TransUnion

Finance, lease, subsribe or buy — here’s what you need to before you jump in.

New car leasing is similar to renting a car, but in this case your rental term lasts for two, three or more years. You never own the car you lease and if you end your lease early or exceed the allotted miles, you will pay some costly penalties.

With these things in mind, why would anyone want to lease a new car? For several reasons, including:

1), you want to drive a more expensive car,

2), drive a new car every few years or

3) you simply don’t have much cash to plunk down for a down payment.

If you fall under any of these three reasons, then leasing’s appeal may be strong for you.

Just like buying a car, you should do your research to find the vehicle you want and the best leasing deal possible. Leasing deals are negotiable—you’ll want to put out the least amount of cash up front while limiting your monthly lease payments.

1. Know your credit score.

If you have a good credit, then a high credit score should provide you the best leasing deal. Obtain your credit score from at least one of the three credit reporting bureaus — Equifax, TransUnion and Experian — to see where you stand. A score of 700 and higher reflects “good credit management” according to Experian.

2. Choose your car.

Find the type of vehicle you want and narrow your list to about three models, each of which you should test drive. Buy the car you know you’ll be happy with for the next several years. If you settle for something that you’ll tire of quickly, you’ll either be stuck with a car you dislike until the end of the lease term or be forced to pay hundreds, perhaps thousands, of dollars to break your lease.

3. Compare lease deals.

Most leasing plans are offered through your new car dealer, although arranging a lease privately is possible. Avoid being pressured by any dealer offering a “take it or leave it” deal on auto leasing—shop several dealers for the best terms.

4. Negotiate the price first.

Consider not telling the new car sales person that you want to lease your vehicle until after you negotiate your best price. Your lease is based on the final agreed upon price, so try to lower that price to hold down your overall costs and reduce your monthly payments. You can find out what a dealer paid for the car by buying a new car price report from Consumer Reports and using that information to negotiate.

5. Calculate your lease.

Before signing your lease agreement, you must calculate your costs; use a lease calculator such as one found on leaseguide.com. Your negotiated price is your base capitalization cost, which should be lower than the car’s sticker price. Be mindful of other costs including acquisition fees, a luxury tax, state sales tax and lease insurance. Adjust this figure by the amount of money you put down and any trade-in credit. Your dealer has a residual value in mind, which is what the manufacturer determines what your car will be worth at the end of lease term. In addition, leasing companies use a “money factor” or interest rate to determine costs—include that number and your term (months) to determine total lease costs and your monthly payment.

Take Your Time

New car leasing sounds complicated, doesn’t it? That’s why you should take your time to come up with the best deal to find the car you’ll be happy driving for several years. If you rush the process, you’ll pay hundreds, perhaps thousands of dollars more on your lease.

Longer Term Auto Loans

The TransUnion study determined that car loan terms between 73 and 84 months have more than doubled between 2010 and 2015. Indeed, one-quarter of all loans originated in the third quarter of 2015 were for loan terms between 73 and 84 months, compared to just 10 percent five years earlier.

Another factor the TransUnion researchers noted that even as average new auto loan amounts increased during the five-year period, the average monthly payment declined as consumers chose the extended loan terms.

For example, in the third quarter of 2015, the average new auto loan amount was $21,368, compared to $18,008 five years earlier. At the same time, the average new auto loan payment had fallen to $398 per month from $420 per month five years earlier.

Smaller monthly payments should help consumers afford their loans, but TransUnion found that consumers holding longer loans are more likely to fall behind on their payments by at least 60 days (seriously delinquent) than those with shorter terms. And it wasn’t just sub-prime borrowers who were delinquent at a greater rate — the trend affected prime and super prime borrowers as well.

Mitigating Auto Loan Risk

Jason Laky, senior vice president and automotive business leader for TransUnion, noted, “Longer auto loan terms allow consumers to keep payment levels reasonable as they finance more expensive vehicles. However, consumers who cannot afford the monthly payment on a shorter term for the same loan are riskier, and we see this manifested in the higher delinquency rates for 72- and 84-month loans. We encourage lenders to use readily available risk analysis tools to identify borrowers who are more likely to go delinquent with an extended term, to ensure consumers are receiving loans that they can manage.”

For consumers with sufficient cash flow, the risk of a longer term auto loan defaulting diminishes according to TransUnion. Thus, the credit reporting agency urges lenders to carefully explore all applicant debt when underwriting, including mortgages, credit card payments, student loans, and other debt commitment. In effect, an “aggregate excess payment” or (AEP) algorithm is useful for helping lenders determine lending risk and make their decisions accordingly.

As for consumers, affording a new car may mean much longer auto loan payments, going well beyond the original loan term all in an effort to purchase beyond their capabilities.

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