You get what you pay for (con’t)

  • Transportation (usually the next largest item after housing)

–         Is it better to lease vs purchase a vehicle? There are advantages to both leasing and purchasing. My recommendation if you are buying is to not buy new. Typically, a vehicle will depreciate to 50% of its initial value (value being wholesale not retail price) in 3 ½ to 4 years. When purchasing I recommend a vehicle 4 -5 years old. This would mean a vehicle with an initial “value” of $20,000 could be purchased in the $7 – 9,000 range. Assuming a 36 month bank loan and a “good” credit score the monthly payment would be approximately $240. I recommend leasing only for new cars and only for a person that has achieved an “excellent” credit score and only if you will be using the vehicle for 12,000 miles or fewer. Also, I only recommend a lease when the implied interest factor being offered is less than 2%. Near the end of a model year these lease deals are readily available. Often you can lease a $20,000 value vehicle for zero down and less than $250 per month. Keep in mind that you will probably be restricted to no more than 12,000 miles per year and will be charged at turn in for any damages (inside and out) in excess of minor wear and tear. An added advantage of leasing is that the vehicle will be covered by the manufacturer warranty for the full term of a 36 month lease.

–         Is it more cost effective to purchase new or used? As mentioned on the above topic, I rarely find a deal that justifies a new auto purchase. When it comes to using a new vehicle I prefer to lease and when purchasing prefer to target a lower mileage 4 – 5 year old vehicle. The only exception to this rule would occur when a new car is heavily discounted and in addition the manufacturer is offering a 0% loan for 72 months. I recently took advantage of 2015 vehicle in April (of 2015) that was heavily discounted from a retail of $27,000 down to $19,000. The 0%, 72 month loan put the monthly payment at under $265. The lease rate factor was at 1% which put that payment at under $230, so I still opted for the lease. However, the purchase option was a great deal.

–         Additional cost factors: Insurance (how to shop it), fuel, personal property tax, license, routine maintenance, repairs, etc. Outside of financing the next largest cost element will be insurance. There is more variance in auto insurance premiums that most people realize. Attempt to ignore all of the auto insurance ads that dominate the airways. One solid place to get a decent free quote is via Esurance.  They tend to be near the bottom cost for equivalent coverage. I’m not suggesting that you sign up with this firm, but merely that you use their quote as a benchmark against which to evaluate the quotes you receive from others. Initially I recommend that you get 3 – 4 quotes and also that you requote at least every three years. There can be as much as a 100% variance in premium quotes for identical coverage! In some cases the company will provide a “teaser rate” for the first year. If this occurs, be sure to shop again before renewing.

–         What factors should be considered in choosing a vehicle? The simple answer is cost. Regardless of the type or price range the cost to operate needs to be at the top of the criteria list. Quality is important, but also tends to be somewhat objective. As long as you stick with the top manufacturers it is hard to make a bad choice. Ford consistently ranks highest in quality in regards to USA firms, but the top Japanese and Korean manufacturers are worth considering. I encourage folks to shop for a model with certain specifications and not by brand. When you do this it opens up a lot more options to take advantage of special promotions, which gets us back to cost. After the cost of financing and depreciation the next largest factor is fuel economy. When you open up to several brand options it allows you to factor in this item.

–         What can we do to minimize fuel costs? Once you acquire your vehicle the single largest incremental cost is for fuel. The two variables here are the price you pay for fuel and driving habits.  Of the two, the latter (driving habit) is the most consequential. Research shows that gas mileage can vary as much as 20% depending on just a few factors. These are: 1. slow steady acceleration from a standing start, 2. slow steady stops from to a stop, 3. only pass when you have time to accelerate without having to gear down & 4. Keep you maximum speed at no more than 65 MPH. The price you pay for fuel of equivalent value can vary by as much as 5% or more in the same general location. In that regard I recommend the smart phone App “Gas Buddy”.  It allows you to identify the station close to you with the best price and also will provide precise directions. This is particularly useful when travelling, especially if you are unfamiliar with an area. There seems to be much concern about fuel that contains 10% ethanol. Ethanol provides about 15% fewer MPGs so fuel without the 10% ethanol will achieved about 1.5% fewer MPGs than unblended fuel. It is good to factor this in when making a fuel purchase. It may make sense to pay $.04 or $.05 a gallon more for unblended fuel.

see more on this topic next week