New car thoughts-leasing, paying cash, and extended warranty

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21

It is pertinent. The OP wanted to know about these extras. I’m saying…they are not necessary and others have said the same.

@snowball if you can pay cash for this car…go for it. And don’t feel obligated to buy these unnecessary extras.

Do you have a trusted friend or relative you can discuss this all with? See what someone IRL that you know thinks.

Like I said…no extended warranties, no service contracts, nothing. And for us, the only reason we didn’t pay cash is we would have lost put on some significant financial incentives…but pay off will happen!

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I’m sorry - but this is not sound advice.

It may be sound for you - and I’ve explained above.

It depends on the current interest rates - but if you are buying a Mazda, for example, you would take the 0% and not pay it off. Anytime you can make assured money on another’s money, it would be foolish to pay off early - at least from a financial POV - but not everyone is subventing APRs so low…so in the end, OP has to find the vehicle of choice and go from there.

OP noted they heard dealers make money on finance. I simply pointed out that rates are just the beginning of what Finance Managers sell. I didn’t say to buy extras - but I was pointing out it’s about a lot more than just finance - that job is a lot more sophisticated than in prior cycles and was noting that to OP.

And it’s not sound advice to say - no no no to extras. Some, first off, you can’t avoid - the dealers put them on every car. And every dealer has a doc fee - some $499, some $999, etc. You can shop. For an ELW (extended warranty), the OP should shop the price and terms - because at a basic level if they’re not over charging, the extra few thousand dollarss might be worth it to the OP piece of mind. You know what happens with cars - once the warranty is gone, parts wear out and break - especially with all the telematics. And you know what mechanics don’t do today - they don’t repair. They replace. I don’t know OPs risk / reward mindset - but they should examine and decide what they are comfortable with when they are purchasing the vehicle. Again, some dealers sell at MSRP and for an extra two years, likely well worth it (in my opinion, as again, we pay out more in warranty than we bring in - hence a recent price hike). And some try and take a customer’s head off - by charging $8K for something that stickers at $2K…so ask for the MSRP. Only OP can decide what is right for them - not you and not me. And they should study the options.

OP You can also take the easy way out and go through the Costco Auto program. You won’t necessarily get the best deal - but you’ll get a very good deal, etc. If you’re not a Costco member, you can join for $60 or $65…it simply will take the back and forth negotiation out of it if you’re not comfortable.

One other thing OP - you talked about finding a local repair guy. They still exist but there are fewer and fewer and they have less ability to work on new cars… The reason - all the new car technology and they have high tech systems - that only they have access to. There are some states - like Mass I believe - coming out with laws that the OEMs have to share that technology or offer it to independent shops. As you can imagine, the OEM lobbyists are working hard against these laws. But again, that will vary where you are.

Good luck to OP on your purchase.

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You know…some people just don’t want to have a monthly car payment no matter how low the interest is. It’s still a payment going out every month. YMMV, of course, and I’m just giving my POV.

And regarding extras, I’m talking about the add ons they try to sell you…not the conveyence charge or anything like that. Add ons are something to consider…or not. Many folks just say NO. I’m not the only one. And yes…plenty of folks do pay for these extras…which add to that monthly payment!

If I can pay cash for something…I pay cash for it…cars included.

@snowball you are fortunate you have the option of paying cash. If that’s what you want to do…go for it.

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24

Interest rates are currently relatively high so in general terms you are likely better off paying cash if the funds are available and not invested. Obviously you have to see if there are incentives that offset these higher rates.

Extended warranty programs are designed to be profitable. This means they earn those selling them greater fees than the repair payments made for the “insured”. Those selling the program have extensive access to historical data and rely on large numbers to resemble that history. In general terms you are paying a premium for security but you are paying a premium. If you can tolerate that uncertainty (beyond the warranty) it is better to pass.

Lastly you are dealing with commission based sales forces. They are not your friends and will take advantage of you because it is in their self interest. Think scorpion and frog fable.

Good luck!

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25

What finance or dealership managers earn is not relevant to this conversation, and should not be the OP’s concern. Her concern is to get the best deal she can, as she has to be concerned about her finances, not the managers’, and to think about maintenance convenience. Many new cars come with long maintenance agreements. Since she has a good mechanic, she doesn’t need an extended warranty once the base warranty has been exhausted.

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26

Interest rates are high but many OEMs, from Mazda (0%), Hyundai (.99%), Toyota (as low as 1.99%) and more are offering huge subvention as inventories pile up. This means the sales organization is paying the finance arm to lower the rate in hopes of boosting buyer demand.

