Buy, Lease or Repair Your Car?

Today’s automobile is not only ultra complex in terms of technology, design and operation; but also the mere process of making a good financially sound decision mirrors that complexity. For the past ten years autos have been designed and manufactured with technology that surpassed the Apollo space rockets and the marketing that sells these cars have evolved into an intricate web of features, numbers and options that serve to confuse the average buyer. There are the automobile’s options, but then there is the negotiation, the financing, and the method of obtaining the car. Should one buy or should one lease or just keep what they have? Clearly automobiles are not an investment but a controllable expense. Another complication to the process is the folks that sell the car to you.

A successful sales technique must focus on emotion, not product-benefits and the agent who appeals to the prospects' emotions by getting them excited or disturbed, finds closing the sale easy. If one is not prepared or worse yet combined with desperation, they may be easily overwhelming into making a bad decision. Drazen Prelec of the MIT Sloan School of Management says: “When you purchase any good, your enjoyment is reduced by the psychological cost of paying for it". It’s no wonder that most folks prefer to dream about owning a different car than to actually buy it. Most often new cars are compared when leasing or buying, but a car already owned adds a new dimension. Is “being nickel and dimed to death” over repairs a fact or fallacy? Therefore, how does one become prepared to buy, lease or repair when faced with this decision?

It is best to whittle away as much unneeded information as possible. Knowing what you want, what you want to pay and how long your going to keep a car should become the primary focus. Knowing what you want is purely about taste, if money is no object. Looking at the prospect from a “best financial decision viewpoint” may help answer how long to keep it. There are both fixed costs and variable costs to consider; but most important is the relativity of cost to drive. Beatty, Hill and Trocchia summarize their study “An Empirical Study of the Purchase Lease Decision Making Process” as “ Leasing appears to be the choice of certain consumer types who want more 'bang for their buck’, as well as for those consumers who, given a specific set of non-economic motives feel that leasing represents the better economic value.” The operative word here is “feel” which is emotional, as opposed to “knowing”, which is logical and factual. While the marketers need the feelings, the consumers need the facts. Leasing is certainly a great advantage for the new car industry, CNW Marketing Research, of Bandon, Ore. Claim that “Ford buyers stay out of the new-vehicle market for an average of 62 months, while its lease customers are back within 32 months”.

To find good answers we need to know where the money is spent, for what and at what rate. Jerry Seiner, who sells General Motors and other brands at four locations in the Salt Lake City area remarks, “With up to 70% of those who lease becoming repeat customers, says he would "absolutely rather have them lease" than buy. Plus, he says, “he gets a steady supply of high-quality used cars from the leasing returns”. So if dealers prefer you to lease than buy, is it plausible to think there is an economic motive to have people leasing? Before buying your next business vehicle, check out how much it costs to own and operate. Don't just calculate fuel economy--taking into account the true cost to own, or TCO, is the smartest way to budget transportation over the long run. Ongoing expenses include maintenance, fuel, repairs, insurance, financing, depreciation, and state taxes and/or fees.” Relative costs would be fuel economy, insurance, financing, depreciation as well as taxes as they are relative to the vehicle or area and would be consistant whether repairing, leasing or owning. Purchasing costs also have variables not taken into consideration for this study. Such as financing which can dramatically raise the cost of purchasing depending on rates and loan length. Both options of buying or leasing also are not reflective of insurance costs, which stand to be higher than an older model already owned.

Comparisons often used are based on “cents per mile”. What may be difficult is determining how to establish that number for what car. The IRS figures the cost per mile to operate a car is 34.5 cents on average. While that number helps give a reference point, it needs to be applied closer to our three options of leasing, buying, or repairing in the same terms. The numbers we need to focus on regarding the lease are the payment cost per month and number of months of the lease, (lease cost per month X lease term in months = total lease cost assuming 0 down payment). For new car purchasing the cost of the vehicle and sales tax will be used. For both comparisons a thirty-six month period will be used, as this is the duration of the complete manufacturer warranty period, (Payment cost per month X 36 months). For repair costs a period of 36,000 miles and beyond need to be considered as the car is now out of the manufactures complete warranty period. A used car purchase can be also be predicted in a general sense as well, although the market price of the car used car is very difficult to establish as well as the warranty aspect of this example.

