What You Should Know About What’s Happening to Car Buying and Leasing Costs
Whether you lease or buy your next new car, there are some things you might want to be aware of — things that have changed significantly since you last purchased or are now changing that will affect what you pay for your next car.
Average Prices for New Cars are Going Up
The average price of a brand new car this year is now over $35,000. That price has increased every year and will continue to do so, making new cars less and less affordable to the average consumer. Manufacturers must raise prices to keep up with increasing cost of material, labor, and manufacturing. Even distribution costs (“destination and delivery” fees) are steadily going up.
Transaction prices now average at least sticker price (MSRP) or above, based on current market shortages.
More frequent and larger law suits, costly recalls, and increasingly rigid government regulations also contribute. Cars today have more expensive safety equipment and features than ever before. Government mandated emissions controls and fuel economy requirements drive costs up.
However, it’s not just the cost of the vehicle itself that is rising, the secondary costs of actually purchasing, financing, and leasing are also rapidly on the rise. It’s a bit of a double whammy.
Dealer Margins Are Going Down, So Fees Go Up
Actual dealer profit margin, as a percentage of sticker price, on new cars has gone down in recent years. That is, the difference between the price a dealer pays his manufacturer for each car and the retail price on the car represents a potential profit margin of about 7%-8%. However, we all know that we don’t pay full sticker price for a new car, which means the average profit margin is only about 3%, if that much. Dealers can’t stay in business with a profit of only 3%. It’s doesn’t pay the bills.
So dealers have to compensate by adding fees and other sources of revenue. Dealer “doc” fees have been around for a long time but were typically in the $99-$199 range, and could often be negotiated out of a deal. Now, doc fees are routinely in the $499-$699 range, higher for luxury brands, and can rarely be negotiated out of a deal anymore.
Another important revenue source for dealers is the Finance Office where customers are subjected to endless offers of extended warranties, various kinds of insurance, security systems, maintenance contracts, wheel and tire protection, rust proofing, paint protectant, and other high-cost, high-profit products. For the consumer, these items are generally not worth the cost, but a dealer must be successful in selling them to a high percentage of his customers to improve his overall profit picture.
Many dealers add VIN window etchings, paint and fabric protection, mats, wheel locks, nitrogen-filled tires, and other non-essentials to every car on the lot, and add the marked up cost to cars’ window stickers, forcing customers to buy it whether they want it or not.
We should expect to see dealers and car companies become more creative in the future with new and increased fees. It’s a trend that shows no signs of changing or slowing down.
Financing Costs are Increasing
Even though base interest rates remain low, car buyers are paying increasingly higher finance costs. Banks and finance companies offer partner car dealers a “buy rate” that dealers routinely mark up. They are not legally obligated to tell customers if they have increased the bank’s rate, or by how much. Some states have recently set limits on the percentage by which a “buy rate” can be increased. There have been investigations that suggest minorities are often charged higher markups.
Lenders look at applicants’ credit scores to set loan interest rates. They have become much more strict in determining who gets the best rates. Generally, it takes a score of about 720 or higher to get a good loan or lease rate. In past years (since about 2008) a score of 680 might have gotten the same rate. Therefore, buyers with marginal credit will pay more for financing.
As automotive consumers attempt to deal with higher vehicle costs, they are opting for longer and longer loan terms — up to 84 months (7 long years). This means higher interest costs and, in most cases, being “upside down” on the loan for years — with the problems that come with it. The cost of financing alone can therefore become a significant part of the overall cost of a new car.
Taxes are Changing
State and local governments continue to find ways to increase tax revenue. Car sales are frequently the target. As the price of cars increase, sales tax also increases.
Many states have changed either the rate at which motor vehicles sales are taxed — or the method by which motor vehicles, in particular, are taxed. For example, Georgia in 2013 changed the way vehicles are charged tax, replacing a general sales tax and annual ad valorem tax with a title tax. This change hit car leasing customers especially hard. Instead of paying sales tax on each month’s payment, they now pay a tax based on the full value of the vehicle at the time they lease. Other states have made changes that nearly always mean higher costs to car buyers.
Insurance Rates Increase Every Year
Auto insurance companies apply for rate increases just about every year with state insurance commissioners’ offices, and are usually granted those requests. They justify the higher rates by claiming rising costs due to an increasing number of claims and higher repair costs. Even if you don’t have accidents yourself, you must help pay for the costs of those who do.
Full-coverage auto insurance is partly based on the value of the vehicle. As vehicle prices increase, so does insurance cost.
What can you do? Since not every insurance company has the same rates or applies for rate increases at the same time, rates can vary widely between companies at any point in time. One company can have good rates one year, but not the next. Therefore, more than ever, it’s important to shop around for better rates at least every two years.
GAP Insurance Going Away for Leases
Although car loans have never had GAP insurance included, leases have always included it, for free, until recently. It’s important if a car is totaled in an accident and insurance settlement is not enough to cover the remaining loan or lease balance. Many car companies have now eliminated it altogether or offer it as a paid option. Without it, customers could easily owe thousands of dollars after an accident.
