear and tear on a vehicle which may show up during the inspection so in other words if you took out the lease and you like to basically possibly overuse the car for example and possibly not take care of it quite as well then usually within the lease terms if you've gone overboard on that then you might have more fees and it might actually be cheaper to purchase the car at that time so keeping the car is a way to stave off that extra expense those who put a lot of miles on their car may also save some money by purchasing it when the lease comes to an end so these contracts typically have an annual mileage limit if you go over you're assessed a fixed charge for any extra miles so when you go into the lease they're going to take the money back usually a lease is on the terms of how many years you're going to be using something but really the more accurate kind of measure would be miles you would think because you would think the life of the car would be more actually measured by miles not the years I remember there's an old Indiana Jones quote where he says something like it's not the years it's the miles right and so if you go over the miles then they might have an added fee of course and that's the amount of take that into consideration with the lease and decision in terms of how much you're going to be driving the car of course and of course the calculation on the cost of the lease you would think would be determined in part by the wear and tear in the car that would determine not solely possibly on years but by an average amount of miles usage that you're going to get out of the car take for example a three year lease with a 12,000 mileage limit by the time the lease expires the leasing company is expecting you to return the car with fewer than 36,000 miles on it but let's say you make long trips on a regular basis and racked up 45,000 over that stretch if your lease has an average fee of 6 cents per mile you'll have to pony up $1,350 when you return the car some overage fees can reach 25 cents by purchasing the car you don't have to worry about that additional surcharge so if you're basically planning on purchasing the car and you're running over that price then you know that's something to consider as well because then you can just purchase the car and you don't have to deal with that situation most likely how much does it cost to buy a leased car of course these potential benefits are only part of the equation for most drivers the biggest question after quote do I want a new car end quote is whether the purchase price constitutes a good deal so clearly whenever we're making a big purchase like this we want to walk away we want everybody to walk away from the table hopefully feeling that they had a good deal that they're going for because that's you know that's going to be an important psychological factor with these big purchases so the majority of leases will include a quote buyback price end quote the amount you'll have to pay if you'd like to hold on to the car it's a quirk of the leasing industry that this buyback price is actually determined before you begin your lease so again you would think the buyback price might happen like at the end of the lease when you can take all these considerations into factor but they want to basically put it in at the beginning of the lease before you really know all the conditions from the beginning to the end so you could kind of go into the lease determine that you're going to go through with the buying process at the end or you kind of have the factors of the knowledge up front to see whether or not you're going to and then act accordingly as you use the car so the reason is that in order to determine your monthly payments the leasing company has to estimate how much the car will depreciate during the course of the contract so when they're trying to figure this out one of the things is how much is it going to depreciate in other words how much of the car or what's the value of the car at the end of the contract that value of the car that they expect to get back at the end of the lease or that you're going to be purchasing at that point in time is going to be crucial information for them to do the calculations for the lease amounts so your monthly outlay of essentially the same price of the car minus its residual value that's the value at the end of the lease the residual value at the end of the time frame when the lease is up divided by the number of months on the contract so take a sedan that goes for $25,000 new over three years the leasing firm projects that the car will be worth $15,000 that $15,000 residual value becomes the basis for the buyback price so they're going to say okay I'm going to figure this out at the front end I'm going to try to determine what's going to be the depreciation with a decrease in the value of the car I'm going to determine what I think the car is still going to be worth at the end of that time frame and of course that's the basis on which they're going to determine the price they're going to mark it up most likely then at some point to get some kind of gain on it but that's how they're going to calculate so some leases contain a buyout fee which can make up the final price slightly higher but here's the thing sometimes the company's estimate estimate is off the factors that can affect resale value years ahead of time so clearly if you're talking about any substantial lease it's going to be over a year so if you're talking years into the future a lot can happen like in a day what's to say a lot happens in a day or a year or something so things could change so before deciding whether to buy your lease car you'll want to compare the buyback price from your lease to the current value of the car so clearly you're then