According to the website calculator at leasecompare.com, a 2007 Chevy Cobalt is $316/month to lease, yielding a 36 month total at $11376 when using a cost of $15,129.00. At 36,000 miles the cost per mile of this lease is 32 cents. If you drive less, you’ll be at a higher cost per mile. Say you only drive 9500 per year or 28,500 miles for the lease term; the cost is now at 40 cents per mile. If buying the car outright, using the same, invoice of $15,129 (MSRP: $16,140), and a sales tax rate of 8.00% for a total of $16340. The cost per mile over the same 36,000 miles is 42 cents per mile. The difference is 10 cents per mile to own the car and have it paid for in three years when it is purchased.
The prices used were based on invoice prices which is overly conservative, higher negotiated costs should be anticipated. The credit score is based on 730 and no money down or a trade-in considered. Purchased vehicles are based on cash to eliminate a potential variable of financing.

The research done at the shop I work at show that the customers of the shop “generally pay 7 to 13 cents per mile to drive their owned car saving them $5100.00 annually when they drive 15,000 miles instead of replacing it with a new one.” After 36 months, when the car is paid for, owning the car has the cost to drive dropping to an approximation of 13 cents per mile for maintaining and repairing on average. After compiling the numbers, I found that the Kia Rio was less to buy than to lease for the 3-year/36,000 mile period. To check this, Northtowne Automotive Co. in Western New York was contacted. An Internet Sales Specialist at Northtowne Automotive Co's confirmed this surprise, saying, “It works out in you favor” when purchasing the Rio over leasing.

Depreciation does need to be addressed in some manner. While it needs to be accounted for, the market value will actually dictate how much of a used amount has been undertaken. For example, a person can spend $15,000 on a car, three years later the projected depreciation is $8100 leaving $6900 of residual value, but may still not sell it for that amount. On the other hand, a customer of Bundy’s Auto Repair in Niagara Falls, NY bought a Jeep Cherokee for $575.00. Six months later another driver hits her daughter and the insurance company gives her $2350.00 for it.

Arlena Sawyers of automotive news writes, “ Among all nonluxury brands, Honda tops the 2007 residual rankings. Honda cars and trucks will maintain 53.7 percent of their value after three years. Overall, though, 2007 luxury-brand vehicles have residuals 48.5 percent. Kia is at the bottom of the rankings of non-luxury brands for 2007, with a three-year residual value of 37.2 percent. Jaguar trails among luxury brands, with a projected value of 38.2 percent.

So it can be said that a 3-year depreciation will fall in the area estimated at about 46% - 63% for a new car, leaving a residual value ranged at 37% - 54%. It should be noted that the depreciation is based on the sticker price, as negotiated prices are typically but slightly different. Bob Tasca Jr., president of the Tasca group of car dealerships adds some insight, “Lease payments are not based on a vehicle's full price, as are finance contracts. Rather, lease payments are based on a vehicle's residual value - an estimate of what it will be worth at the end of the lease”. We know when the new owner drives a new car off the lot, it becomes a used car and depreciation is then realized. The large difference between buying and leasing payments are largely due to who maintains control of the depreciated vehicle.

It should be understood that these options are not meant for business usage that “may” have a tax advantage. There are also many other points that will affect what the decision’s extra costs are. Leasing costs that are not taken into considerations are a gap protection insurance that will cover you in the event of a collision. Additional costs for exceeding the mileage or extended wear and tear when turning the car in. Another factor is the depreciated value that is used for the contract. Lessors can manipulate the anticipated residual value called sub venting a lease.

Brendon Moore from AUTOSAVANT explains, “When lessors sub vent a lease, they typically artificially bump up the residual value of the vehicle leased, or, lower the lease finance rates, or, lower the FICO credit scores needed in order to be approved for the lease.” The Northtowne group takes advantage of sub-leasing as a salesperson can move a potential customer into a Subaru as the manufacturer to move more cars most likely due to excessive inventories has inflated the residual value.

