The Automotive Leasing industry has gone thru some recent shakeups that may have a large impact on your next car purchase.
Huntington Bancshares Inc., Firth Third Bancorp, Chrysler Financial, and Wells Fargo & Co. are just the first batch of large institutions that have either exited the auto leasing business or have restricted the automobiles they will provide lease financing for.
Leasing has been a popular choice among consumers looking to keep their monthly payments lower. Essentially, the financial institution purchases the vehicle and then leases it to the consumer at a monthly cost that covers the depreciation of the vehicle over a defined period of time plus an additional profit.
The problem comes when, due to higher gas prices and reduced consumer demand, many larger vehicles are depreciating at a faster rate than the financial institutions had anticipated. The monthly payments they are charging no longer cover the depreciation and they are stuck with a vehicle worth much less than they had planned for.
As more lenders exit the leasing industry and auto manufactures focus more on purchase incentives, you may find that buying your next car is the only option available.
Purchasing a car, unfortunately for those accustomed to leasing, traditionally comes with a higher monthly payment. To purchase a new car in the same class will require either a larger down payment or a higher monthly payment. For most, they’ll have no choice but to absorb the higher monthly payment or look at a less expensive vehicle.
If you are planning on purchasing a new car in the next 6 - 12 months, there are some things you can do now to prepare yourself in case the leasing industry hasn’t turned back around.
If you are coming off an auto lease, you won’t have the benefit of being able to offset the down payment with the trade-in value of your current automobile. It’s important that you start saving as soon as possible for that next purchase. The more you are able to put down, the more expensive a car you can afford with as little an impact to the monthly payment.
One way to absorb a higher monthly payment is to cut your spending in other areas of your life. Some often overlooked suggestions are:
• Increase the deductibles on your home and auto insurance policies
• Use your local library instead of the bookstore and video store
• Make your Coffee/Latte habit a luxury and make your own at home
• Drop your home phone line and use your cell phone
• Bring your lunch to work more often
• Call your Cable TV provider and inquire about specials and promotions (or check out a local competitor)
Take a close look at the debt your currently owe. Evaluate the repayment periods and the interest rates. It may make sense to explore a debt consolidation loan if you are able to reduce the average interest being paid across all your accounts. Be careful not to simply trade a lower monthly payment for a longer repayment period. You should also consider any consequences taking out a new loan will have on your credit standing and ability to obtain auto financing when the time comes.
You may not be able to control what happens in the automotive leasing industry; however, you can control your saving and spending habits. The earlier you start to prepare for your next auto purchase, the more likely you’ll be able to purchase your next car with as little an impact as possible to your financial well-being.
About the Author
Chris Rocks is the Founder and Executive Director of the Credit Advisory Alliance (CAA), a membership based organization helping those who have suffered a financial crisis restore their credit and reinsert themselves back into the credit-driven economy. Prior to founding CAA, Chris had successfully helped consumers achieve their financial goals as both a Financial Advisor and the Vice President of a Mortgage Origination Firm.