Read this and watch out for car loan mistakes that could cost you a lot
1. Negotiating the monthly payment rather than the purchase
price. Reed warns that buying a car based on the amount of the monthly payment
is a trap. Although you should know what you can afford each month, don't
provide that figure to the salesman. If you do, you will forfeit your capacity
for negotiating a lower purchase price. "Don't let them turn you into a
monthly payment buyer," he says.
Once volunteered, a monthly car loan amount tells the dealer
how much room is available to hide other costs such as a higher interest rate
and add-ons. Reed says to negotiate the price of each cost category separately.
"Minimize the individual pieces of negotiation -- price, trade-in and car
financing," he says.
2. Letting the dealer define your creditworthiness. Reed
explained that your creditworthiness determines your car financing interest
rate. Your credit score (300 to 850) is your creditworthiness as a rating and
is based on your credit report with the three credit reporting agencies --
Equifax, Experian and TransUnion. A borrower with a high credit score qualifies
for a better car loan rate than one with a low score. Shaving just one
percentage point of interest from a $15,000 car loan over 60 months would save
hundreds of dollars in interest paid over the life of the loan.
Reed emphasized knowing your credit score before you set
foot on the dealer's lot. "Most people think their credit score is worse
than it is," he says. "When people don't know their credit rating,
the dealer can tell them almost anything."
Reed recommends consumers check their own credit by
obtaining preapproved car financing. They should go to a bank or credit union
and apply for an auto loan before visiting the dealership. Even if they intend
to take advantage of a deeply discounted interest rate offered by the auto
manufacturer's lending agency, consumers can find out how much vehicle they can
buy and the interest rate they qualify for by getting a preapproved car loan.
"It's another way of checking your credit," Reed says.
Erin Downs, former spokeswoman for San Francisco-based Wells
Fargo & Co., says, "We consider your credit rating, your payment
history and the amount of debt you already have."
3. Making the wrong choice between cash rebate and low
interest rate loan. If you want to take advantage of a manufacturer's offer of
a cash rebate or a low interest car loan, do your homework before deciding.
Reed cautions that the method netting you the most savings varies from offer to
offer.
Bankrate's car rebate incentive calculator simplifies the
comparison. Manufacturers' low-interest car financing isn't available to
everyone, so it will help to know your credit score before talking to a finance
manager. "Your credit must be very good to get the low-interest financing,"
Reed says.
4. Rolling negative equity forward. "Upside down"
is the term used to describe owing more on your car than it is worth. The
difference is "negative equity." When a dealer tells an upside-down
consumer that he can fold that negative equity into the car financing of the
next deal, he means that he will add it to the purchase price of the new car.
You will be paying interest on that negative equity for the
term of the new loan. Moreover, if you were upside down on your last trade-in,
chances are you will be that much more upside down next time. "It's a
horrible practice and should be avoided," Reed says. "They are just
making the problem worse. It's because people are buying more car than they can
afford. Live within your means."
5. Financing the cost of add-ons that you can buy
separately. According to a 2012 report by National Automobile Dealers
Association, nearly 37% of the average gross profits earned in new and used car
sales departments were generated in the F&I, or finance and insurance, office
through aftermarket add-ons.
"Just say 'no'" is good advice. "They are
really there to make extra profit for the dealership by increasing interest
rates, and selling extended warranties and add-ons such as fabric protection
and paint sealant," Reed says.
Even if you want an extended warranty or credit life
insurance, these items are available at a lower cost from sources outside the
dealership. Folding them into your car loan and paying interest on them for the
life of the loan can add hundreds of dollars to the amount you pay. Further,
question every fee you don't understand.
"Dealers can write other fees into the contract and
give them official-sounding names," Reed says. "These fees are
another attempt to take profit on the back end of the deal when the buyer's
guard is down."
