If the mere thought of reading an auto lease produces a headache, but an auto loan payment would destroy the monthly budget, consider a hybrid deal structured like a loan with a payment plan similar to a lease.
First Teachers Federal Credit Union in Schenectady, N.Y., is one of many credit unions offering the special loans, which can be written for a new or used car with a term ranging from two to six years.
A little of this, a little of that
“It’s kind of mixing a regular installment loan with some of the features of a balloon payment — that’s what makes it a little unique,” said Gloria Friello, a First Teachers loan manager.
At the end of the First Teachers Premier Payment Shaver loan, the borrower has four options:
- Sell the car and pay off the loan balance.
- Trade the car in and pay off the loan balance.
- Keep the car and refinance the amount owed.
- Return the car to the credit union and the balance will be paid off.
While they may not be able to beat the rock-bottom financing prices of dealers trying to clear off a lot, the lease-like payments on the Payment Shaver loan can be as much as 30 percent less than a conventional auto loan. And members do not have to worry about a down payment or a security deposit, roughly equal to one monthly payment.
In addition, there are no acquisition or disposal fees with a Payment Shaver auto loan. Together, the fees can add up to nearly $1,000. Those who opt not to buy the car at the end of a traditional lease pay a disposal fee.
Since late August, 49 First Teachers members have signed on for Payment Shaver auto loans worth $941,000.
“Those 49 loans are accounts we feel probably would have gone to a dealer for a lease,” Friello said.
While new at First Teachers, lease-look-alike balloon loans at credit unions have been around since the mid-1980s. While 1 percent of credit unions offered balloon auto loans in 1984, roughly one in 10 offer them today, according to Bill Hampel, chief economist at the
Credit Union National Association.
Balloon loan programs at credit unions vary. Some are more complex than others, but even the more complicated programs — such as the one offered at First Teachers — are often easier for people to understand than a typical lease.
When looking for a lease, “It’s a lot more difficult to comparison shop because there’s so many terms and conditions,” Hampel said. “It’s much more difficult to get an apples and apples comparison.”
And with a balloon auto loan, the interest rate is made crystal clear upfront. Most people who lease a car simply don’t know how much of each monthly payment is being pocketed by the finance company as a fee.
“With a balloon payment, you know what you’re getting,” Hampel said.
The Premier Payment Shaver auto loan offers a mileage allowance of as much as 18,000 miles a year, with a penalty of 8 cents for each additional mile. A typical lease allows 15,000 free miles a year. Every additional mile costs 10 cents to 25 cents.
“Eighteen thousand miles seems more congruent with people’s actual driving habits, so we don’t have that many penalties,” said James Selke, vice president of sales for
The Payment Shaver Co. The Troy, Mich., company provides the lending program to more than 400 credit unions nationwide.
About 80 percent of credit union members who sign up for a Payment Shaver Auto loan opt for the 18,000-mile plan, over the company’s 12,000- and 15,000-mile plans, Selke said.
Dings are free
Members who turn in the car and walk away at the end of the loan do not have to pay for dings or scratches. The car will be examined for insurable physical damage — such things as the windows, grille or headlights, missing or stolen items, and excess mileage. Many leases charge for simple excess wear and tear.
“We expect wear and tear. We expect dings and scratches,” said Selke, who once had to pay because the cup-holder in his leased car lost its spring during the lease period.
Of course, the biggest selling point with lease-look-alike loans and leases may be that they enable people to drive more car for their monthly payment.
“If a monthly finance payment totals something in the neighborhood of $600 for a top-of-the-line Toyota, you could very well lease a mid-luxury car, like a C220 Mercedes Benz … or a BMW 530i, for about the same amount,” Bob Elliston writes in his book
What Car Dealers Won’t Tell You, The Insider’s Guide to Buying and Leasing a New or Used Car.
“So the argument that you can drive more car for the same money is true.”