Buying a Car

If you’re considering buying a car, you need to do some homework. Walking into a car lot without being prepared would be suicidal to your finances.

Buying a Car – Not doing your homework can cost you

Consider this. You sit at the salesperson’s desk and you tell them you like that silver Honda you just test drove. The salesperson is a trained professional, he sells cars ever day, that’s what he does for a living. He is not biased, he wants to sell you a car. He doesn’t necessarily care if you can pay for it or not, or if it’s the right car for you or not. He is going to push either the car you like (easiest for him) or the car that pockets him the most money (in most cases anyway).

He studied many sales techniques, he memorized all possible “objections” you may come up with and knows exactly what to say to overcome them all, he knows how to “close” you because he’s been trained to do that.  This is his job.

And what about you? How are your negotiating skills? Now you can see why we said before that walking into a car lot without doing your homework would be suicidal, metaphorically speaking of course.

But relax, you are not going to war. You just need to learn a few things because above all, you don’t want your finances to be impacted with the purchase of a car. So read on.

The first thing you need to do is know what your FICO score is. This is a number assigned to measure your credit worthiness, the higher the better. It does NOT tell the creditor the whole story or your ability and /or willingness to repay the loan. However, it is used by almost every lender in the US, either for a  car or a house, and it will have the most influence on whether the loan will be approved or declined, and what the interest rate will be.

So be sure to get current copies of your credit report from the three major agencies and review them thoroughly. You can either go to the three major credit reporting agencies

[Equifax: PO Box 740241, Atlanta, GA 30374; www.equifax.com

Experian: PO Box 2002, Allen TX 75013, www.experian.com

TransUnion: PO Box 2000, Chester, PA 19022; www.transunion.com]

Or to AnnualCreditReport.com (read http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm first) If you don’t get your FICO score, that’s ok, you can see whether the information on the reports is accurate or not.

If the information is NOT accurate, you may want to consider postponing buying a car until the problem is resolved, to avoid paying higher interest due to a credit reporting mistake.

Next, consider carefully whether any 0% loan offered by a dealer is the best deal for you. That number certainly looks attractive, compared to the 4% or higher that is often the next best thing. But you might actually be better off taking the immediate cash rebate instead.

For example, at 4% with a $2,000 rebate on a 36-month loan, your monthly payment will be $30 lower and you’ll save over $1,100 on the total cost over a 0% loan. You can run various scenarios yourself by using one of the readily available online loan calculators.

It is almost always better to pre-arrange financing before you go car shopping. This has several very important benefits for you. You will know in advance exactly how much the loan will cost you and what you can afford (both in terms of monthly payment and total cost)

Not only will you have a bargaining advantage when negotiating with the salesperson, but you will also feel more confident knowing exactly how much you can afford. For example, most car salespersons will ask you how much you can afford (let’s say it’s $300/month) then they simply divide the cost of the car over many more months in order to reach your monthly payment, increasing your total interest in the process.

Financing is where most of the profit is made at the dealership, along with the extras they try to sell you. Go to a Credit Union for a lower interest rate instead and pocket the difference.

Another important advantage of having pre-arranged financing is the confidence you get from being able to walk away if for any reason you feel the deal is not good for you. This is especially true for  new cars, since their prices are fairly similar across dealerships (the ad you see in the paper that shows your car for thousands of dollars less than other dealerships charge is usually not true; either there is “only one available at this price” –that somebody purchased a few minutes before you got to the dealership- or you need to have a 900 FICO score, or some other restriction).

You do need to walk away if you are not happy with the deal, period. Do not fall in love with the car simply because there are millions of cars for sale, and you can always find a better deal.

Last, be sure to calculate the pros and cons of leasing versus a car loan versus another forms of financing. Getting a home equity loan, for example, can give you ready cash with tax deductible interest and most home equity loans don’t require you to spend the money on the house.

Being creative when considering financing options can save you money.

An excellent strategy that can save you thousands of dollars is this. If you can wait one year to purchase another car, save the monthly payment. Let’s say the monthly payment would have been $400 a month. If you save it for a year while driving your older car, after those 12 months you would have $4,800. If you can get, let’s say $5,000 for your older car, you can buy a used car for $9,800. Repeat the process for another year, saving an additional $4,800, and with the sale of your car and the amount you saved, you can buy an excellent used car for about $14,000 and own it outright! No payments, no interest. How would you feel if you had a $14,000 car and no monthly payments?

Do your homework, and make it a priority to get out of debt as soon as possible!

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