How to buy a car
Car Purchase
If you think of the negotiating process of buying a car as a dance, you'll find it a lot more tolerable and you might possibly enjoy it. It's just two people suggesting and redirecting. And remember - you have the advantage. You have a long line of salespeople who would like to dance with you. If one isn't a good dance partner and isn't working with you to nail down a price, feel free to say, "Good night," and find yourself another dance partner.
Another good attitude adjustment before you start: dealerships try to average a specific amount of profit on each car they sell. People who pay too much allow there to be people who pay too little. With some preparation and education, you can be one of the latter.
Dealers will pressure you to make all your decisions in a single day. They've been doing this for a long time. They have all the scenarios mapped out. So when they react, they're acting with experience. For you, it's probably unfamiliar territory so that when you react, you may be acting with emotion. Dealers and salespeople know how to use that to their advantage. So slow the process down, sleep on decisions overnight and it could save you quite a bit of money.
Also, the more proactive you are and the more you take control, the better the result. Educate yourself. Understand how the car business works. Know what price the dealer paid for the car and have some alternate financing options.
Some strong negotiation moves and redirects can help you come out ahead:
· Keep a neutral outward attitude. Don't sell yourself. If you give the impression that you could take it or leave it, a salesperson will work harder and be willing to give more to sell you.
· Avoid financing questions. Even if you don't have the money, tell them you're paying cash. They won't hold you to it. But it will force them to concentrate on the current price negotiation and not see a long-term strategy to inch up their profits.
· Be prepared to haggle back and forth for a while. The salesperson might try to tire you out with a prolonged negotiation session. Don't give in. Stay strong and save money. Keep in mind an extra hour of persistence could save you a few hundred dollars.
· Watch for the good cop, bad cop move. The salesperson will tell you that he or she really wants to give you the price you're asking for, but he or she will have to ask the manager. You may feel like the salesperson is on your team at that point. Just remember who signs their checks. It's you versus them.
· Ask to see the invoice. If they are dead-set against showing you the invoice, there's a reason why. They're probably offering you a bad deal.
· Shop for a car later in the month. There are a lot of bonus and rebate programs that are based on monthly sales quotas. If a salesperson or dealership is short of meeting goals at the end of the month, you might find more willingness to sell the car cheaper in order to get the extra sale.
There are some no-haggle dealerships, such as Saturn dealers. If you are really opposed to the negotiation dance, head there. The dealership is still making the same average profit on each car but there's no way for them (or you) to use bad negotiators to an advantage.
Let's Talk Price
Before you talk price, there are some terms you should know:
· Invoice Price This is the wholesale price the dealer paid the manufacturer before any rebates or incentives. Do some research on this number. If you can find out what the dealer paid for the car, you'll know what the profit is on each car. Then you're ready to strike a compromise between letting the dealer make a living and getting a good deal for yourself. The Internet is a great source for this information. Use it to decide on a number you're willing to pay. Print out the invoice price when you find it and bring it with you to the dealership for back-up.
· MSRP - Manufacturer's Suggested Retail Price Also called the "sticker price," this is the number on the car window. Don't pay this! It's just a starting point for negotiations. If the model you're interested in is in high demand, you probably won't get much lower than this number.
· Dealer Incentives Manufacturers sometimes give dealers extra money, bonuses and rebates for selling overstocked and undersold cars. Find out if the car you're interested in buying has any dealer incentives attached to it. Then subtract that amount from the price you're willing to pay.
· Holdback The manufacturer often gives money to the dealership to help reduce operating overhead expenses - the cost of running the dealership. It's often 2% to 3% of the sticker price. This information may not be very helpful in the negotiations, but if it comes up, you'll know what it is.
· Sales Tax The sales tax is the same tax that's charged on everything from candy bars to umbrellas. However, don't try to go to a different county to avoid a higher sales tax. They charge it based on the county you live in, not where you buy the car. This cost, of course, is non-negotiable.
Beware Of The Add-On
The dealer will probably offer all kinds of add-ons after you've negotiated the price. The dealer makes extra money on almost every single one of them. You may find add-ons are included as if you have no other choice. You do. Feel free to refuse them. It will help if you know what these add-ons really are:
· Destination Charges Some manufacturers charge separately for shipping the vehicle to the dealer. You can't get around this. But check the sticker to make sure it wasn't already included in the price.
· Licensing and Registration Fees These are necessary, but call your state's Department of Motor Vehicles to make sure the dealer hasn't padded this price.
· Extended Warranties These are also called service contracts. Just buy a car with a good service history and an extended warranty should be unnecessary.
· Dealer Prep Part of a dealer's job is to get the car ready for you and it's one of the things the dealer gets paid for. Don't pay this twice.
