Buying a new car can be stressful. With the stereotypical assumption that dealers are taking advantage of you with add on fees and the general fact that cars are more expensive right now with the current market and microchip shortage, it’s important to understand what you are suppose to be paying for with your new car, and what is complete bogus. Generally, people also have the assumption that cars should lease or finance for their advertised pricing, and if not they aren’t getting a fair price. Unfortunately, this is not reality, so below I will outline the basics of a finance, cash, and lease deals on a new vehicle so it is easy to understand.
Cash and Financing Deals
In simple terms, when you buy a car you pay the price of the car, hopefully with some discounts, and then some additional fees. These fees include the sales tax for the state the car will be registered in, as well as the dealer’s documentation fee and motor vehicle fees. That’s it! The dealer documentation fee covers the leg work the dealership does to get all the paperwork done for you. You just have to hand over some money, sign paperwork, and you’re ready to drive! This typically ranges from $400-$600 depending on the dealer. Motor vehicle covers a few fees which sometimes get separated on the paperwork, but all lump together for the final motor vehicle fee. For motor vehicle itself it includes the major fee for the vehicle registration and plates for your state. There is also usually a small internet fee (in NJ its $7.50) and a tire tax for every new tire on the car (in NJ its $1.50/tire or $7.50 total for cars with a spare). Also lumped in with motor vehicle will be the luxury tax, also considered a supplemental tax depending on the dealer (and again varies by state) if the vehicle costs over a certain amount. In NJ this rule applies for new vehicles over $45,000, and the tax is 0.4% of the vehicle’s selling price. For the most part, that is everything.
If dealers are adding any additional fees on top of this, then there is reason for a raised eyebrow. Some dealers add a detailing fee for prepping the car for you, which really should have been accounted for with their profits from the sale. One such fee I’ve seen are mandatory protection coatings, like the Zurich Shield, where they spray a protective coating on interior and exterior surfaces for protection. In actuality these sprays do nothing for protection and are in most cases not even applied to the car, yet you are incurring a cost of up to $1000 for them. Don’t be fooled and stand your ground if the dealer is trying to pull one over on you with the extra fees, especially if they are only telling you about them once you walk into the finance office. If you are willing to walk for dumb extra fees, the dealer will, in most cases, remove it so they don’t lose the sale. They aren’t losing anything except extra profit from pulling one over on you, so be wary. At the end of the day, you pay for the price of the car with the discounts you get either from the dealer or manufacturer, plus the sales taxes, motor vehicle fees, and dealer documentation fees.
Keep in mind, cash and financing deals all work the same, all be it that with a financing deal you are paying monthly installments instead of shelling out the entire cost of the car out-front. The total price of the car remains in tact, you just have to obtain a financing rate and put down the right amount of money to get to a payment that works for you. In both scenarios you are buying the car outright, either immediately with cash or over a period, usually 60-72 months, and you own the depreciation on the car. There are some perks to leasing a car instead of buying, but the numbers do apply a little differently. Read the next section for an outline on leases and how the numbers differ slightly.
Leases are typically a great option for those who don’t exceed 15,000 miles a year, look for a lower monthly payment, and enjoy getting into a new car every few years. In addition to this, the bank you lease through is taking the risk of depreciation of the car, so if you get into an accident during your lease term, the loss in value of the vehicle is incurred on the bank, not you since you don’t own the car. Of course you always have the option to buy the car, cash or finance, when it comes out of its lease if you decide you want to keep it longer. Luckily, there are no solid commitments until the end of the lease, so you don’t have to keep the vehicle if you don’t want to.
The reason leases are cheaper than financing a car is that you are paying for the value of the vehicle over the time you posses it, so you aren’t paying for the entire vehicle’s price. If you add together the buyout figure with all your monthly payments and cash out of pocket at signing, it should add to the price of the vehicle new with its sales tax and fees added on top. Some numbers do apply differently in a lease opposed to a cash or financing deal, so keep that in mind. Also note that like a financing purchase there is a percentage rate that is applied to the payments, which is called a money factor instead of APR (Annual Percentage Rate). You are still paying a bit of interest since you are leasing your car through a bank.
When you lease a car you are still paying for all the same motor vehicle fees previously mentioned plus the sales tax, although in this case the sales tax is applied to the total amount of money you are paying over the lease term, since you aren’t buying the entire car out and paying that entire value. In addition to this, there is usually a bank fee incorporated into the lease as mandated by the manufacturer. You can call it a convenience fee for leasing the car through a bank, but in many circumstances it also includes gap coverage in case the vehicle is totaled during the lease term. Make sure to ask your dealer if the bank fee incorporates gap coverage because sometimes it does not. Outside of this, again, there should not be any extra add on fees from the dealership. If you want to be sure they are not taking advantage of you with the lease price, work backwards from the buyout figure and add up all the monthly payments and money you put down to see what the approximate all in cash price would be. If the number is considerably higher than the price of the vehicle with the typical taxes and fees included, you know there is a problem.
Beware The Ad Pricing For Leases
Many people will think dealers are taking advantage of them because lease pricing is way out of line with ads you may see online and on tv commercials. The true fact though is that most of these ads are deceiving to lure you into dealerships. You always need to read the fine print! These ads are run nationwide, so taxes and other fees are left out of the picture since they differ from state to state. When an ad shows cash down (or down payment) it is not the same as the total out of pocket cost. It is missing the state sales tax, motor vehicle costs, bank fee, and dealer documentation fee, or about $3000-$4000 depending on the vehicle you are looking at. Add on top of this that all lease deals are advertised with low annual mileage on base cars that most dealers don’t have. When you incorporate the higher mileage, higher vehicle cost, and fees that were not lumped in, you have a much higher total out of pocket cost and a monthly payment that could be a few hundred dollars higher. Again it all depends on the car you are looking to lease, but remain wary and always read the fine print.
People think that because dealerships don’t match ad pricing they are taking advantage of you, but the reality is that the ad is highly deceiving and the dealer is actually being more realistic. A good dealership will be able to explain this to you on paper, so if you want a good test to see how transparent a dealer is about how they price out their vehicles, ask them to explain to you why its higher and see if they can do it on paper.