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.
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.
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.
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:
First, 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.
Second, 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.
While 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.
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.
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.
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.
Can extra fees and charges be financed?
Yes, registration, taxes, extended service plans and other supplemental charges may be included in the financing plan.
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.
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.
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.
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.
What are the laws regarding automobile insurance?
The laws vary by state, but most require basic liability coverage. States want to be sure that motorists have some financial backing in the event of a collision or any insurance-related incident. Most states require insurance to operate a vehicle in any circumstance, but there are a few exceptions:
Tennessee and Wisconsin do not require liability but legally expect drivers to prove adequate "financial responsibility" in the event of a collision. (Source: TN, WI DMV websites)
New Hampshire initially requires no insurance but does temporarily after a collision. (Source: NH DMV website)
Virginia is a rare exception, allowing a driver to pay a $500 Uninsured Motor Vehicle fee to legally operate without insurance at his/her own risk. However, the fee expires with the registration and must be renewed. Drivers in Virginia opting for insurance must meet the state's minimum coverage. (Source: VA DMV website; http://www.dmv.virginia.gov/webdoc/citizen/vehicles/insurance.asp)
Drivers in these four states often still carry insurance as protection.
How is one protected from uninsured drivers?
By purchasing uninsured/underinsured motorist coverage. UM/UIM pays for medical bills if you and any occupants are hit by an uninsured motorist or one without enough insurance. Many states require this coverage by law.
How is a vehicle protected from uninsured drivers?
Uninsured/underinsured motorist property damage coverage pays for damage to your vehicle if hit by a driver without any or enough insurance. Some states offer this coverage in place of collision coverage.
Is coverage transferable from state-to-state in the short term?
Yes, if you have an insurance policy you're covered throughout the United States. Moving to a different state temporarily may require changing coverage, depending on the amount of time a state allows residency with out-of-state insurance.
What about long-term?
Moving for the long-term definitely requires switching insurance, although the time to do so can be somewhat variable. For example, a state may technically require changing after 90 days, but if you have two full months left on your current policy it would seem silly to switch prematurely. However, the "grey" period in between could prove problematic in the event of an incident.
What is an SR-22?
An SR-22 is a form that proves a driver has insurance or is financially responsible. High-risk drivers are often required to carry these forms for periods of 3 to 5 years, depending on their offenses.
What is liability insurance?
Liability covers bodily injury (including death) and property damage to others if you are determined responsible for an accident, even if you are not driving. Owning the vehicle and lending it to someone else constitutes responsibility. Liability coverage also pays for legal fees if you are sued as a result of an accident.
How does one decipher the numbers associated with liability?
Insurers will often represent liability coverage with three consecutive numbers; for example, 50/100/25. The first number stands for maximum amount payable for an individual bodily injury in an accident, in this case $50,000. The second number represents the available coverage for all injuries in an accident, or $100,000. Finally, the last number denotes maximum property damage liability for one accident, $25,000.
What are the minimum requirements?
Amounts of required coverage vary among states. Along the spectrum of minimum coverage, a low figure is 15/30/5 (California, New Jersey) while a high set is 50/100/25 (Alaska, Maine).
What is comprehensive insurance?
Comprehensive coverage pays for damage to your vehicle that is not caused by an accident with or without another vehicle. Natural events - fire, wind and flood - are included, in addition to theft and vandalism. Damaging encounters with animals are included as well. If a vehicle is stolen, comprehensive will reimburse you for any related expenses or losses. Some comp plans pay for the replacement of broken glass, often known as full-glass coverage.
What is collision insurance?
Collision pays for damage to your vehicle in the event of an accident, regardless of whether or not another vehicle is involved. This insurance also provides you coverage if you are driving a non-owned or rental vehicle.
What if the accident is my fault?
Several states have enacted "no-fault" policies that mandate your insurance company pay compensation for injury or damage regardless of who is to blame. These laws are meant to streamline the liability process while reducing injury fraud and lowering premiums.
How are insurance rates determined?
Many different factors contribute to the final insurance rate. Generally, these pieces fall into the following categories:
Personal information — name, address, date of birth, gender, marital status, home ownership status, employment, education, credit history, membership status to various organizations, social security number (in some cases), age at which a driver's license was first obtained and very importantly, your driving record.
