Many of the questions I get on the air have to do auto financing. This is an area people who have bought cars before worry about. By the time it is time to sign on the dotted line, you may have been at a dealership for a long time, you are tired, and you are just ready to go home with your new vehicle.
Here are some things to keep in mind:
Beware: As with every profession, there are good dealers and bad dealers. Many people are taken advantage of in the finance department of dealerships. Over the years, I have seen it all, high-pressure tactics to purchase extended warranties, credit life, and disability insurance, GAP insurance, etc. I have also witnessed downright fraud. Bear in mind, most finance managers are paid on commission, based on what they sell.
The finance experience does not have to be a trying experience. This seems basic and simple, but it is critical that you understand you are signing a contract-a legal and binding document that obligates you to make monthly payments on a timely basis. READ WHAT YOU SIGN. People never ceased to amaze me when I was in the car business. They would negotiate for five hours on a car, then when the most important part came…going over the final numbers and signing papers, they would almost always want to rush through this part. They would sign everything you put in front of them without asking any questions.
It is no secret that a dealer makes money on almost every product it sells in the finance department. Remember that all additional products are optional, nothing has to be purchased in the way of optional policies or products. There are worthwhile products offered, like extended warranties and GAP insurance just to name a couple, but they are totally up to you. Nobody will hold a gun to your head and force you to buy anything. Dealers first and foremost provide financing as a convenience to their customers, to help complete the sale under one roof. In many cases, the auto manufacturer offers extra rebates if you finance with its captive finance arm, like Ford Credit, Hyundai Financial, and the others.
Doing your homework is always a good idea. As far as interest rates go, know what you can get before you go to a dealership. Talk to your banker or credit union to know for sure what interest rate you can get, don’t leave it to chance. Know how many miles you drive per year to know which extended service policy to buy.
Get online and calculate what your payment should be. Buying a car and committing to five or six years worth of payments should rank right up there with buying a home, and taken as seriously, especially when it comes to reading and signing paperwork. Once you know what interest rate you can get on your own, give your dealer a chance to get you a better interest rate. They often can. If the dealer can save you a quarter to half a percent on interest, let them have the business and pocket the savings.
One good rule of thumb is to look at every line on the finance contract that has a dollar amount next to it. You will see normal charges for tax, title, and license, but if there are any added items, they must be broken out on the contract itself, so they are easy to spot.
This is difficult to do actually. You can find out from your bank or credit union the best possible interest rate, but until the loan officer can see the actual numbers on the car you picked out, most lenders will not do that. The lender wants to know how much you want to borrow versus the collateral, the car. In other words, they don’t want to loan $50,000 on a vehicle with a $40,000 MSRP.
You can often get a better price by financing the car with the dealership from which you are purchasing. I realize this sounds counter-intuitive but let me explain. Thinking back to my years in the retail auto industry, I ran across a lot of people who wanted to throw around the fact that they were paying cash. They were determined that they should get some sort of special deal because of that. The truth was, as a car dealer, I didn’t really care how we got our money. Whether cash, credit union, bank or one of our finance sources, we got our money quickly, often the same day, so waving a blank check in front of me did not carry any weight when it came to pricing my vehicle.
Today, many of the captive finance sources (Ford Credit, GM Financial, Toyota Financial Services, etc.) offer extra rebates for financing with them. I’ve seen those amounts as large as $1500. Diehard cash buyers are often put off by this and get angry with their car dealer, but the truth is, the dealer cannot control this. There is an easy way to get around it, however.
The finance companies offering the rebates are enticing you to finance with them, of course, to make a return through interest rates. They are hoping that you will decide to keep the loan so they can make money. In these cases, the savvy cash buyer will proceed with financing the car, get benefit of the financing rebate, and simply pay the car off in full before the first payment is due. You get full benefit of the extra rebate and get to write a smaller check. The finance companies know a lot of people are going to do this and they are fine with it. However, others will not go through the process.
One important note: dealers like to tell you to make the first three payments before you pay the car off. Dealers are paid a flat fee in many cases, it’s normally a couple of hundred dollars. That flat fee is charged back to them if the consumer pays off his or her car before three payments are made, but by law, you can pay it off at any time.
If you keep anything from this article, remember to read what you are signing, and make sure the numbers match what you agreed to. Don’t rush the auto financing process whether you purchase, lease, or pay cash.