Money for a Car:
A Guide to Auto Financing
In a car buying deal, nobody wants to
be the dumb buyer. You have to be smart or you end up losing more
money than you ought to. ‘Ought’ because you do have to pay for the
car and ‘ought’ because there’s just no way of avoiding it. However,
that doesn’t mean that you should pay an outrageously high price.
Because not everyone has the necessary cash in hand to pay for a car
right then and there after a deal is closed. Unless, of course,
you’re Bill Gates. Then again, why would business genius Bill Gates
pay cash for a car when he could probably pay less for it on a loan?
You see, THAT’S the key to playing smart.
It is a very common scheme among car
buyers to first get money in order to buy a new car. The term is
called “auto financing” and it simply means how you pay for a
vehicle. You can finance a car by taking out an auto loan to own a
car, in which case, you have two options: You either use the money
from the loan to buy the car, or use it for lease. Later on, we’ll
discuss the topic of the advantages and disadvantages of buying or
leasing a car, but first, let’s talk about auto financing, in the
general sense.
How Important is Auto Financing?
Don’t look at the shiny object! Don’t
look! Shinies are bad! Expensive shiny objects are especially bad!
They could drain your entire life savings!
While that much is true, you can’t
really expect people to stop focusing on that shiny new car, and
instead think about the subject of auto financing. But then again,
the most important part of car buying is actually auto financing. So
take the above-mentioned advice and just ignore the fact that it
sounds slightly paranoid.
If this isn’t your first time buying
a car, you might already know that the salesman or your car dealer
will be checking your credit report before starting with the
negotiations. But this is not the only way you can go to get that
new car of yours. The seller will try to sweeten the deal and offer
you special car finance situations in exchange for throwing yourself
completely at his mercy. That is not a path you have to choose. The
key is preparation. Knowing what auto financing options you have
before you get to the dealership will mean that you can take charge
of your credit and take charge of your car loan.
Just remember: when you negotiate
with the salesman for the most favorable auto loan, nothing is
permanent until you have it in writing. So haggle and then haggle
some more. Once negotiations seem to be over, that’s when the sales
contract is prepared.
The Ups and Downs of Auto
Financing
Problems in auto financing usually
occur when the contract is prepared in the finance and insurance
office, called “F&I” room. So when your deal goes wrong, chances are
it’s about something that occurred only at the time when
negotiations are almost over. This is because the F&I room is where
you, the car buyer, can see much of the potential savings regarding
your auto loan go up in smoke. So you see just how important this
so-called F&I room is?
Downer #1: Ignoring the F&I
Room
Now, the thing with car buyers is
that they rather have this not-so appealing tendency to focus on the
car they want to buy, and just ignore the F&I room as nothing but
tedious paperwork. It’s not very appealing because it is, after all,
your money being held in negotiation here and if you don’t pay
attention to it, there’s a chance you’ll lose a big chunk of it.
Upper #1: Focus on Financing
While it’s true that the whole point
of car buying is to own that new car you’ve been eyeing, it’s not
wise to ignore the financing aspect of it as well. The two must
necessarily go hand in hand or in you’re in for a tough spot with a
bad investment on a car loan. Don’t view the financing part as
paperwork that should be completed as quickly as possible so you
could drive away in your new car. Don’t make the same mistake other
car buyers are making. Be aware of how vital the F&I experience is
to car buying.
Downer #2: Inflated Interest
Rates
Top on the list of the things you
must do involving auto financing is to have the deal agreed upon by
you and the salesman be put in writing in a binding contract. Often
involved at this part of the procedure is to determine monthly auto
loan payments based on an interest rate. Now, as you well know, the
interest rate varies from car buyer to car buyer. Your credit is
only one of the factors and if the interest rate a car buyer
qualifies for is inflated, then the dealership can make extra profit
off your loan. That’s merely one of the pitfalls in auto financing.
Upper #2: Get Independent Auto
Financing
Fortunately for you, there are
solutions to that particular problem. One way to do it is to obtain
independent auto financing BEFORE going to the dealership. When you
have the approved auto financing option on hand, you can then
proceed with the deal as a “cash buyer” so to speak since you
already have the cash in hand from the loan and you are merely
buying the car from the dealer with that money. No other relation
exists between you and the dealer aside from that of a seller and a
buyer. No such thing as a debtor and a loan creditor.