Family information — other primary drivers, other occasional drivers and their driving histories.
Vehicle information — year, make, model, primary use (pleasure/work), how often the vehicle is driven to work or school, business use of the vehicle, how long you've owned the vehicle, factory safety equipment, presence of an alarm/immobilizer system, expected annual mileage and zip code at which the vehicle is normally parked.
Previous insurance information — name of previous insurer, length of previous insurance, lapses in insurance, previous liability limits and other coverage.
Previous insurance claims, accidents and moving violations — essentially an elaboration on your driving record, including dates and severity of the events and costs of repair.
Desired coverage — limits on liability and whether or not comprehensive and collision are chosen.
Why is the parking zip code required?
Insurance companies want to know where the vehicle is kept most of the time and if it garaged, driveway parked or street parked. Obviously, areas with higher crime will contribute to higher comprehensive rates than those with lower crime.
What is a premium?
A premium is just another name for a rate.
What is a deductible?
A deductible is a fixed amount of money you pay for each insurance claim. For example, choosing a deductible of $500 per accident means that for each accident you pay that amount before the insurance pays. If you chose to add comprehensive or collision you can vary your rate by adjusting your deductibles. High deductibles correspond to lower rates, while low deductibles often mean higher rates.
What if the claim is below the deductible?
You pay the full cost. If you carry a $1,000 deductible for collision and a minor accident causes $700 in damage, you're fully responsible for the cost.
What if a vehicle can be repaired for less than the paid amount?
Often a vehicle is repaired without using the entire insurance payment. Although different insurers maintain different policies, repairs are generally supposed to be documented to show the money went into the repair of the car. It's perfectly legal to keep part or all of the money and not fix the car, but in the event of another accident with the same vehicle an insurance company may reduce payment in accordance with the first payment. For example, if an insurance company pays $2,500 for an accident and only $1,000 is documented in repairs, the insurer will assume that the remaining $1,500 is still available and reduce the second payment by that amount.
What is a total loss?
Vehicles that are considered totaled are determined not suitable for repair. Insurers pay the cost of replacing the vehicle with a similar vintage make and model.
Are only certain shops allowed to perform the repairs?
No, most states allow the shop to be chosen at your discretion. Some body shops may not be approved by the insurer, in which case you might have to pay a little more.
Are aftermarket or OEM parts used for repair?
Depends on the parts' availabilities. You can request that factory authorized parts be used, although sometimes this costs a bit more.
How long does a policy last before needing renewal?
Generally speaking, policies run either six months or one year, at which point the rates may be adjusted to reflect differences in the driver's record, number of drivers, covered vehicles, etc.
What is a Declarations Page?
A Declarations Page is a report from your insurer stating your coverage and limits, drivers insured, vehicles covered and the cost of coverage. These reports usually arrive shortly after renewal or when beginning a new policy.
Tips for reducing insurance premiums
While reducing liability coverage and raising deductibles may lower premiums, there are other ways to lessen your rates without sacrificing any coverage.
Keep a clean record
Some insurers offer a discount to drivers who consistently prove to be safe drivers by not receiving moving violations or being involved in accidents. At the least, keeping a clean record will prevent extra surcharges from being added to your premium.
Maintain consistent coverage
Customers who do not lapse in their insurance often receive a better premium when applying for new coverage.
Take a defensive driving course
Drivers who participate in official courses in defensive driving may see reductions in their rates, especially if accidents or moving violations appear on their driving records.
Take a Driver Improvement course
For drivers over 55 years of age, these refresher courses can improve skills while reducing rates.
Choose a suitable vehicle
Certain vehicles are cheaper to insure depending on their characteristics. A basic Volvo and a powerful Chevrolet Corvette are likely to have very different rates.
Trading in your current vehicle towards another can partially offset the cost of the new vehicle. The trade-in's net value goes towards the purchase or lease of a new car. Conditions of a trade-in vary depending on who owns the vehicle.
If you own the vehicle, trading-in means that you're selling the car to the dealer for some determined price. As a result, the price of the new car goes down, only.
