When it comes to buying a new car it might seem as though the dealer holds all the cards, but that's not necessarily the case. You can get leverage by controlling the part of the transaction that's most-dear to dealer: the part that involves money.
Auto loans can be confusing because of “zero interest” financing, related fees and the rules that govern the industry, which is actually quite complex. What can you do to protect your interests? Here are strategies to give you a boost when dealing with a dealer:
✓ Save every month for your next car. The more you can put down the lower your monthly payments and total interest you pay.
✓ Check your credit report before shopping for an auto loan. Incorrect or out-of-date information can result in lower credit scores and higher loan rates. Free credit reports are available online from AnnualCreditReport.com.
✓ Look for dealers who offer simple-interest financing.
✓ Search credit unions for fixed-rate, simple interest auto financing and get pre-qualified for a loan. This way you will know what's affordable before you walk into a dealership.
✓ Look for loans with shorter terms – four years rather than five or six. You'll get big interest savings as a result.
✓ When getting a new car, check with auto insurers to see if better rates are available than with used vehicles. The money saved on insurance can go toward car loan payments.
✓ Shop hard. All dealers get new cars from the same factories. If Dealer Smith is difficult, go speak with Dealer Jones. Let dealers compete for your business.
Knowing in advance how much you can spend, having financing in hand and not relying on strange loan formats will give you a huge advantage when it comes to buying a new vehicle, so prepare your finances before you go car shopping – and then enjoy the ride.
Be cautious with ‘zero-interest’ financing
In many car sales today the dealer will offer zero percent interest or a rebate. It's hard to know which is better because the real terms of the deal likely include other factors.
If you have to pay a premium price or receive a low trade-in value to get a zero-interest loan, you may not be ahead with the deal. If you have a choice between zero percent financing and a better price, be sure to run all of the numbers carefully.
For example, if you buy a car for $25,000 at zero percent interest over 48 months, you’ll pay $520.84 a month for a total of $25,000, not including fees and taxes, etc.
If you buy the same car for $22,000 at 5% interest, you’ll pay $506.64 for a total of $24,270, not including fees and taxes, etc.
That’s a savings of $730 total along with the lower payment each month. And if you pay off the loan earlier than four years, you will save even more money by limiting the interest.
For a proper comparison, have the dealer run both loan options and give you the amortization statements, monthly payments, fees, and total amounts for each.
Also, if you borrow $25,000 at zero percent interest, the cost of financing should be, well, zero, right? But a closer look at the deal may show something else, perhaps a “processing fee” equal to $20 per $1,000 in financing. With a $25,000 loan, that's a $500 charge.
And there may be an assortment of other extra charges and fees. The Center for Responsible Lending has a calculator to help you estimate dealer extras.
Where Are The Regulators?
At this point you may be wondering why consumers don't have more protection in the auto finance marketplace. While mortgage loans are closely regulated under Wall Street Reform, auto loans are not. Is the lack of regulation a problem? You bet.
Millions of Americans “are easily obtaining auto loans from used-car dealers, including some who fabricate or ignore borrowers’ abilities to repay,” says The New York Times. “The loans often come with terms that take advantage of the most desperate, least-financially-sophisticated customers. The surge in lending and the lack of caution resemble the frenzied subprime mortgage market before its implosion set off the 2008 financial crisis.”Call today for more information.