Financing Tips

If you’re a buyer in position to do some interstate car shopping, you may have seen some cheesy newspaper ads and radio spots talking about how “the deals are better in (whatever neighboring state)!”. As bad as these attempts are to sway your opinion of buying a car outside your home state, there’s actually a lot of validity to the argument. If dealers took the time to educate their consumers rather than push big bubbly ads on them, the concept could actually be of value to many buyers out there.

Well, if you want something done right, I guess you’ve got to blog it yourself. So here we go.

You should first understand that there are several key elements of car buying which vary from state to state:

• Supply & Demand
• Manufacturer Programs
• Dealer Legislation
• Credit & Loan Legislation

Why should you concern yourself with such matters? Because driving to a dealer across state lines could mean getting a lot more car for your money, and that’s what it’s all about.

For one thing, making the trip across the border can easily land you in a different demographic region if you go far enough, where the car you thought was so hard to find (and even harder to get a deal on) turns out to be readily available. I helped a few friends with their purchases last year, and they experienced this phenomenon first-hand. A three-hour drive from South Jersey to Maryland meant the difference of $1,000 in the price of a 2007 Acura TL, simply because the market wasn’t as hot there. Even more interesting was the market for the G37 Coupe; brand-new at the time and in extremely high demand in northern New Jersey. Dealers there refused to take more than $1,500 off the MSRP, and even that offer came about after a lengthy negotiation. We decided to try our luck with a New York dealer only 40 minutes away, and found that they had no qualms about letting go of the G37 at $300 over invoice because no one in their snow-ridden area was biting on the rear-wheel drive car. 40 minutes driven, $2,500 saved. Not bad.

You also have to consider the legislation of all the states in your area. We’ll stay with the New York/New Jersey theme as there are some great examples there.

We’ve all seen that mystery fee on our vehicle purchase forms referred to as “Document Fee”. You see, in New Jersey, it’s state law that you can charge whatever you like for Doc Fee, as long as you charge everyone the same amount. In NJ you could easily find yourself paying a $300 Doc Fee… though I suppose you can rest easy knowing everyone else got as screwed as you. And what about New York? Turns out that NY mandates a $45 Doc Fee for all dealers. Figure that one out.

Then there’s the matter of Gap Protection. Gap Protection is often sold as insurance, covering your first few years of ownership when you owe more on the car than it’s worth (hence the “gap” in your investment’s value). Gap Insurance is great for peace of mind, but it will run you upwards of $500 - depending on what a dealer decides to charge - on a financed vehicle in New Jersey. In New York however, Gap Protection is gratis… no need to purchase the insurance.

You’ve got the Internet as a great resource for gathering this information. Now you just need the time (and the patience) to shop for your best purchasing opportunity.

Automotive leasing has been gradually gaining steam every year, and consumers on the east and west coast have turned it into the preferred method of vehicle ownership. In the New York Metro Area for instance, leased vehicles often account for 75 - 90% of all automotive purchases.

So why hasn’t leasing caught on as fast in the rest of the country? Is it simply another case of the coasts setting the trend and the land-locked states showing up late to the party? Will leasing ever extinguish the concept of financing entirely? Because really, who in their right mind would want to pay $500/mo when they could pay $300/mo for the same exact vehicle?

Not so fast… financing is alive and well for many reasons, the most notable being that it’s still the better investment.

In fact, of the two options, financing is really the only one you could call an “investment”. In a lease, you’ve agreed to pay the vehicle off while its value is in the red - the period where it’s worth less than what you owe on it. It’s when the vehicle reaches a point of being in equity that financing and leasing take two different paths. At this point, a leased vehicle is returned to the bank, and you’re back to square one without a dollar in your pocket. Meanwhile, a financed vehicle becomes an asset once the vehicle is worth more than you owe, and usually reaches a maximum return value later on, around the time that you’re making your last few payments on the loan.