Maintenance and Repair Costs are Increasing
Dealers look to their service department for a significant portion of its overall profits. As a result, routine maintenance and repair costs have steadily increased over the last few years. Not only have manufacturer-specified maintenance costs sky-rocketed, but dealers now typically recommend additional services that are rarely needed. For example, if a manufacturer specifies an oil change every 7000 miles, dealers frequently recommend such service every 3500 miles, twice as often as actually needed.
Repair costs, even for minor damages, are on an upward trend as well. This is a result of parts being more expensive, and labor costs easily in the $100+ an hour range now.
Leasing Costs are More Expensive Now
Leasing has most of the same costs as buying and financing a new car, which are on the rise as we’ve discussed above. However, there are additional fees for leasing that are also going up.
An acquisition fee is normal when leasing but that fee is rapidly approaching $1000 even for non-luxury cars. Just a few years ago this fee rarely exceeded $300.
Routine lease-end disposition fees remained at about $300 for a long time but now can be $400 or more. Unlike in the past, the fee is often charged even if the customer chooses to purchase his car. There are frequently early termination penalty fees that are charged over and beyond the normal early-end costs. This was not a common practice until relatively recently.
You Get Less for Your Money
Government regulations are forcing car companies to build better, safer, more fuel-efficient vehicles, at greater cost, but benefits to customers often don’t follow in proportion.
Hybrid vehicles are more expensive yet many don’t get significantly better gas mileage than similar non-hybrids. New turbo-charged 4-cylinder cars are advertised as having good horsepower but when the turbo is not engaged (which is most of the time), the car performs as a normal under-powered 4-cylinder. Electric vehicles (EVs) are more expensive than expected because of the cost of new technology and batteries.
Some new safety technology is not fully tested and subject to recalls. Many features of expensive “infotainment” systems are of little or no use to many drivers, although they make for exciting advertising. Navigation systems are becoming less attractive as consumers use their cell phones’ map and navigation features, yet those systems often must be purchased as part of a “package” that can’t be excluded. Dealers tend to order cars with these high-priced high-profit options on their cars such that customers often don’t have a choice.
What You Can Do?
Although you have no control over the rising cost of new cars, you can be smart about buying or leasing to get the best possible deals.
First, don’t buy more car than you want or need. Don’t buy expensive equipment or options simply because the dealer only has cars with them on the lot. He can always order the car you want, or find it at another local dealer. Refuse to pay for already-installed high priced paint sealant, fabric protection, rust proofing, or security features if you don’t want them, or ask the dealer to get you a car without the add-ons. Refuse to buy products and services offered by the Finance Manager if you don’t want them. These might include various kinds of insurance, extended warranties, theft protection devices, or maintenance contracts.
Second, negotiate a lower price — or find a ready-made deal. Dealers will nearly always give you a better price — if you ask. Know the price you want to negotiate by using one of the top car pricing web sites such as our own LeaseGuide New Car Deal Finder . They work with dealers in your area and have arranged price discounts that you probably wouldn’t be able to negotiate on your own — unless you are very skilled. The prices include any discounts and manufacturer incentives that are available. A bit of further negotiation might get you an even better deal.
If your dealer doesn’t give you the deal you want and you feel it is reasonable, your best negotiating tool is your ability to get up and walk out. If the dealer doesn’t run after you or call you later, you probably have been offered the best deal you’ll get from that dealer. You can always shop around at other dealers.
Leasing Might Offer a Solution
Although leasing doesn’t change the price and one-time costs you pay for a new car, it does offer significantly lower monthly payments since you only pay for the part of the car’s value that you use — its expected depreciation in value — instead of its entire value. At the end of the lease, you return the car or purchase it for the remaining part of its value that you haven’t already paid.
Leasing can therefore make a new car much more affordable in terms of monthly cost, although leasing a new vehicle ever 3 years or so is obviously more expensive in the long run than buying one car and driving it for years.
Leasing only works if you drive no more than about 10,000 miles a year, take good care of your cars, and don’t mind having no ownership value in the car. To learn more about the essentials of car leasing, visit our Lease Guide.
How About Used Car Costs?
Used cars are subject to many of the same cost increases as brand new cars. There are rising fees and taxes, higher insurance costs, and more expensive maintenance costs than just a few years ago. As new-car dealers find it more difficult to make a money on new cars, they look to their used car businesses to make up a significant part of their overall profits. Used car prices have never been higher than right now. However, it’s always possible to find good deals, regardless of market trends.
Summary
The cost of buying, leasing, and financing a new vehicle is rapidly increasing on every front. There’s the rising cost of manufacturing, material, and labor, as well as stricter government regulations, which makes for higher prices for automotive consumers. There are now higher financing and leasing costs as well as dealer-added costs and official taxes and fees that have grown significantly over just the last few years.
Owning a new car has never been inexpensive but it’s becoming less and less so.
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