going to think well what if I had the car and I was just going to sell the car how much could I get for the car I'm going to compare that to the buyout option of the lease so how much does it cost to buy a leased car continued sources such as Kelly Blue Book Edmonds and NADA Guides so these are going to be certain guides you can look a lot of them up online are good places to start so you can look at some of the options your car has where you live and the exact number of miles on the odometer as well as an honest assessment of the condition of the car so you could plug this information into these tools and they should give you a fairly accurate or give you at least a baseline price that you could work off of some experts suggest using the quote private party in quote price to steer your decision for less than its current market value and you like the car buying it from the leasing company probably makes financial sense but even if it looks like you'd be overpaying slightly at first glance buying the car can still be a good idea say the vehicle has a buyback price of $20,000 and a similar car is worth $19,000 from a private seller for some folks the fact that they know the car inside out might make up for a slightly inflated tag so in other words if you're buying from the dealership versus buying from some random person some people might say especially if you're not as up to date on being able to you don't want to go through a haggling process or you don't feel sufficient to try to go through the haggling process and you don't feel as secure then obviously if you buy from the dealership you might have a little bit more trust in the dealership than buying randomly from a private seller and of course you're the one that owned the car for the last time frame so you've got a pretty good idea of how it runs and again the maintenance and how well that you personally took care of it so if the driver faces mileage charges when they return the car to the dealership the decision gets even easier suppose the overage fees total $1,500 if you factor in these fees the true cost of buying a similar car elsewhere is actually $20,500 more than the price of the buyback so of course once you kick in the fees then the buyback price starts to look better negotiating the price in some cases haggling with the leasing company won't bear much fruit this is especially true for brand specific leasing companies which have a reputation for standing firm on their buyback price and so you might think about that is it like a good or bad, a pro or a con because haggling with the car dealerships can be a hassle and you can feel like the car dealer you can feel like you're at a disadvantage of knowledge even though you're the one that's been driving the car in this case for some time and so a lot of car dealerships are sticking by a price which I think is a pretty good strategy because then it actually gives people more confidence that the price they're sticking to is a reasonable one that's why they're sticking to it I tend to kind of like that as someone who doesn't enjoy the haggling process as much but many people do enjoy the haggling process and so there's pros and cons to it so if the leasing company is a bank or credit union experts say you might have better luck bear in mind that lease lenders have to unload that car somehow either by selling it to a dealership or putting it on the auction block sometimes they're looking to avoid the time and expense that goes along with selling the car to a different buyer so as such it might be worth finding out who's underriding and contract and try to negotiate so you might then say I don't know what you're going to do with the car after this point in time based on the haggle that I think that you're going to go through by selling the car let's see if we can lower the price so you might have some leeway to do that if you have more knowledge about what the dealership's options are at that point in time with the car to make money so the bottom line deciding what to do with your leased vehicle sometimes requires a little math it's a good idea to compare the buyback price to what the car would go for on the open market so don't forget to factor in any additional charges such as mileage fees that could make buying the car more attractive should you decide to buy the car and would need to take out a loan to do so it's important to consider what kind of price down payment, loan term and interest rate you can afford an auto loan calculator can be a huge help in this endeavor so anytime you're taking on the financing once you step into the purchasing of a car situation now you've got the price if the price is fairly set because it was set at the beginning of the lease and you got a pretty set buyback price that eliminates some negotiation although we saw that you can possibly try to negotiate at that point in time but then you've got the whole other negotiation process which is the financing process if you need to finance the car don't think that the financing department is not still part of the sales department because that's the other place where they kind of hit you with basically costs that you've got to be ready going into the financing department it's the same kind of thing you want to sit down and just trust the finance department of course you want to think about the terms of the financing and probably go home and work it out yourself and think about what you think is reasonable and then go into that financing department just like you would going into a car dealership department ready to negotiate the price and walk out if you need to so that's how I would recommend the financing so once you get the negotiation just the car, you're not done it's only halfway then you've got the financing