Some organizations offer an either / or - for example, Mazda is offering 0% for 36 months or $1500 off - so giving the customer the choice and hoping and praying that you choose the $1500 as it’s cheaper for them.

If you buy a $35K vehicle and you invested tax free at $1400, over 3 years you’ve made a lot more than $1,500. Or if you bought a 3 year CD (taxable), $1500-$1600.

So what current interest rates are is not relevant when the OEM is offering subvention - which comes with no loan fees. The rate offered is the rate, in other words.

As for Extended Warranties, yes OEMs price them based on historical records - similar to other insurance policies. That’s what these are. But in the last few years, repair costs for many OEMs went way up given their dearth of supply and components. Why? OEMs had to find new suppliers and many of these suppliers are not tier 1 - and costs went way up and in cases I know exceeded OEM revenues (hence price resets).

Some organizations also cheapen out on the supply chain. There was one organization, that to save 40 cents, used a crappy part. They ended up having a recall and spent more than $100 million to resolve the campaign. However, if it wasn’t done in a campaign, consumers would have been in a world of hurt.

This is a risk / reward for the customer. You hope never to need warranty services after the initial expires. But a bad tranny, cylinder heads or anything mechanical, electrical or technology related will cost a fortune to fix, especially if OP chooses a European car.

I’m not saying OP should purchase an ELW. I’m saying that she verify MSRP pricing (so they don’t get robbed), study the terms, and make the best risk/reward decision for their comfort level. But to simply say avoid it could end up costing someone huge $$ down the road. None of us know the brand, cost, or terms. And for those who live in Florida, you are assured not to get ripped off as dealers can charge no more than MSRP. Not sure if any other states have similar laws.

I work in the industry - and today, I would not purchase a vehicle without an ELW of at least 100K miles. And I would not purchase used, even a Certified Pre Owned - just too many horror stories of the certifications being “subjective” and customers getting big bills. Not in most cases - but in enough to warrant concern (to me). Of course, driving habits also matter - because if someone is driving 5K miles a year, for example, it changes the calculus.

That’s my opinion.

In the end, only a consumer can make these decisions on warranties for themselves…because if something goes wrong and they’re not covered, they’ll be the one with the bill - and today those bills are often in the high single to $15-20K in repair costs.

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27

It was relevant to the fact that she noted that’s how dealers make money and I was simply noting there are lot more things in finance they make money on - that’s all.

They don’t always make $$ on financing.

When OEMs offer 0% financing, usually there’s a flat paid to the dealer - say $300 - of which the manager in most cases would get only $60. Whereas if it were a standard rate of 8% and the customer was being marked up, they’d make a ton (but this customer would pay cash).

I was simply explaining there are so many offerings today - and it’s beyond rate - because OP is not aware of all the nuances of today.

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Buying an extended warranty means that you expect the car to be unreliable and expensive to repair after the warranty period. If so, consider choosing a different car.

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Even Toyota makes lemons!!!

Again, it’s individual - risk, reward.

OP, this is just brands - there’s model breakdowns and there’s other studies - but here is the Consumer Report one by brand - if it’s a help to you:

How the Brands Stack Up

Brands are ranked on average predicted reliability, based on CR member surveys.

How the Brands Stack Up

Brands are ranked on average predicted reliability, based on CR member surveys.

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We have gotten extended warranties on our last two vehicles primarily due to the electronics. We have used those extended warranties on multiple occasions more than saving us money. In one case the entire electronic circuit board went out. In another the radio system went out but because of the electronics involved it was an extremely pricey repair. Just got our car back from the dealer with a $7000 transmission issue, covered on extended warranty. But of course we drive our cars into the ground/high mileage.

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100%. We had a Mercedes G550 that we Lemon Law returned after its third transmission failure in under a year. Thankfully the dealer and manufacturer worked with us but never again even with an extended warranty.

I am not in the business but have owned numerous cars. Do your research on the brand and model.

In terms of interest rates…

“the cost to finance a vehicle is also trending up. Financing costs are often an afterthought in the car affordability equation, but a higher interest rate can mean paying thousands of dollars (or even tens of thousands) more over the course of the loan.”

Auto Loan Rates Hit 10%, Used Cars Even Higher - CarEdge.

https://www.msn.com/en-us/money/personalfinance/why-it-s-so-expensive-to-own-a-car-right-now-in-5-charts/ar-BB1lrFMl

“ Auto loans are getting more expensive

On top of all that, many Americans are paying higher interest rates on their auto loans.