We can see how the length of ownership truly dictates how much value you’ll get out of your vehicle. If you get rid of cars every 3 or 4 years, then financing doesn’t really net you any profit (typical of drivers on the coast, hence the popularity of leasing). Holding onto your vehicle for 5 years or more is the secret to keeping your automotive expense as low as possible, and us fast talkin’, fast walkin’ folk on the coasts are too busy looking for the next best thing to stay in one car for that long. That’s why leasing is so popular on the coasts and not so much in the rest of the country, plain and simple.

There’s a recent development in car buying that rarely gets noticed beyond the “oh, I don’t want the old model” stigma. Manufacturers are now making a habit of rolling out new models with more attention to marketing strategy than production times… you may have already found yourself at a dealership in January looking at the next year’s model. It’s always enticing to purchase the latest and greatest, but what are the real advantages of buying a car “from the future”? Are there any disadvantages?

Our last blog post was a perfect example of this situation: the 2009 Nissan Murano debuted in January of 2008, with no 2008 model having been produced. Throughout 2008, you’ll have the option of buying either a 2007 or 2009 Murano, but there is no ‘08 to speak of. All other things being equal, which year’s model should you purchase? Does it matter?

You bet. If you’re financing a new vehicle, there are two facets to consider in this equation:

• Your annual mileage
• How often you trade in your vehicles

What makes this whole thing worth discussing is the fact that used vehicle values when traded into a dealership are calculated only on the model year, and not for the month the vehicle was purchased. Dealers and used car buyers both make this mistake, thinking for instance that all 2006 models are created equal. But when we’re talking about buying next year’s/last year’s model, it is very possible that a pre-owned 2006 model was purchased in either 2005 or 2007, entirely changing the consideration of the vehicle’s mileage and condition.

Pre-owned car values are gauged primarily on the relationship between model year and mileage. If the average car racks up 15,000 miles in a year, then a 4-year old vehicle should have 60,000 miles on it, and the value of that car will be pretty straight-forward, as calculated by the banks and the consumer market. But what happens when the year in which you purchase a vehicle doesn’t match up with its model year? Well, that’s where you can take advantage of the situation.

• When you buy last year’s model (i.e., buying a 2007 in 2008), the market unintentionally grants you approximately 15,000 “free” miles as soon as you drive the car off the lot.
• When you buy next year’s model (i.e., buying a 2009 in 2008), the market assumes zero mileage until the next year rolls around, so any mileage you rack up in 2008 will look like overmileage down the line.

By now you probably see where this is going. Depending on the model year you choose, you’re either buying mileage or buying value. So, if you’re a high mileage driver, buying last year’s model makes sense, as those “free” miles will wash out your heavy driving years later when you’re ready to trade the vehicle in. Your high mileage driving will cancel out the free mileage grant, and your car will have the same value as any other 3 or 4 year old used car when you trade it in, even though you’ve driven it much longer and harder than its counterparts.

On the other hand, if you’re a low mileage driver, your years of conservative driving will cancel out the fact that you started driving a 2009 in 2008, and tacking on mileage that shouldn’t exist. As opposed to the high mileage driver, your reward is having the latest and greatest thing on four wheels, with no penalty down the road for mileage consumption when you trade it in.

The frequency with which you trade vehicles in plays a large part in this scenario, as both options have their “point of no return”. In buying last year’s model as a high mileage driver, your year of “free miles” can only help you out for so long… if you keep the car for 6 or 7 years, your high mileage driving will catch up with you and you’ll lose value in the market. The sooner a high mileage driver can get out of last year’s model, the better the investment. For the low mileage driver buying next year’s model, the opposite is true. You need time for your low mileage driving to offset the initial mileage that you put on before the car’s production year caught up to itself. The longer you keep such an investment, the better it will pay out relative to the market.

Worth noting: if you combine low mileage driving with buying last year’s model, you’ll always be driving a car that is worth more than its counterparts, and this is a great position to be in. Conversely, if you’re a high mileage driver looking to get into next year’s model, your mileage will nearly kill the value of the investment, and in that case you’d be much better off leasing, as lease resale values actually are calculated on the month a vehicle goes into service.