Leases and lengthier loans can reduce car payments

Car shoppers are increasingly favoring financial arrangements like leases and longer-term loans that allow them to buy costlier vehicles but with more manageable monthly payments.

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Car shoppers are increasingly favoring financial arrangements like leases and longer-term loans that allow them to buy costlier vehicles but with more manageable monthly payments.

Almost 27 percent of all new car transactions in the third quarter of 2015 involved leasing, up from about 25 percent a year ago, according to data* published recently by Experian Automotive, which tracks automobile financing. That's the highest proportion since the company began making its data public in 2006.

With a lease, a shopper pays for the car for a set period of time, typically three years. At the end of the lease, that person has the option of returning the car to the dealer or buying it. Monthly lease payments are generally lower than payments on a standard loan because they are based on the car's depreciation over the lease period, rather than the full purchase price.

Consumers save an average of $84 a month on payments by leasing a new car rather than taking out a loan, Experian said. The average monthly lease payment was about the same as a year ago, at just under $400 a month.

"When you lease, it really is all about the monthly payment," said Philip Reed, senior consumer advice editor at the auto website Edmunds.com.

Shoppers who buy cars with loans are also looking to keep their monthly payments down, and one way to do that is to extend the loan term. In the third quarter, the proportion of consumers who took out car loans of 61 to 72 months — five to six years — reached record highs for both new (44 percent) and used (41 percent) cars.

Loans of even longer terms are gaining popularity as well. New-car loans of 73 months to 84 months — six to seven years — increased to nearly 28 percent, and long-term loans for used cars reached a record high of 16 percent.

Melinda Zabritski, Experian's senior director of automotive finance, said rising prices for both new and used cars were pushing up the average size of car loans, and consumers were seeking to make monthly payments more affordable.

Jeff Bartlett, deputy auto editor with Consumer Reports, said the recent data continued trends that had been evident throughout the year. Consumers are more confident about the economy, he said, so they are more comfortable buying more expensive cars, while lower gas prices make buying larger vehicles, like sport utility vehicles, more feasible.

But the lower monthly payments available with leases and longer-term loans come with some trade-offs.

Longer loan terms mean buyers will pay more in interest for the car over all, and increase the risk that some sort of economic shift — an increase in gas prices, say — may make the car less affordable during the life of the loan, Mr. Bartlett said.

Leasing, meanwhile, can lock consumers into a stubborn pattern of monthly payments.

"When you enter a lease for the first time, it seems wonderful," Mr. Bartlett said, since the lessee gets a new car with low monthly payments, and down payments that are usually quite low as well. It is easy to overlook that at the end of the lease, there will not be a car to trade in to help finance the purchase of another one. That makes another lease more likely, so the consumer never has the benefit of a payment-free period, as when a shorter-term loan is paid off.

"It's hard to break the cycle," he said.

People who drive long distances, or who often transport children or pets, may not be good candidates for leasing, he said. Leases typically include a fixed mileage amount — often, 12,000 miles a year — and charge drivers hefty fees for exceeding it. Leases also usually include fees for "excessive" wear and tear. That means that dents or scratches, or stains on the upholstery, may cost hundreds of dollars at the end of the lease.

"If you have messy children or a hairy, slobbering dog, think twice," Mr. Bartlett said.

Lease agreements can also be confusing and contain jargon, as well as hidden fees, that make it difficult for shoppers to understand clearly the overall cost. "It pays to go slow and look at all the numbers," he advised.

Consumer Reports has a list of leasing pros and cons on its website.

Mr. Reed of Edmunds said the cheapest option over all was usually to buy a used car, perhaps with a small loan. But some people truly enjoy driving new cars and, if consumers understand the trade-offs, he said, leasing can make sense. The consumer has a car with the most up-to-date safety features and will be driving it during its most reliable period, so there is less worry about budgeting for repairs. "It's quite likely you won't even have to buy tires," he said.

Here are some questions and answers about leasing a car:

  • Can I negotiate the mileage terms in a car lease?
    Yes, Mr. Bartlett said. Mileage fees can add up. If you drive 1,000 miles over the limit, and the overage fee is 25 cents a mile, that's an extra $250. So if you suspect you will go over the allotment, you can seek to negotiate upfront for extra miles, at a lower rate, and be reimbursed for the miles not used.
  • Are leases available for used cars?
    Leases are most common with new cars, but they are available for some used cars, Mr. Reed said — typically, certified upscale cars offered by dealerships.
  • Can I get out of a car lease early?
    Yes — but significant early termination fees usually apply. Edmunds.com suggests that you may be able to have someone else assume your lease, through websites like swapalease.com and leasetrader.com. The sites charge fees, but they may be much lower than the termination fee in the lease agreement.
Topics:
  • Financial Planning
  • Making a Big Purchase
  • Financial Planning
  • Making a Big Purchase
  • Financial Planning
  • Making a Big Purchase
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* Q3 2015 State of the Automotive Finance Market report by Experian Automative, published December 2, 2015
This article was written by Ann Carrns from The New York Times and was licensed as an article reprint from December 4, 2015. Article copyright 2015 by The New York Times.
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
This reprint is supplied by Fidelity Brokerage Services LLC, Member NYSE, SIPC.
The third-party provider of the reprint permission and Fidelity Investments are independent entities and not legally affiliated.
The images, graphs, tools, and videos are for illustrative purposes only.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917.
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