Key Consumer Issues - Financing a Car

Financing a Car: Quick Tips

Buying a car, whether new or used, can be complicated and overwhelming.  If you’re going through a dealer, it can be tempting to deal exclusively with the dealership on both the purchase and financing of the car.  In fact, many dealers try to entice buyers with dealer financing specials, although these specials often have restrictions or conditions that make them unavailable to many consumers.  Just because you buy a car from a particular dealer, doesn’t mean you have to finance it through that dealer as well. 

Dealers often make much of their profits through financing car loans.  In fact, they often have deals with lenders if they can get a buyer to take out a loan at an interest rate higher than what they might be able to get elsewhere. Rather than put your money in their pockets, it’s best to shop around for your financing.  With a little legwork and some comparison shopping you’re likely to find a more favorable loan from a local bank or credit union.  Also, keep in mind that deals differ from dealer to dealer as well. A key point here: as you’re negotiating with a dealer on the car you want to buy, don’t tell him how you plan to pay for the car and/or whether you plan to get dealer financing or to look elsewhere.  If he knows he’s going to lose out on potential financing profits, he’s likely to build those profits into the sale price of the car.  Agree on the price of the car and then talk about how you’ll pay for it.

As exciting as buying a car may be, before you begin considering how to finance your purchase, there are certain realities you must think about. Before you begin shopping, know what you can afford to spend. How much can you realistically spend each month altogether for car expenses including: monthly payments, insurance, regular maintenance, and potentially necessary unscheduled maintenance?

If there’s a certain car you really want, know what it’s worth before you begin negotiating a deal. Don’t trust what the dealer tells you. If you do, you may take out a loan much larger than the actual value of the vehicle. It’s helpful to always keep in mind the possibility that you could buy a car and it could be totaled shortly after that. If that happens, your insurance company will only pay for the actual value of the car and you will be responsible for paying any balance on your loan, even though you no longer have the car. You could find yourself in a similar situation if you decide to sell the car before the loan is paid off.  If you spent a lot more on the car than it was actually worth, you may have some big payments left to make on your loan even after you no longer own the car. Websites such as www.edmunds.com, www.kbb.com, and www.nada.org, can give you an idea of what new and used cars are worth. Consumer reports (www.consumerreports.org) and other organizations also offer consumer resources that can help you determine a reasonable price for the car you want.

Once you know what you can reasonably spend on your car purchase and begin shopping for your loan, be sure to compare and consider:

• How much of a down payment can you make and how much you will need to finance?  The more you can put down up front the less you have to finance, which generally means the car costs less in the end.
  
  
• Interest rates-what are they? Are they fixed or variable? (there’s usually more risk with variable rates.)
  
  
• All fees and charges associated with the loan. Beware of charges you are told are “automatic.”  In truth, these are often negotiable.
  
  
• The length of the loan: how long will you be making payments?
  
  
• How much money you are really borrowing.
  
  
• What the monthly payments will be?
  
  
• The terms of the loans you’re looking at. What are the requirements? What happens if you miss a payment? Can your interest rates go up? Keep in mind that what looks like a better deal at first glance, may not be so good in the long run.
  
  
• Beware of loans with balloon payments toward the end of the loan term. Balloon payments are often a sign that you’re mostly paying interest early in the life of the loan and may be stuck having to make a very large payment toward the end.
  
  
• Beware of extended warranties, service contracts, credit insurance and other products built into a finance agreement. Often, these products aren’t worth much and don't do what you think they do. Remember: any additional products you finance basically increase the total cost of the vehicle. It’s very easy to lose sight of how much you’re spending if you only think of the sale price of the car and to get talked into a few seemingly inexpensive extra products and services that will supposedly protect your investment.  If you’re considering buying any extras be sure you know what they are, what they cover, and what they don’t.  Ask yourself if they are things worth paying for up front or if are you better off holding onto your money and purchasing those products and services as you need them. Consider prepaid maintenance contracts, for example, which offer discounted prices on maintenance for your car. While that may be true, you may be able to shop around for the same or better deals on maintenance when you need it. And, what happens if your car is totaled? You’ve paid for maintenance you’ll never use.
  
  
• If your car is totaled before your loan has been paid, make sure to get refunds for unused portions of any extended warranties, service contracts, credit insurance, or other similar products you bought with the car.

Once you’ve done your initial comparison shopping and think you’ve identified the loan that’s right for you, go back and examine it one more time to make sure you fully understand what the total cost of the vehicle will be. This calculation should include: the sales price; taxes; interest; any fees or charges on the car sale itself (for example tag and title fees, etc.); any fees or charges, in addition to interest, associated with the loan; and any additional products or services you purchased.  Don’t just trust the lender and/or dealer to give you this information. Check the numbers yourself to make sure they all add up.  Ask yourself again: If by some unfortunate accident, the car is totaled in a few months, will the loan I am about to take out leave me in a vulnerable financial position?

As with any consumer transaction, a few final pointers are critical:

• Beware of a finance agreement or any other deal that looks too good to be true-It probably is.
  
  
• Be sure all important terms and promises you were told about verbally are written into the contract before you sign it.
  
  
• Always review any forms before you sign them, making sure you understand them and that they don’t contain any blanks.
  
  
• Before you resort to "last chance" financing, make sure you don't qualify for a traditional loan.