Jill is right. When she signed the lease three years ago, she
set herself up for this problem. Leasing is attractive because allows people to
drive cars that they really can't afford. That's because you're only paying to
use the car. During the course of the lease you build no equity in the car and
have to return it to the dealer at the end of the lease.
Using Kelley's Blue Book (www.kbb.com) for pricing info, we
found that a 4Runner depreciates nearly $12,000 in the first four years. That's
the portion that Jill was paying for. Unfortunately for her, the first few years
are the most expensive years for any vehicle. That's one reason dealers push
leases. It is very profitable business for them.
Jill has four basic options available to her. She can buy a new
car, lease a new car, buy a used car, or buy her existing 4Runner. Let's look at
Buying a new car will be the most expensive option. A new car
will mean the highest yearly depreciation and the highest monthly payments. But,
the biggest advantage is that once the car is paid for it belongs to Jill. Once
she's finished with the payments she can drive the car payment-free for as long
as she likes. She'll also have the benefit of the new car warranty.
If Jill chooses to buy a new 4Runner or similar vehicle, she'd
be borrowing $25,000 ($29,000 purchase minus $4,000 down payment). On a four
year loan the average payment would be $588 per month. That means that the new
car payment is nearly 50% higher than the used car payment. And she'd have an
extra year's worth of payments on the new car.
A sharp dealer could reduce Jill's payment on a new car by
showing her a 6 year loan. That would reduce her payment to $403 per month.
Basically the same as the used car payment. But, that would mean paying over
$4,000 in interest over the life of the loan and making six long years of
Another new car option would be to buy something less expensive,
like a Toyota Carolla. For $17,000 (the same price as her used 4Runner) she
should be able to get good, reliable transportation. Plus have the warranty.
Leasing a new car would get her a lower payment. But, after a
few years of lease payments she'd be right back where she is now - without a
Buying a used car would keep her payments down and allow her to
own a vehicle once the payments are complete. If Jill finances $13,000 on a used
car or buys her present 4Runner (figuring $17,000 purchase price minus $4,000
down payment) her monthly payment would be $401 for 36 months.
The disadvantage, as Jill pointed out, is that she could be
making payments on a 7 year-old car. But, at the end she'd own a 4Runner worth
over $11,000. And, if she were worried about repairs she could buy a 4-year
extended warranty for about $1,000.
Probably the best long-term choices for Jill would be to buy her
4Runner or to find a used vehicle. The payments are affordable and she will own
her vehicle when they're done.
With her 4Runner she'd be buying a used car that she's very
familiar with. It is also a car with lower than average mileage.
If Jill decides to buy her car she can negotiate with the
leasing company. Depending on the circumstances they may be willing to let her
buy the car for less than the price in the original lease agreement.
Ultimately Jill needs to decide how much she enjoys that new car
smell and the comfort of a new car warranty. The safest financial deal would be
to buy her leased truck or a similar used truck depending on where she can get
the best deal. Next best would be to buy a less expensive new car. No matter
what she decides we hope that she enjoys many trouble-free miles.
Gary Foreman is a former financial planner who currently edits
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