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Archive for October 2011

How To Buy or Lease Your Next Car

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Believe it or not, car buying isn’t as much of a hassle as it used to be – the reason is simple:  There’s so much available information through internet sites.

If you’re looking at a new car, it’s now possible to see exactly what the dealer paid – and, I’m not talking about the ‘dealer’s invoice’; that’s a marketing ploy, as is the manufacturer’s suggested retail price (MSRP).

The thing to remember is that car dealers like ‘moving parts’ in a negotiation.  The more moving parts there are, the more they can manipulate.  Moving parts include:

  • The price of the car
  • Trade-in value
  • Financing
  • Fees and other add-ons

So, whether you want to buy or lease, whether you have a trade-in or not, you want to begin with this:

  • You’re paying cash
  • You have no trade-in

You’ve just removed two of the moving parts.   So, here are your steps along with my little story:

  1. Test-drive the cars you’re interested in at various dealerships.  They’ll ask you about your trade-in and whether you plan to lease or buy.  Remember:  No trade-in; you’re paying cash.   If you like a car you driven, ask for the literature on the car, including the `trim line’.
  2. Do your homework.  Consumer Reports has an excellent car buying site, as well as a service, for both new and used cars.  It’s worth paying for the reports on the cars you’re interested in.  Once you’ve decided on a couple of candidates, it’s time to get your ducks lined-up.   Whether you plan to lease or buy, you should know your credit score, which you can also find online.  If you plan to finance, you might check out some local credit unions, your bank, or something like LendingTree.com and get pre-qualified for your loan.  When you’re all ready with homework and financing completed, head back to the dealership(s).  Take your homework with you.
  3. Need to test-drive again?  Do
  4. When the salesman asks you to sit down; remember negotiating isn’t about ‘winning’ or acting tough.  It’s about helping him see your side; but begin with this:“Before we begin talking about the car, can you give me an itemized list of the extra fees that will be added to the price?”A reputable dealership will do it readily and easily.  The last one I asked said, “Sure!” and ran out of the room, returning in 30 seconds with a computer print-out.  You can expect vehicle registration, license, etc.; but if `dealer prep’ charges are there, cross it off in front of him – they didn’t try to charge it in my case.You’ve just removed the last remaining moving part, other than price – the cash price – even if you intend to lease.
  5. The negotiation.  It’s amazing what objective third-party numbers can do to solidify your position.  Now, remember, the dealership has to make money.  They have overhead, payroll, etc., like any other business; but, once armed with the true cost the dealership pays, you’ll know about how much profit you can reasonably build-in.  As I said, the Consumer Reportswebsite will be helpful, here.Make your offer – of course, you’ll low-ball a little; but those third-party numbers and your transparency makes your case pretty compelling.  And, of course, the salesman has no ‘moving parts’ to play with.  It’s strictly about the cash price.

The last time I did this, the salesman was very nice; but, quick and adamant that he just couldn’t meet my price.  I smiled and said, “I understand.  You’re probably right!  The car may indeed be worth more than this… I guess I’m simply negotiating for the wrong car!”  I was packing my things as I said it.  There was a $4,000 spread.  But he insisted it was the right car, despite the fact I had homework on others.

Short version:  The dealership came down $3,000, if they could handle the financing.  I had financing in place at 2.95%; he came back and said they’d do 2.9% even, no prepay penalties, blah, blah, blah.

What if they don’t meet your price?  You leave.  There are other cars.  There are other dealerships.  Let him know, “I’m not saying no to you; I’m saying this isn’t the right car.  Maybe there’s another! Maybe you have it!  Want to go test-driving?   They hate that.

  1. We’re done.  Extra add-ons were eliminated early, the price is settled, and the prequalifying allowed me to negotiate the price I wanted. 
    1. If this were a lease deal, I would have worked it the same way. Once the price is established, I could have asked? “What would the residual value of a ___-month closed-end lease look like? Also, ‘What’s your lease factor?”
    2. If I were doing a trade-in, that would come up after everything else is settled.  “I’m glad we have a deal!” Then, I’d stare out the window at my car.  “I’m not sure my niece really needs it – maybe she’d rather have the down payment for another car.  How much do you think my car’s worth?” – you did your homework on that car, too.  I actually gave my car to my brother-in-law.
    3. The ‘business office’ stop should be a formality.  The extra charges (vehicle registration, etc.,) have been previously disclosed and there’s no dealer prep.  The price is set and the financing is in place.  The ‘trade’ value, if any, comes off the price.  The moving parts are done.  My stop took four minutes.