· Credit Insurance This insurance will pay off your car loan should you die while leasing it. As long as you have life insurance, this also is unnecessary.
There are many other fees that may be added. Ask directly what each one is for. If it seems unnecessary, it probably is and you should refuse to pay it.
Just because you’ve figured out what you can afford, it doesn’t mean lenders will agree. That’s where your credit report comes in. Lenders decide how large a loan you qualify for strictly by looking at your credit report. It’s nothing personal. They don’t care what you look like, what you think about the status of your personal finances or how nice you are to small animals. They only care about the numbers that appear on your credit report.
The credit report will tell them your credit worthiness (How well have you paid past debts?), financial means (Do you have sufficient income to repay a loan?) and debt load (Do you have too much debt to be able to take on more?).
Pre-Approved Financing
Many lenders will pre-approve a certain loan amount based on your income and credit history. You’ll know exactly how much car you can afford and be able to leverage your financing deal against financing offered by the dealership.
Financing Options
·Dealer Financing The big advantage of dealer financing is convenience. You buy and finance the car all at once. But if the dealer is just reselling a bank loan to make a profit, the rates won’t be the best. Occasionally dealers offer special rates to get rid of overstock, especially at the end of a model year. So make sure you ask them about financing and compare their offer to your prearranged financing.
·Banks You can usually get a lower interest rate at a bank than a dealership, especially if you are an existing bank customer. They’ll probably require a 10-20% down payment to cover the depreciation of the car in case you default on your loan and they need to repossess your car. Smaller banks offer personal relationships, which are important, but may not be able to compete with rates of bigger banks.
·Credit Unions Credit unions have lower overhead costs than banks which allows them to offer lower financing. Sometimes it can be a full percentage point lower.
·Home Equity Loans You need to own a home to get a home equity loan. You use your home as collateral for the loan - which is a little bit scary. If you can’t pay the loan, they can take your house. But if you’re sure you can afford it, a home equity loan is a great way to go because not only can you get a lower interest rate, your interest is tax deductible!
·The Internet As with everything else these days, you can shop for car loans on the Internet. You miss out on any kind of personal relationship, but you can get quick approval and very competitive pricing.
·Trade-In Your old vehicle is basically a very large coupon that you can trade for a discount when you buy a new vehicle. If it’s worth enough, you may be able to use it as a down payment. Trade-ins are a convenient way to use the car you already own to help purchase a new one.
Negative Equity
The value of a new car drops dramatically as soon as you drive it off the lot. That’s because it then becomes a used car. It doesn’t matter that you only used it for five minutes - it’s still used and is worth much less because of that fact.
This depreciation is an important concept to understand when dealing with financing because while the value of your car drops immediately, your loan principal drops more gradually. So if you try to sell the car too soon, you may end up owing more on it than you can sell it for. That’s called negative equity.
You can avoid getting into negative equity situations by following these simple rules:
1.Keep your car until it is paid off completely. Obviously, no matter how much your car depreciates, you won’t have negative equity if you don’t owe anything.
2.Don’t buy a car that is too expensive. If you struggle too much to make the payments, you may decide to sell the car earlier than is financially prudent.
3.Don’t drag out your payments. You might get a slightly better interest rate and your monthly payment will be smaller. But it will staple you to that car for the financing term. Five years later you’ll still be paying for a car that may no longer fit your needs.
4.Make the biggest down payment you can. This will help offset the effect of depreciation and start giving you some positive equity.
Some people seem to get a new car every year or so. What happens to all the ones they’ve gotten rid of after just a year? People buy them and sometimes get great deals.
A large part of a car’s depreciation happens as soon as you drive it off the lot. So the main advantage of buying used is that you’re buying after this huge drop in price. That makes a used car less of a long-term investment.
Shopping for a Used Car
Used car salesmen have one of the worst reputations of any profession. While most will not live down to this reputation, some will. You’ve heard the term “too good to be true.” It applies double to used cars. That motto will help you avoid some of the car sharks.
Shopping for a used car can be much harder than shopping for a new one. They’re like snowflakes. Each one is unique. That makes comparison shopping more of an art than a science. And dealers have a little bit of an advantage since you can’t just leave and buy the exact same car at another dealership.
There are three main sources of used cars:
Used Car Dealer Dealers often offer you a warranty on a used car - which is comforting when a previous owner may have used it to haul chickens down an uneven gravel road every day for the past three years. But you probably won’t get as good a price as you will if you buy from the Average Joe/Jane.
Average Joe/Jane A little negotiation can really drop the price to something that’s fair to both of you. But you won’t get a warranty. And to look at five cars, you’re most likely going to have to visit five different people.
Public Auctions You can get some incredible deals at public auctions. There is no dealer to haggle with and only other potential buyers will increase the price. The downside to these auctions is that you usually can’t test drive the car and it is extremely rare to get a warranty on an auctioned car.
