Perhaps the most frequent question asked of us by our friends and clients shopping for a new car is whether they should finance or lease their next vehicle. Car dealerships and manufacturers promote leases heavily in their advertisements, and some dealerships push lease deals pretty aggressively. They point out lease payments are lower than the car loan payments. But, is leasing really cheaper on a long term basis?
We wrote a couple days ago about interest rate discrimination by car dealers. Auto finance companies permit dealerships to "mark-up" the rates, and that often results in women and minorities paying higher interest rates.
Most car dealers do not want consumers to know that they regularly mark-up the interest rate on auto loans. Many banks and finance companies will approve a credit application at a "buy rate" but permit the dealership to charge a higher "contract rate." The bank will share the extra money that the consumer pays in interest. So, the consumer has a higher car payment, and the car dealership makes a higher profit. This is one of the reasons that car dealers are so eager to handle the financing when selling a car.
Most consumers trade-in their old vehicle when buying a new car. These deals can be complicated if there is still money owed on the trade-in, and a consumer can have real problems when the dealership does not pay off the trade-in.