The average interest rate on new-car loans increased from 5.7% in February 2020 to 7.1% this past February, Edmunds data show”

I trust these unbiased experts but certainly shop what incentives are available.

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This is how car leasing is calculated. Purchase value - residual value= amount to be financed over the term of lease. If the purchase value is 50k and residual value is 35k then you are financing 15k over 3 years (lease term). Higher the residual value, lower amount you are financing. Higher end cars tend to have higher residual values, therefore less lease payments (BMW vs Honda).
Leasing is not good for people who drive a lot, more than 10-15k miles per year.
When I used to need cars, I found leasing to be better for me. I liked newer technologie and improved safety features with newer cars and less maintenance issues. I was never the kind of person to drive car to death.

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33

This is key - when you lease, you are in essence signing up for a perpetual car payment - but the advantage is that you always have the latest and greatest. Some like that - and some want to be done paying and drive to the death but then they’ve got old technology, smaller screens, potentially torn and scratched interiors, and higher repair bills.

There’s no wrong answer - everyone is different.

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OP- consider posting this question on the JMOA page (you know what I am referring to). Folks there will be more likely to provide recommendations of places they have had good and terrible purchase experiences. No need to get sidetracked by irrelevant side issues. And while certainly any brand can have lemons, for the most part the Japanese Vehicles (especially the Toyotas/Lexuses) are very reliable. I know you aren’t able to install a Tesla charger so that’s a deal breaker, but just FYI the purchase process for them is clean and direct, and they have much less maintenance (and the prices are currently great). Also, pick up the April issue of Consumer Reports (their annual car buying guide). Full of useful info. Also look up www.truecar.com for good info.

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We have purchased or leased many cars - for decades at least one every two years (employer requirement). We learned to evaluate purchase/lease/extras each time and to never say never on any of these options. Sometimes we leased and did a pay ahead lease for two years (pay ahead can be a little risky, but we had deals and then no payments). We thought we would never do a loan, but 0%-1% interest and incentives made it worthwhile. We thought we would never buy at the end of the lease, but once the residual purchase price was thousands less than market price and we bought on behalf of a family member, to whom we resold (no taxes due), also found a dealer with an especially low fee for this type of residual deal by shopping around. We usually do not do trade-ins; we keep cars in immaculate condition and sell them ourselves. We didn’t think we would ever buy a warranty past the standard warranty, but once bought a pothole warranty for a car that was used in an area with lots of potholes. We have almost always had employee or friends and family deals, would look into Costco if we didn’t. We do not put lots of mileage on cars. Good luck on car purchase. My suggestion is to evaluate a couple or more scenarios of time, lease/ purchase/finance as well as decide on a car and dealer.

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Did the employer in this case subsidize the purchase or lease of a car every two years?

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Add Tesla to that list, which is offering 0.99% on the Model Y, which also qualifies for a $7500 EV credit. For those willing to consider a Tesla Model Y, it’s an absolute bargain right now.

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They are a bargain for a reason…

Now may be a good opportunity but buyer beware…

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They were overpriced during COVID-related supply shortages. I think they are fairly priced now before the rebate, and underpriced after the rebate and low cost financing.

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Yes there’s many OEMs subventing rates - whether purchasing or lease.

If the OP is going to have a vehicle for x years, 13, like the other - depreciation is not really relevant. It does seem like the OP will want an ICE vehicle - or hybrid (if leased til they get comfort).

In some cases, just like APRs are subvented, leases are as well. Many OEMs are looking to move units in larger #s and are willing to kick the financial can down the road.

So OP mentioned hybrids but any lease where a car has low APR - the OEM (it’s model dependent), the OEMs will subvent the residual (meaning, guarantee a reduced amount of depreciation during the lease term) and buy down the money factor (interest rate) - to make a compelling case for someone who wants to try a vehicle for a few years and have the option of walking away. However the trade off for the lower lease payment may be a higher pay off if the lessee wants to purchase at the end - that will be dependent on the actual marketplace at the time.

You never know what could happen - as just two years ago, used cars were on pace with new cars from a pricing POV - and some dealers on off lease vehicles were paying their captives more than original MSRP to keep them. On the other hand, some lessees were buying even at higher prices - knowing they could flip them. But today’s market is much more supportive of the consumer (albeit with mass vehicle inflation these past 4 years).

But this is why OP needs to find the vehicle they want - and then go from there.

That should be paramount - finding what they want - and then they can work on finding an attractive deal for them.

I hope OP has fun driving the different models out there. Obviously they will be vastly different than 13 years ago with technology that has rapidly changed - and yes, added a lot of expense.