Why You Should Not Lease! A sampling of Yukon Denali Leases

If you have read through this site, you know that I offer many ways to help you figure out if you are getting a good deal on your lease. I also stress the importance of not leasing a car if you are at all unsure of any factors that determine how a lease is done. It is to easy to not know what you are getting and when you are purchasing something such as a Yukon Denali, you are spending $50K. You should know what you are doing, but many people do not.

I decided to sample Yukon Denali leases since most of them come fully loaded and it lessons the chance for expensive upgrades. Using Edmunds.com, I determined that the cost for a fully loaded Yukon Denali with an extra 5K in add-ons (sunroof, larger wheels, DVD, Navigation, etc) should cost about $50,000 not including any rebates. Through some research I was able to collect details from offers and prior purchases of leases.

I sampled 10 Yukon leases and here is what I found:

You can see the payments, terms, and residual payoffs vary greatly. Next I totaled the payments over the term and added the residual to determine the final cost (It does not show any down payment the buyer put towards the car so assume the total price below is lower than the actual total price). I then put in the cost over the same term for a 5% loan based on a fully loaded Yukon with $5K in upgrades costing $50K and compared the two.

You can see the difference. Car 10 ended up over $8,000 higher than the $50K car I put together. In fact, out of the 10 cars I sampled, only 3 came in better, and two of them we would have to assume they had full upgrades and did not put more than $356.00 dollars down. Also notice how bad most of the 39-month leases worked out.

If any of the 7 other cars had put money down, the terms become worse. To make matters worse, the blue book on a 2007 Yukon Denali is $37,000. Wow, look at car 1 and car 10, at the end of the lease term you have to pay nearly what the car is worth today after making 27 payments of over $700 per month. Sound like a good deal? I guess if your spending $50,000 on a car what is an extra 6-10K right? At least you had a nice sales person and your car payment met your budget.

I hope this puts a little more light into how much a lease can cost you if you don’t know all the terms. I would like to say that someone spending $50K knows the terms, but as demonstrated here, that is not the case.

Leasing any car, expensive or not, you can get ripped off. There is a reason all the ads push leases, either do your homework or don’t lease. Remember never buy a car based on a car payment.

If anything know this.
-A lease is simply financing the depreciation of the car. American cars lease bad as they do not hold their value. Cars like Toyota, Honda, and Nissan lease better.
-The more a car holds it value, the better your lease payment.
-Down payments for leases should be very small since any amount is usually applied to the residual (a dirty trick), which if you turn your car in the money is pocketed by the lease company.
-Always know the total cost if you were to buy the car at the end of the lease. Dealers will say this does not compare to a purchase, that is a lie. It does and it should be close to what you would buy the car on a conventional loan under market interest rates.
-You will be upside down on 90% of leases.

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More on Regulation Z and your heloc loans

I was surprised at the large response to the last post about regulation z of the fair lending practices set forth by the FDIC and as such decided to add a few more details to how it directly protects you regarding Helocs.

Under section 226.5b of the fair lending guidelines, you will find provisions for heloc loans. Section F is probably the most interesting to consumers given the current the housing market:

(f) Limitations on home equity plans. No creditor may, by contract or otherwise:
(1) Change the annual percentage rate unless:
(i) Such change is based on an index that is not under the creditor’s control; and
(ii) Such index is available to the general public.
(2) Terminate a plan and demand repayment of the entire outstanding balance in advance of the original term (except for reverse mortgage transactions that are subject to paragraph (f)(4) of this section) unless:
(i) There is fraud or material misrepresentation by the consumer in connection with the plan;
(ii) The consumer fails to meet the repayment terms of the agreement for any outstanding balance;
(iii) Any action or inaction by the consumer adversely affects the creditor’s security for the plan, or any right of the creditor in such security; or
(iv) Federal law dealing with credit extended by a depository institution to its executive officers specifically requires that as a condition of the plan the credit shall become due and payable on demand, provided that the creditor includes such a provision in the initial agreement.
(3) Change any term, except that a creditor may:
(i) Provide in the initial agreement that it may prohibit additional extension of credit or reduce the credit limit during any period in which the maximum annual percentage rate is reached. A creditor also may provide in the initial agreement that specified changes will occur if a specified event takes place (for example, that the annual percentage rate will increase a specified amount if the consumer leaves the creditor’s employment).
(ii) Change the index and margin used under the plan if the original index is no longer available, the new index has an historical movement substantially similar to that of the original index, and the new index and margin would have resulted in an annual percentage rate substantially similar to the rate in effect at the time the original index became unavailable.
(iii) Make a specified change if the consumer specifically agrees to it in writing at that time.
(iv) Make a change that will unequivocally benefit the consumer throughout the remainder of the plan.
{{12-31-07 p.6652.03}}
(v) Make an insignificant change to terms.
(vi) Prohibit additional extensions of credit or reduce the credit limit applicable to an agreement during any period in which:
(A) The value of the dwelling that secures the plan declines significantly below the dwelling’s appraised value for purposes of the plan;
(B) The creditor reasonably believes that the consumer will be unable to fulfill the repayment obligations under the plan because of a material change in the consumer’s financial circumstances;
(C) The consumer is in default of any material obligation under the agreement;
(D) The creditor is precluded by government action from imposing the annual percentage rate provided for in the agreement;
(E) The priority of the creditor’s security interest is adversely affected by government action to the extent that the value of the security interest is less than 120 percent of the credit line; or
(F) The creditor is notified by its regulatory agency that continued advances constitute an unsafe and unsound practice.

