Why trade-in?
Trading in your current vehicle towards another can partially
offset the cost of the new vehicle. The trade-in's net value
goes towards the purchase or lease of a new car. Conditions
of a trade-in vary depending on who owns the vehicle.
If you own the vehicle, trading-in means that you're selling
the car to the dealer for some determined price. As a result,
the price of the new car goes down, only.
Why is it beneficial to trade-in?
When you trade-in you don't have to worry about selling the
vehicle yourself or any of the associated costs (advertising,
showing the car, etc). A dealer may offer a price you could
not get yourself as an incentive to purchase a new vehicle.
If the trade-in has known problems that could plague you later
(when the buyer returns complaining), selling the car to the
dealer eliminates the bother. Trading-in a lease car may relieve
you of, in the long run, monthly costs you cannot afford. Sometimes
people trade in lease vehicles because of poor gas mileage or
lack of practicality.
Why decide against trading-in?
If you think you can get a better price selling privately, and
it's worth the time, money and effort, do not sell to the dealer.
Some cars are of special interest and dealers will not always
recognize those interests
How do loans and leases differ?
When you take out a loan, all of the money used to pay it off
applies to your eventual ownership of the vehicle. The initial
down payment and principal on the loan cover the total cost
of the purchase. Lease payments, however, apply only to the
use of the vehicle. The total sum of payments covers the vehicle's
depreciation over the time you drive it and is usually less
than the outright price of the vehicle.
How are monthly lease rates determined?
In formulating a monthly payment structure, a lessor is primarily
concerned with the extent to which the vehicle will depreciate
throughout the lease and the cost of borrowing money to finance
the car during that period.
Three key elements:
First, the adjusted capitalized cost is determined. This figure
represents the real purchase price after elements such as the
down payment, incentive discount and trade-in credit are deducted
from the capitalized (actual) cost, while any fees or charges
(e.g. destination) are added.
Second, the residual value, or estimated value of the vehicle
at the end of the lease, is determined and then subtracted from
the adjusted capitalized cost to yield a depreciation figure.
The residual value depends on the length of the agreement, expected
mileage and make/model of the vehicle.
Finally, a lessor assesses the money factor, a number that
correlates with the cost of borrowing money during the lease
period.
While these terms may seem unfamiliar, the Federal Reserve
Board now requires dealers to publicize all leases' down payment
amounts, lengths, residual values and interest rates.
What factors determine the purchase price at the end
of a lease?
Most leases rely exclusively on the residual value in determining
the end of term purchase price. These closed-end deals require
you to pay the fixed residual amount regardless of the actual
market price. Open-end leases work differently in that the actual
market value helps determine the purchase price. As a customer
you are responsible for any difference between the residual
and actual value when buying outright