Now that having leasing or purchasing new vehicles been addressed, what about repairing one that is already owned? Folks may be reluctant to replacing a transmission or engine should they fail due to potential costs of three to four thousand dollars; opting to replace the vehicle instead.

Runzheimer International, a cost analysis firm, has calculated the price of car ownership based on a 36-month retention cycle. They say that depreciation and interest account for about half the expense of driving. Because cars depreciate most drastically when they're newest, buying a used car can eliminate the worst depreciation. It also can lower vehicle taxes and may reduce insurance premiums. Typically, a car becomes cheaper to run as it ages”.

If you were to buy a used car for $3000.00, the following 36,000 mile period may reflect a cpm of 21 cpm for the purchase price and anticipated repairs and maintenance. This projected cost would still be less than lease situations. But if you already own that same car, the cpm drops to an estimated 13cpm or $4680 for the 36,000 mile period. What this means is that once you own the car, your costs to drive drop substantially. While that figure could potentially, but unlikely doubled, it would more likely be favorable to be reduced by 70%. It should be understood that CPM is a good tool to bring the expenses to a common denominator; it can be also used to understand what can be budgeted for. If you drive an average of 3000 miles in three months, which is the typical oil change interval, than you are driving 1000 miles per month. 1000 miles per month multiplied by 13 CPM equals $130 per month or $1560 per year. Owning a car never means driving for free, but driving for much less once you do pay for it.

Armstrong reverberates in the The Milwaukee Journal Sentinel the misconceptions of human nature: “One of the great snow jobs we pull on ourselves every couple of years is to come to the conclusion that a new car makes sense because the old one is starting to run into rust and repairs, and it will ultimately be cheaper to own new. But not according to the experts. Studies by Runzheimer International and IntelliChoice Inc. that put aside the "subjective considerations of image, safety, comfort and reliability" and strictly compare the costs over four- and five-year periods come to the conclusion that it's quite a bit cheaper to stick with what you've got. "Most people don't do their homework on it," said Kathleen Wondolkowski, a consultant with Runzheimer, the Rochester-based consulting company.” Financial planner John Czajkowski, president of Midwest Financial Planners Inc. hedges on this as well, “Cars go a lot longer now and look good longer", who continues to drive a 1989 car with 105,000 miles on it and has no plans to trade for new. He weighs the cost of depreciation and finance charges against the future. "Those things are a real drag on your ability to pay yourself first with savings for retirement," he added.

In conclusion, there are variables will affect individual decisions that can not be determined until that particular point time or be in speculation only. It is apparent however that once a car is paid for, it is the most likely least expensive option to choose versus replacing it, especially with a new one leased or bought. Should one be hedonic in their lifestyles choices, they will pay a much higher price to do so. Vehicle leases appear to possess greater desires for gratification and to be more likely to seek social approval in regards to their vehicle selection than automobile financers. On the other end of the economic spectrum from life-style financers are those who rent near-necessities such as furniture and appliances. These individuals rent over many months and end up paying up to three times the purchase price in rental agreements. Those who make decisions on feelings instead of facts or are not prepared for the skilled auto sales force are far more likely to endure a financial loss and can be more susceptible if they are under pressure for a car immediately.

Complications can challenge the prepared when the process adds in financing and trade-in features as well as vehicle variations and options. Purchasing a vehicle can become a large equation that a single variable can turn the transaction into a poor choice for the consumer. In this consumption driven society, there is a false perception that leasing is the best choice for those who are on a tight budget. This is essentially like just paying the minimum payment on a credit card. While cars do reach a point that repair should not be done, it is more often from obsolesce of part availability, lack of maintenance or severe rot to the under carriage that places a vehicle in this category. A little simple math can show how some high repair bills are not as evil as the continual financial drain of just paying for the vehicle.

Article by Paul L. Davey

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