Section 3vi A-F, provide the details as to when a bank can make changes to your heloc credit line. In summary, short of any government intervention, your property has to have a material change in value or you have give reason that your ability to repay the loan is no longer secure.

While these guidelines are in place, they fail to define what “material” is. Given today’s market, banks will be stretching “material” as far as possible and that is what the FDIC is concerned about.

If you find yourself arguing with your bank, it is up to them to tell you how they define “material”. They must prove to you they are within the guidelines, so use that to your advantage. Be persistent and a pain in the ass. Make them pay for appraisal, credit reports, and any other information they claim. Ask them to prove their guidelines are within reason. These guidelines are the only thing you have to protect you, so use them the best you can.

While many abuse home equity lines, they still do play an important roll. A blanket tightening of un-used equity lines could further damage the fragile housing market.

Please comment with any strategies you know to help home owners facing a reduction in home equity lines by their banks.

In an effort to reduce risk in this uncertain market, many banks are sending notices to home owners that their line of credit on their home has been frozen or reduced. In a letter to the banks from the FDIC, banks are urged to take a reasonable and systematic approach. A blanket reduction of equity lines could further aggravate the current credit crunch.

The FDIC also warns that banks must comply with truth in lending regulation Z. Here is an excerpt from the Letter:

Regulation Z generally prohibits lenders from changing the terms of home equity lines of credit; however, there are exceptions. For example, Regulation Z expressly permits lenders to prohibit additional extensions of credit or reduce the applicable credit limit “during any period in which the value of the dwelling that secures the plan declines significantly below the dwelling’s appraised value for purposes of the plan.” To use this exception, lenders must determine that a “significant decline” occurred.

The term “significant decline” is not defined within the regulation itself. However, the Federal Reserve Board’s Official Staff Interpretations (Official Interpretations) to this provision of Regulation Z includes an example indicating that, while a “significant decline” will vary according to the circumstances, such a decline has occurred if the unencumbered equity is reduced by 50 percent. According to the Official Interpretations, a lender is not required to obtain an appraisal before suspending credit privileges, but there must be a significant decline in value. Although full individual appraisals need not be obtained, institutions should have a sound factual basis for determining that a property has experienced a significant decline in value. For example, automated valuation models or local tax assessments may be used, taking into account the issues described in the Home Equity Guidance regarding the validity of those values.

Other grounds for a reduction in line of credit include a material change in your credit or ability to repay the loan.

You can read the full letter here from the FDIC.

If you have received a reduction in your home equity line, you should contact your bank. They have to provide you the reason why they reduced your loan. If it is due to property value, be prepared as they may want to have your home appraised unless you can show why your home is valued more than they claim. If it is due to material change in your ability to re-pay the loan, make sure to ask why they believe this to be the case and again be ready to show them otherwise.

Most importantly, you should check the status of your loan before you make a purchase that will not be honored.

With all the Low APR deals, I thought it might be time to review how much does 0% APR save you and is it worth worse gas mileage.

Lets take a look at Ford’s offer of 0% APR for 72 months on 2008 F150’s. To determine what this means in savings all you have to do is determine how much interest you would have paid over a similar term under normal circumstances. For a 72 month loan, your normal APR would be somewhere between 6-8% for average credit, lets call it 7%.

To determine the total interest, you can use excel and calculate your own formulas, or simply visit this handy tool from Bankrate and enter your information and then view the Amortization schedule. Scroll to the very bottom and in the last month you will see the total interest paid.

So try this, assume 7% for 72-months on $25,000 (as that seems to be the mid-level price after discounts on the F-150).

With the 0% APR, your interest expense is $0.
With 7% APR your interest expense is $5,688.21.

There you have it, the 0% financing saves you $5,688.21 Vs. a loan for the same period at 7% interest. However, since most people do not get a 72-month loan, it is more accurate to compare the offer against the normal loan you would get. If, for instance, you normally buy cars on 48-month loans, than just use the lower number for your comparison. The savings goes down for ever year you decrease the time you would have normally bought the car. You should also adjust the interest to what you think you could qualify for.

Other compares you can do!

0% APR can be great offers, but remember, if you are looking to save money due to gas then make sure to compare the total cost of the car over the time you plan to own it including fuel costs. Many of the really good offers are on trucks or less fuel efficient cars. On the surface, they may look like the better route, but with fuel cost so high you will quickly lose those savings.