If you are leasing a vehicle and do not own it, trading-in means that the seller of the new car agrees to pay the outstanding costs associated with the lease. Depending on the financing of the new vehicle and the outstanding balance on the old one, trading-in can either raise or lower the new car's price.
Why is it beneficial to trade-in?
When you trade-in you don't have to worry about selling the vehicle yourself or any of the associated costs (advertising, showing the car, etc). A dealer may offer a price you could not get yourself as an incentive to purchase a new vehicle. If the trade-in has known problems that could plague you later (when the buyer returns complaining), selling the car to the dealer eliminates the bother. Trading-in a lease car may relieve you of, in the long run, monthly costs you cannot afford. Sometimes people trade in lease vehicles because of poor gas mileage or lack of practicality.
Why decide against trading-in?
If you think you can get a better price selling privately, and it's worth the time, money and effort, do not sell to the dealer. Some cars are of special interest and dealers will not always recognize those interests.
What happens to a trade-in?
Some are kept by the dealer and resold as used cars. Many are sent to auction and purchased by other dealers for resale. Dealers know that auction prices often will not match the sum credited toward a new vehicle, but they absorb the losses as sales incentives.
How much can I expect to get?
Check used car values in guides issued by organizations such as Edmunds.com or the National Automobile Dealers Association (NADA). Often both trade-in and private sale values are listed. Factors such as mileage, overall condition, damage and known mechanical problems heavily influence the trade-in value.
If a part on your vehicle demands replacing there are three options for replacement.
First, you can find a factory OEM part by either going through a dealer or contacting the manufacturer directly. Factory parts are built by the OEM manufacturer to the exact same specifications as the existing parts. New OEM components are generally the most expensive option but often yield the best fit, durability and overall quality. If you own your vehicle and are thinking of reselling, documenting repairs using factory parts can increase the resale value of the vehicle.
Second, you can find a new aftermarket part from a variety of parts dealers online and at shops around the country. Aftermarket parts are often exact replicas of OEM parts but are built by companies not associated with the primary auto manufacturer. While aftermarket pieces are less expensive than their OEM counterparts, they also may suffer in terms of quality, fit and finish. Aftermarket parts are great to get a car back up to speed if the budget is an issue and fit/quality do not matter. However, some aftermarket companies produce pieces that are of exceptional quality.
Third, you can find a used factory (or maybe even a used aftermarket) part at a salvage yard or from a private seller. Good used factory parts are a great way to save money and get an OEM specified piece at the same time. Obviously, used parts are subject to wear and are highly variable in their quality and usability.
To determine the best method of replacing a part, check with you dealer, owners of similar vehicles and on the Internet to determine what option makes sense. You know the new OEM part will work, so read online testimonials to see if aftermarket replacements are worth the cost. You can also gain insight that's helpful in a used search, learning the common defects/attributes of a part before buying it yourself.
Many suppliers offer both OEM and aftermarket parts for a broad range of vehicles. Some specialty parts may not be produced in the aftermarket if demand does not warrant investment. Tracking down these obscure pieces may require consulting a parts specialist. Some dealers have caches of unused factory parts, often called New Old Stock (NOS) or New Old Replacement Stock (NORS). These command high prices especially when out of production.
Like replacement parts, some add-on accessories are factory authorized while others are produced in the aftermarket. Depending on the popularity of a vehicle, a variety of special components exist to modify it. Engine enhancements, body kits, interior pieces, electronics, exhaust systems, wheels and tires are among the many elements that contribute to customization.
Understand the conditions of your warranty
All new and many used vehicles arrive with a warranty covering unexpected repairs. Be sure to understand the duration and covered components of the warranty. A typical warranty might be written "48/50,000" meaning that coverage lasts either 48 months from the initial purchase or until the vehicle has 50,000 miles, whichever comes first.
Why are multiple warranty periods listed?
Depending on what is being repaired, the length of a factory warranty varies. Often a comprehensive "bumper-to-bumper" warranty covers everything outside of schedule maintenance. This is generally the shortest warranty period. A usually longer powertrain warranty covers engine and transmission defects. Anti-corrosion protection often lasts even longer. Finally, some manufacturers offer roadside assistance for a limited time.
Are used vehicles still covered under factory warranty?
