Car Financing: Tips that WILL save you money

Here’s the thing: Just deciding on the right car and haggling over the final sales price is exasperating enough, so by the time the deal is handed over to the finance department, the buyer is at the weakest point of negotiation.

Unfortunately, financing the car is where most buyers end up squandering their savings on the sales price. Higher-interest loans and expensive extended warranties are where dealers make the most money.

In fact, more than a quarter of a dealer’s profit is made by the finance and insurance office. On average, $947 is made off of dealer financing and another $795 is made via an extended warranty...

(58% of buyers take dealer financing while 30% buy the extended warranty). Another $438 is made via gap insurance, a policy sold to cover losses beyond what your regular auto insurance will cover.

The Irony

Many of today’s car buyers walk into a dealership armed with research they’ve gained from Web sites like Edmunds.com. They know what they want in a car. However, they haven’t put in nearly as much time researching finance options. Ironically, financing is where they could achieve the most savings in the car buying process.

Financing is more than just the necessary paperwork that allows you to drive off the lot with your new car. It’s the contract you’ll have to live with until you pay it off.

Pre-Approval

Just as you would when looking to buy a new home, it pays to apply for financing before you even take a test drive. If you walk in preapproved with financing from your bank, credit union, or online lender, this gives you a lot more clout when it comes to negotiating the price of the car. There is not much a dealer can do to gouge a “cash customer” for extra profit. 

Dealer Financing

The car dealer doesn’t actually finance your car; it shops around with other lenders to find the best deal (for the dealer, not the customer). Car loans are offered to dealers at wholesale rates, which means the dealer can then offer the loan to the consumer for a few percentage points higher.

Also beware of bundled packages. The dealer may offer you a finance package for a flat rate that bundles several options, such as your interest-rate loan, extended warranties, and a few other goodies such as paint & rust protection, fabric protection, VIN etching or LoJack.

The dealer might ask you to choose between two or three different bundles. The key is to remember you don’t have to pay for a bundled loan. Just decline the options you don’t want and ask for the baseline pricing for what you do want. You can always buy the extras later on at a more realistic price—just keep them out of the negotiation process.

As for extended warranties, customers can pay as much as double the actual cost of the warranty to the dealer.

Finance Tips

Whether or not you plan to take advantage of dealer financing, follow these simple guidelines to help you negotiate a better deal:

• Once you strike a deal with the car salesman, ask him to put it down in writing. This may include the final sales price as well as the interest rate and monthly payment. That way, once you’re in the room with the finance guy, you can refer to the deal whenever you feel like the pricing is getting out of hand.
• Research the most current rates for auto loans in your area, so when the dealer quotes rates you will know if you’re getting a good rate or not.
• Find out your credit score before you shop for a car. Many dealers take advantage of buyers’ ignorance and will position a buyer’s credit as less than perfect, and thus sell a more expensive price or interest rate as a “deal” given his credit score. If you know you have a good credit score, you’ll know when to call his bluff.
• As a general rule, bear in mind that your monthly car payment and associated expenses (gas, maintenance & repair) should not exceed about 20% of your monthly income.
• Don’t throw a trade-in into the deal; you usually will receive less money applied toward your purchase price than you would if you sold the car on your own and applied the proceeds to your car loan.
• Don’t let the car salesman know you have a monthly payment amount in mind. Once you give this away, he will show you only cars on which he can make a profit based on your monthly payment. First, decide on the car you want. Once the salesman believes you are ready to buy the car, he will negotiate a better deal for you.
• As a general rule, the extended warranty isn’t necessary, and it is never required. But if you do decide you want it, this is a very negotiable expense. The dealer has nearly a 100% markup on the warranty, so there is much room for haggling.

Cash Rebate or 0% Interest?

This decision comes down to a couple of questions. First, if you take the cash rebate, will you apply it to your auto loan? If so, run the numbers; you may well come out ahead by applying the rebate to the purchase price and financing the car through an independent, low-interest loan. See the example below.
 

 For more information on how to save money on car financing, check out these resources:

• http://www.autofinancing101.org/
• Auto financing quiz: http://www.autofinancing101.org/learning_suite/tuneup.cfm
• http://www.bankrate.com/auto.aspx
• http://www.edmunds.com/car-loans
• Brochure: What You Need to Know About Auto Financing: http://www.autofinancing101.org/resources/wyntk.pdf

Video - Tips For Financing a Car:

Kara Stefan is a freelance financial writer and author of Head of Household: Money Management for Single Parents. You can find her at Linkedin or Kara Stefan Communications.