In the example above, the Ford F-150 would cost $4,421.53 in fuel base on $4.79 per gallon gas and 12K miles per year. A more fuel efficient car could save you 50% or more on that cost. Over a six year time, a car that cost 50% less fuel will save you $13K. This may be enough to justify a more expensive hybrid truck or a hybrid SUV if you need the large car. If you don’t need the large car, then you better be saving at least $13K off your deal before you take the truck over a more fuel efficient car. Keep in mind this savings assumes fuel will remain constant and that you only drive 12K miles per year. Adjust anyone of those numbers and you will get different results.

Point is, before you rush to buy a car based on the desperate measures automakers are taking, do the math to see if makes sense on the model you are looking at. If savings is your goal, you have to factor in fuel costs before you can make a good choice.

Steps to compare total cost:

1. Start with the price you will pay for the car after rebates and incentives.
2. Determine the interest expense on the loan you will be going for using the tool above from bankrate.
3. Determine the number of miles you drive per year and divide that by the average MPG of the car. Multiply the number by the gas cost in your area. Now you have the yearly fuel cost.
4. Multiply the yearly fuel cost in step 3 by the number of years you plan to keep the car. (must be the same for each car you are comparing).
5. Add the results from 1, 2, 4 to arrive to your estimated total cost of the car (this excludes maintenance, registrations, and other factors assumed to be the same for all cars in your comparison. If you are comparing a BMW to a Civic, you will have to adjust these numbers as a BMW has more expensive ownership costs).

That is it, this will give you an idea of what car is less expensive when you factor in fuel, rebates, and special financing.

Good Luck!

It is a sunny day, the windows rolled down, and no one on the highway. You can’t help but step on the gas cruise a little faster, or perhaps your a few minutes late and want to make up some speed, whatever the reason many Americans find themselves speeding on the highways.

It is no surprise that speeding does consume more gas and in return increases your fuel consumption sending you to the pump more often, but how fast is to fast? What is the optimal speed? How can you go further on the same tank of gas? And, most importantly, how much does your speeding cost you?

What is the optimal speed?

I found a study called the Transportation Energy Data Book that has some very useful information regarding this topic. Unfortunately the data only goes through 2000, but nonetheless it still gives a good picture as to what an estimated optimal speed should be.

First of all, the optimal speed should be defined as the speed at which the least amount of fuel is used to achieve the greatest MPG. Since the engine burns some gas no matter what speed you drive, low speeds will not give you a good MPG. On the flip side, as you increase speed the momentum works to improve efficiency up to a certain point. At that point, the resistance and drag of the car start to work against you and require more and more fuel for just to maintain your speed.

In the study, they sampled 9-cars from 1997 and found that the optimal efficiency occurred at 55 MPH. This increased from an optimal speed of 40 Mph for cars between 1973-1984 (a 37% improvement from car design). It is probably safe to say that the optimal speed in today’s new car designs have inched up a bit. With that assumption the optimal speed of today’s cars probably lies somewhere between 55-65Mph.

So how much does my speeding cost?

In the cars tested, roughly you lose 3% in the first increase of 5mph, and then 7% for every 5 MPH thereafter.

55 = 0%
60 = -3%
65 = -7%
70 = -7%
75 = -7%

The difference between 55 MPH and 75 MPH is -24%. So, if your car gets 30 MPG, your MPG will be reduced to 22.8 MPG driving at 75 Vs. 55. Based on the current gas in my area ($4.79), if I drive 100 miles in a car that gets 30MPG here are the comparisons:

So you save 30-minutes in driving time for $5.03 in fuel cost.

One thing to keep in mind, these numbers are based on an average of several types of cars. Depending on your car, you may have to slide the scale left or right. A very aerodynamic car might have an optimal speed of 65 MPH, whereas your H2 Hummer might be 50 MPH. Unfortunately, I could not find any data on specific car models to send you to, but use common sense based on the size and shape of the car.

How can you make your tank go further?

Even if you still do speed, you can make a large difference in your overall MPG by knowing a few facts.

The more you stop the more fuel you burn. Obviously, when you are idling you are getting 0 MPG, but the larger problem comes when you start again. The initial fuel required to move your car is much higher than the fuel required to keep your car moving. Avoid frequent stops if you can.

Similarly, acceleration to quick de-acceleration reduces your MPG. When you are inconsistent with your speeds, your car becomes less efficient since efficiency is achieved when you hold a speed long enough to offset the acceleration.

Some tips:

-Accelerate slower in the city and try to maintain a consistent speed between signals. Speeding to the next light will cause your MPG to decrease.
-On the freeway, try to maintain a consistent speed.
-Avoid roads with lots of stops if possible.
-Don’t prove how fast your car can go from 0-60.
-Remove any objects on your roof.

With any luck, you can achieve 3-15% improvement in your MPG without slowing down.