Warranties are often transferable, meaning that a vehicle inside its mileage and duration caps will maintain its factory warranty.
How does one maintain the warranty?
By performing required service at the proper intervals and responding if something clearly goes wrong. Your owner's manual explicitly lists service intervals, although cars are often equipped with "check engine" dashboard lights that signal needed maintenance.
What is the driver's job?
You just need to take the vehicle in for service when the time arrives. Factory-authorized technicians must perform service and any other outside maintenance can potentially void a warranty.
Will a warranty pay for all expenses?
Many warranties cover the parts and labor costs involved in fixing unexpected repairs but place the burden of expected maintenance on the customer. Certain repairs may be covered by some manufacturers and not by others.
Changing your engine's oil and filter is one of the most vital maintenance procedures possible. Oil keeps friction down in the engine and prevents the motor from seizing up. Typical intervals for new cars are between 5,000 to 15,000 miles.
Water and antifreeze keep your engine from overheating and freezing during extreme temperatures. Intervals for flushing the system and replacing coolant vary, as some manufacturers promise long lasting antifreeze good past 100,000 miles. A general timeframe would be every few years or 30,000 to 40,000 miles.
Older vehicles required the replacement or adjustment of spark plugs much more often than new vehicles do. Manufacturers today promise over 100,000 miles before a tune-up that includes changing the plugs. Still, checking the plugs at 50,000 to 60,000 miles is not a bad idea.
The interval for changing the filter depends on the quality of filter, type of vehicle and environment in which most driving occurs. Traveling on dirt roads will surely clog a filter faster than paved highways. Also, local pollution can determine filter life.
Again, the interval of changing a battery depends on the type of battery, type of vehicle and local climate. Super cold regions may require a more powerful battery for cold starting. Also, rechargeable batteries that have completely lost their charge at some point often never reach full potential again.
During scheduled maintenance it's a good idea to inspect all hoses, belts and other connections under the hood to be sure everything is in good shape and properly attached.
Wipers need to be replaced, especially in climates with ice and snow. Sometimes just the blade needs replacing, while other times the entire wiper unit should go. Some customers may choose different types of wipers for better performance.
The type of vehicle, specific tire and driving style determine the life of a tire. Many are rated to last 30,000 to 70,000 miles, but an aggressive style can wear out tires in 15,000 miles. Customers may deviate from OEM specification in the interest of better looks or performance.
Like tires, brake life depends heavily on driving style. Lots of stressful braking will significantly shorten the life. Replacement requires new rotors and sometimes, new pads.
Anything required for an annual inspection can also need replacing. Light bulbs, exhaust components and emission controls may require fixing.
Different seasons require different types of tires. Many manufacturers sell vehicles with all-season tires that are suitable for most conditions. However, if your vehicle arrived with performance summer tires you should invest in a set of snow tires for safety in the bad weather. Some drivers with all-season rubber may also fit snows for added security.
How does one find correct snow tires?
No tire is perfect, as extra competence in one category often means compromise in another. For example, a tire that is great in snow may be so-so on dry pavement and average in the rain. Try to find reviews on a tire to determine if it meets your criteria.
Always be sure to maintain the proper inflation for safety, performance and longevity.
Buy four matching tires, for the most part. Some rear-wheel-drive cars can get by with just rear snows, but front-wheel-drive cars should never have snows up front and non-snows out back. The inconsistency in grip during braking can cause the tail end to slide out of the driver's control. All-wheel-drive vehicles require four tires as well.
When purchasing a set of snow tires try to pick up an extra set of wheels on which the rubber can be mounted. Not having to mount/dismount tires each season saves time and maximizes tire life. Often your dealer will sell a reasonably priced set of steel wheel to match the snow tires.
More seasonal precautions
Be sure your engine oil is the correct viscosity. Colder climates can cause oil to thicken, demanding a thinner oil to start.
Check your antifreeze and be certain the proper water-to-antifreeze mixture is maintained. Antifreeze testers are available at many auto parts stores.
Verify that your windshield wipers are operable and keep the washer fluid reservoir full.
Double-check hoses and belts. Cold temperatures can cause rubber to shrink and crack, so be sure your hoses and belts have some flexibility left.