Finance FAQs

1. Are monthly payments necessary?  
  Unless you're in the position to pay cash for a new or pre-owned
vehicle, you'll need to establish a payment plan to obtain that
vehicle. Two options exist - taking out a loan or leasing.
2. How do loans and leases differ?  
  When you take out a loan, all of the money used to pay it off applies
to your eventual ownership of the vehicle. The initial down payment and
principal on the loan cover the total cost of the purchase. Lease
payments, however, apply only to the use of the vehicle. The total sum
of payments covers the vehicle's depreciation over the time you drive
it and is usually less than the outright price of the vehicle.
3. When is ownership transferred?
  When paid in full, a loan terminates and you assume ownership. Your
bank sends you the title that had been held while the loan maintained
an outstanding balance. When a lease period ends you forfeit the
vehicle to the lessor, unless the lessor offers to sell the vehicle
afterwards. During the entire lease period the lessor maintains
ownership and simply allows you to use the car. Ownership is only
transferred if you chose to buy the vehicle after the lease terminates.
4. How are monthly lease rates determined?  

In formulating a monthly payment structure, a lessor is primarily
concerned with the extent to which the vehicle will depreciate
throughout the lease and the cost of borrowing money to finance the car
during that period.

Three key elements:

the adjusted capitalized cost is determined. This figure represents the
real purchase price after elements such as the down payment, incentive
discount and trade-in credit are deducted from the capitalized (actual)
cost, while any fees or charges (e.g. destination) are added.

the residual value, or estimated value of the vehicle at the end of the
lease, is determined and then subtracted from the adjusted capitalized
cost to yield a depreciation figure. The residual value depends on the
length of the agreement, expected mileage and make/model of the vehicle.

Finally, a lessor assesses the money factor, a number that correlates with the cost of borrowing money during the lease period.

these terms may seem unfamiliar, the Federal Reserve Board now requires
dealers to publicize all leases' down payment amounts, lengths,
residual values and interest rates.

5. What factors determine the purchase price at the end of a lease?  
  Most leases rely exclusively on the residual value in determining the
end of term purchase price. These closed-end deals require you to pay
the fixed residual amount regardless of the actual market price.
Open-end leases work differently in that the actual market value helps
determine the purchase price. As a customer you are responsible for any
difference between the residual and actual value when buying outright.
6. How are loan rates determined?  
  The size of monthly loan payments depends on the amount borrowed, the length of the loan, the interest rate and other factors such as your credit history. Paying more money initially lowers the principal of the loan, thus reducing individual payments. At any period during the loan you may opt to pay off the principal in its entirety, at which point the title of the vehicle is transferred to you.

General loan specifications:

Down payment amounts may range between 10 to 20 percent of the vehicle's total cost, although some purchases require no down payment. A typical loan period is five years with an annual percentage rate around 8 percent. Some manufacturers offer lower rates, but be sure to investigate any associated conditions or clauses.

7. Are loans available for used vehicles?  
  Yes, although they function somewhat differently from new car loans. A
down payment of 20 percent or more is often required and the interest
rate can be a point or two higher. Understandably, banks are more
hesitant to loan money for used car purchases, as they would rather own
a newer car if the borrower defaults. However, the market is full of
good used vehicles, many of which are created by short term leasing.
8. Can extra fees and charges be financed?  
  Yes, registration, taxes, extended service plans and other supplemental charges may be included in the financing plan.  
9. Which option makes the most sense?  

The answer to this question depends on how you plan to use the
vehicle. If you like the idea of driving a more expensive vehicle for a
smaller monthly payment, leasing is a great option. However, if
eventually owning the car is important, financing with a loan is the
way to go.

10. What are the restrictions of driving a "borrowed" vehicle?  
  Annual mileage restrictions are a major limitation for customers who
choose to lease. Lessors want their vehicles returned in saleable
low-mileage conditions, so they place mileage caps on them. A typical
yearly figure is between 12,000 and 15,000 miles. Beyond the
established limit, fees accrue on a per-mileage basis, usually in the
range of $0.10 to $0.25 per mile. So if most of your driving is local,
leasing makes sense. However, if you consistently tack on 500 or more
miles a week, definitely look into a loan.
11. What are the other virtues of a loan?  
  Loans are also sensible for those who want to customize their vehicles,
plan on keeping their cars for long periods of time and plan to re-sell
their vehicles to help recoup the costs of ownership or expenses of
additional cars. For those who quickly wear vehicles out, loans may be
safer bets as lessors often add "excessive wear" charges if the car is
returned with wear over the limits established by the contract.
12. Why lease?  
  Leasing ensures that you'll always drive a late-model vehicle, won't
have to pay for warranty-covered repairs and won't have to bother with
re-selling at the end.