It’s about time for me to purchase a new car for my growing family. Is it better to buy or lease? — Harrison, via email
Buying a car is definitely the less expensive option, at least in the long run. If you plan to pay off your loan and keep the car for several years beyond that, it’s a no-brainer.
In the near-term, however, leasing is actually the cheaper route. When purchasing a vehicle, buyers often put down 20 percent right off the bat. You’re paying the entire remaining value of the car over the course of the loan, which averages around five years.
With a lease, you’re essentially renting your set of wheels. You don’t have any equity in the car when the contract is up, but every few years you can get a brand-new vehicle for little or no money down. Plus, your monthly payments are based on the depreciation of the car during the lease period only, so they’re almost always less than the amount of a loan payment.
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That’s an attractive concept if you work in a sales or real estate job, where you need to impress your clients. Or perhaps you’re the type of guy who reads Car & Driver in your downtime and hangs out at dealerships on the weekend to check out the latest models. Either way, a 10-year-old Ford Focus probably isn’t going to cut it.
“If you see value in having a new car every couple of years, leasing might be a pretty good way to go,” says Jack R. Nerad, author of The Complete Idiot’s Guide to Buying or Leasing a Car. “It’s not particularly good for anybody else.”
Whereas leasing is aimed at maximizing what you can get today, a purchase is all about delayed gratification. Buying allows you to enjoy those post-loan years, when you own the car free and clear. Plus, there’s no restriction on how much you can drive — it’s your dang car. Under a lease, you’re often limited to putting 12,000 miles a year on the odometer. After that, you can get slapped with a fee of up to 25 cents a mile.
Based on your question, it sounds like you might be willing to pay a premium for a newer car, even if it means high long-term costs. If you do, realize that leases are like most other major outlays — there’s room to haggle. The “sales price” you negotiate with the dealer plays a big role in your monthly payment, so you’ll want to do some research online and shop around for the best price.
Nerad says dealers often bring in customers through ads touting their low monthly payments, but in order to drop that number they charge steep upfront payments that can go as high as $4,000. And with a lease, that initial fee isn’t buying you any equity. “You want to look at the entirety of the deal,” he says.
You also want to look out for leases that extend beyond the manufacturer’s warranty, says Nerad. Most carmakers offer three-year, 36,000-mile bumper-to-bumper protection. Beyond that, you may be on the hook if the air conditioner goes out or your electrical system suddenly dies out. So, you could be forking over a big pile of cash, only to return the car to the dealer within the year. You’re better sticking with a standard, 36-month lease.
I just found out that there are two credit scores because my bank looked at a Vantage score that was lower than the main FICO score I normally look at. It didn’t mess anything up, but what the hell? What do I need to know about them to make sure I don’t get screwed? — Jim, via email
Like Coke and Kleenex, the brand “FICO” has become synonymous with the product to which it’s attached. The reason is simple: When it came out in 1989, it was the only credit-scoring model that allowed lenders to easily (if imperfectly) gauge a borrower’s ability to pay them back.
By the time an alternate system, VantageScore, came onto the scene in 2006, “FICO” was a name firmly entrenched in people’s minds. More than a decade later, VantageScore still playing catch up with its older competitor. You’re certainly not the only poor sap who’s been caught off-guard by this other credit score.
Further confusing things is the fact that “FICO” and “VantageScore” are really umbrella names for a family of different credit scores. The companies that create these algorithms periodically adjust their secret sauce, if you will. For example, FICO Score 9, its latest iteration, gives less weight to unpaid medical bills and paid-off collection accounts than earlier versions. There are also FICO models tailored for auto lenders and store credit cards.
The same goes for VantageScore, a solution developed by the three major credit bureaus, which is now on its fourth iteration. But here’s the thing: Every time these scoring companies come up with a new product, not all lenders jump on board. Consequently, there’s no telling what edition a particular lender is going to use when predicting your credit-worthiness.
A lot of people talk about their credit score as if there’s just one. In fact, there are dozens, when you count how many FICO scores you have and how many versions of VantageScore are in use. Most of the time they’re pretty close to one another. If you can regularly get ahold of one FICO number and one VantageScore, you’ll get a pretty idea of where you stand.
With both versions, your payment history is the number one factor in determining your score, so being on time will help you regardless of what model the lender is using. And across the board, the less available credit you use, the better.
But there are some key differences. Generally speaking, the age of your accounts is more important with VantageScore. And it’s harsher than FICO when it comes to late mortgage payments. So while most consumers won’t see a huge chasm between scores generated by one system or the other, it can be enough to make or break some loans — or result in getting a different interest rate.
Fortunately, it’s getting easier to check your various scores on the cheap. The website Credit Sesame, for example, gives you a free credit rating from VantageScore 3.0 that’s updated weekly. A number of credit card companies are offering a similar service. Capital One offers customers a free VantageScore number, while Discover provides borrowers with a FICO score.
By the way, most mortgage lenders use a version of FICO, so if you’re in the market for a new house or looking to refinance, that’s the one to focus on. Be sure to check your card issuer to see if one of FICO’s credit scores are part of the deal. Otherwise, you can always visit their website, myFICO, and get one for a fee.