You’ll find that reputable dealerships are easy to deal with because the amount of available information has actually made their job easier.  When there’s transparency – everyone knows the real story – it’s easier to meet with mutual advantage.  If they don’t want to share fees, etc. in front, it’s time to look elsewhere.

Jim

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Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

October 25, 2011 at 8:03 am

Local Attorney Faces 5 Years In Prison

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

That’s the headline I saw in my local paper a few days ago; and, I have to admit I was surprised.

I didn’t know him, but he was half of a well-respected law partnership that has been in the area for (I think) over two decades.   Now he’s convicted of 34 felony counts and faces up to five years in prison for swindling the estate of an elderly client – in this case, a deceased client – for more than $500,000.

How did this happen?  According to the article, the attorney was executor for the estate and failed to initiate probate for a year after his client’s death and, in the meantime, systematically embezzled the money from his client’s accounts while concealing those assets from the probate court and subsequently filed false statements with the court.

What makes the case interesting is that the attorney had repaid everything he took prior to the filing; but, that didn’t matter, as it shouldn’t.

How do avoid this from happening to you?

Almost all embezzlement scams – Bernie Madoff comes to mind – usually have one thing in common:  The lack of an independent third-party cusotodial firm.  Now, in the Madoff case, checks were made out to Madoff and Madoff supplied all the reporting.

In this case, I don’t know if the investment accounts resided at an independent custodian firm or not.  The attorney may have had control over the accounts, for all I know; but, if there was an independent custodial firm, where was the ‘checks-and-balances’?

Was there a Registered Investment Advisor on the account who would have been receiving independent reporting directly from the custodian, which would have been made directly available to the deceased’s heirs?   Those withdrawals would have shown-up there, no matter what the attorney gave the court… and both the advisor and heirs would have been asking questions immediately – though, presumably, the attorney would have been smart enough not to attempt an embezzlement in the first place, knowing there are other people receiving true reporting.

My guess, and it’s only a guess, is there was likely no independent entity providing the reporting to anyone that could have provided a checks-and-balances. 

There’s a lesson there for all of us.

Jim

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Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Should You Buy or Lease Your Next Car?

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

This is a question people often ask.  If you’re one of them, I hope this will help simplify your decision making.

First, it’s important to understand just how leasing differs from buying – Now, I’m going to ‘make up’ my own numbers here, just for the sake of illustration.  You can get your own.

Let’s suppose a car could be purchased for $35,000.   If buy the car, you would be buying 100% of the equity… all $35,000 worth.  It doesn’t matter if you pay cash or finance it; you’re still buying ownership – all $35,000 worth of equity.  If you’re financing, you would be financing that equity over a certain period of time.

For example, If you have great credit and can get a low rate, say 2.9%, and financed the car over five years, you would be making payments of $625.83 monthly, assuming no down payment.

But a lease is different.  You’re not buying the equity.  You’re simply paying for the ‘use’ of the car. 

Translation:  You are financing the depreciation.  Once the price of the car is determined (the ‘cap cost’), which we’ve stated to be $35,000, then the assumed value at the end of the lease period becomes important, because it’s the depreciation you’re paying for, not the equity.  The same car leased would likely have monthly payments around $375 simply because you’re not buying any of the equity.  At the end of the lease, you have no car and nothing to show for your money.

You can find leasing calculators all over the internet.  You’ll find that auto dealers use a ‘lease factor’.  Those who are more forthcoming will tell you what theirs is – it differs from dealer to dealer.  Just remember this formula:  Lease Factor x 2400 = the interest rate you’re being charged.  By the same token, the interest rate divided by 2400 will tell you the lease factor.

But, should you buy or lease?  It depends.

My opinion:  If you plan to change cars every three or four years, you’re probably better off leasing.  But, if you plan to keep your car five years or longer, you’re probably better off buying.  

If you’re driving a paid-for car now, what’s your rush?  Here in California, we’re in a car culture.  People are often viewed in the light of the car they drive.  Yeah, it’s stupid.  If you can fight-off trying to keep up appearances, put the monthly payments into an index fund and dollar-cost average for five years.  The market may likely buy part of your car for you!

Jim

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Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

October 11, 2011 at 8:10 am