Another advantage to this particular
solution is that you can negotiate with the car dealer only upon the
price of the car. You don’t have to worry about getting approved for
financing with him since you already have that, thanks to your
conscientiousness and foresight. Car salesmen prefer customers to be
“monthly payment” buyers as this makes it easier for them to obscure
the total cost of the vehicle, to the detriment of your savings. So
wizen up and take that independent auto financing option available.
Downer #3: I Don’t Know My
Credit Rating
Now, that’s a very common statement
car buyers make. They know their blood pressure level. Heck, they
even know their blood count. But credit rating? Only a tiny smidgen
of the population knows that. Yet, it cannot be stressed far enough
that knowing your own credit rating could very well mean the
difference between a good investment and a bad one.
Many car buyers don’t know their
credit status when they apply for an auto loan. I don’t know if
they’re just lazy or simply don’t know that determining the kind of
interest rate you get depends largely on your credit score. I’m
praying for the former because that can be cured. The latter just
answers itself. Therefore, it’s critical to obtain your credit
report before shopping for a car so you will know exactly where you
stand when it comes to your auto financing options.
Upper #3: Where to Get Credit
Report
The solution to not knowing your
credit rating is to get a copy of your credit report. And where can
you get that copy? There are a number of sites that offer it for a
minimal fee. These sites are:
Order a copy of your credit report
from the above sites and look for items that may stand in the way of
you getting a good rate. In case of any errors, correct them
promptly and make sure that all your lines of credit are in good
standing. Also, while you’re at it, watch out for any signs of
identity theft as this crime has become rampant these days, and then
contact the credit bureaus for help on this particular issue.
Downer #4: The Last Temptation
of Mr. Car Buyer
Granted you are a really
conscientious buyer and so far you’ve managed to avoid many of the
pitfalls and downers we’ve outlined above. You made it. You have an
approved auto financing program from an independent auto financing
company and are now on your way to the dealership. Nothing can
possibly go wrong now.
Ah, but how wrong you are. Because
once you get to the dealership, the smooth-talking salesman will try
to egg you into overspending.
Upper #4: Set a Price Range
Having a budget is the sensible thing
to do. If you set a sensible price range for yourself, then you have
less reason to go beyond that range and succumb to the temptation of
overspending. If you’re really firm on that budget, no amount of
sales talk can sway you.
Creating a budget for a car is easy
once you have some idea on what financing options are available to
you and the price of the car that you want. Remember that the
dealer’s offer is often marked up – that is, it is a percentage
higher than the real price set by the car maker. One good tip is to
make sure that your monthly car payments and related expenses do not
exceed about 20 percent of your monthly net income.
Downer #5: Discounted Financing
vs. Rebate
Here’s the dilemma to car buying:
Many dealers offer a choice between discounted financing or a
rebate, but not both. Discounted financing means that you get
zero-percent financing while rebate means that you get a certain
amount of cash some time after purchase. The common error many car
buyers make is that the zero-percent loan will deliver the most
savings. But will it really?
Upper #5: Get the Cash Rebate
In most cases, it’s better to get the
cash rebate and apply it against the purchase price of the vehicle.
If you already have a pre-approved car loan, then that’s even better
since you have positively no need of additional financing from your
dealer. Just use your car loan to finance the car and let the rebate
handle some of the charges.
“How are you going to finance your
car?”
When the salesperson asks you that
question, don’t look too confused. Your answer could one of three
things:
-
“I want to lease the car.”
-
“I will be paying cash for the
car.”
The last one is pretty much
understandable. But what is the difference between buying a car and
leasing a car? Here’s what:
First, let’s start with car buying.
When you decide to buy the car and you want the dealership to help
you finance it, the salesperson will ask you to fill out a credit
application. Whether or not the application will be approved depends
entirely on your credit score. Whether or not you apply for that
particular car loan program depends entirely on you. If the interest
rate is too high, then get out and look for other independent auto
financing options out there and only get back to the dealership when
you have your approved application. After that, the car is yours.
With leasing, the case is a little
different. You will still be asked to fill a credit application when
you decide to lease the car and that will still depend on your
credit score. After getting a hold of your credit application and
the length of the auto lease you want, the dealer will shop around
for a lease for you.
You will have to choose how long you
want your lease to be and how much you’re willing to pay upfront.
The obvious choice, of course, would be to pay as little as
possible, but be sure to weigh other options as well. After that,
the car is yours for the period stipulated in the lease contract.
There are several other different
strategies that car buyers like you can adopt in order to make the
most out of your money and reduce costs at the dealership.
Understanding the credit process is just one way of being a smart
buyer.
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