Research is Important
The point of buying a used car is to save money. But if you don’t research the car you buy, it could end up costing you more than a new car! First, look up the Kelly Blue Book value of the car so you know what price range to start in. Then get the history of the car. Ask the seller what it was used for. If it has been used just for driving on relaxing tours of the countryside several times a year, no problem. But if it was used as an off-road race vehicle, you might want to reconsider.
Get the VHR (Vehicle History Report) using the Vehicle Identification Number. It will cost about $10-$15, but this report will let you know if the car has been in any major accidents that may have weakened the frame.
When it comes time for the test drive, be relentless and thorough. Ask the seller about any strange noise the car makes. Anything. It might just be an odd quirk. But it could be a telltale sign of a much larger problem. Use everything in the car. Press every button. Open every window. Open and close every door. Once you are sure there is nothing wrong with the car, get a professional mechanic to do the same. Subtract any small thing wrong with the car from the price you are willing to pay for the vehicle. Realistically, you’ll end up paying that money back to get it fixed.
Here’s another choice for you. Do you want to buy or lease a vehicle? There are pros and cons to both.
What is Leasing?
When you lease a new car, you’re paying to use the car during its first few years. Here’s how it works. You go to the dealership to lease a car. The dealership actually sells the car to a leasing agency (sometimes owned by the dealership). This part is transparent to you. You put some money down on a lease, just like a down payment.
Your monthly payment is determined by the total price of the vehicle minus your down payment, minus what they expect to be able to sell the car for at the end of your lease. That number is than divided by the number of months in the term of the lease. Then they add a finance charge and a profit margin. That sounds complicated, but in the end, you’re paying for the depreciation of the vehicle while you use it. The lease is actually a loan for the amount of the depreciation.
Benefits of Leasing
A lease will offer you a lower monthly payment compared to buying a vehicle. Plus, a much smaller down payment or trade-in is required.
If you like to get a new car every few years, a lease is probably a good option for you. If you buy a car and sell it every few years, you’ll end up with loads of negative equity - that’s bad.
At the end of a lease you have the option of giving the car back or buying it as a used car. If you plan on buying it at the end of the lease, it may be a better idea to just buy it new to start with. If you lease and then buy, the cost of the lease combined with the purchase price of the used car is often much more than the new price of the car. If it weren’t, the leasing agency wouldn’t make any money.
Disadvantages of Leasing
Since you are paying the difference between the new price and the used price of the vehicle, you will be charged extra at the end of the lease for anything that decreases the resale value of the car. You will have to pay to fix any abnormal wear and tear on the car including scratches and dings. You will also have to pay if your mileage surpasses the limit you have agreed to in your lease contract. At 10 to 15 cents per mile, that can become a major cost. If you’ve customized the vehicle in any way, even if it seems like added value to you, you will probably have to pay extra at the end of the lease.
You’re also locked into the lease for the specified term. If you decide you want to break a three-year lease after two years, you’ll have to pay the remainder of the lease PLUS any termination fees in the contract.
These are just some of the stipulations set forth in the lease contract. So make sure you read your lease contract in full before signing it.
Also, make sure your contract specifies a closed-end lease. A closed-end lease is standard and sets a specific amount for a depreciation cost for you to pay. In an open-end lease, the leasing company estimates the depreciation cost and you pay any difference at the end of the lease. This can be a very costly mistake.
Choosing a car is a little bit like dating. There are so many different cars out there. What do you need in a car? What do you prefer in a car? Is there that special connection when you’re driving it?
But unlike dating (or just like dating, depending on your outlook), you can settle for a vehicle that fits your needs right now, even if you can’t see yourself in it long term. And as long as you’re smart about the financing, it’s easy enough to trade it in for a newer model when it no longer suits your needs.
Make an inventory of your needs:
· What will you use the car for most? If you’re just driving back and forth to work, all you need is a dependable car with good gas mileage. If you have to haul around kids, you need it to be roomy. If you entertain clients, it needs to have some style and class. You get the idea.
· Where do you live? You may need four-wheel drive or front-wheel drive. It needs to be able to withstand some major wear and tear if you live on a bumpy gravel road.
· Do you drive in stop-and-go traffic often? That may make an automatic transmission a necessity.
Comparing Vehicles
Now that you have a list of your needs, it’s time for more research. There is an awful lot of research, isn’t there? There are thousands of models to choose from. But your needs should help narrow them down fairly quickly.
Auto magazines are a great place to get less biased information about particular models and the advantages/disadvantages associated with them. Consumer Reports is a very thorough publication with a reputation for bias-free reporting.
Dealerships are often the worst place to get information. They have a lot of material, but it is very heavily biased and you may have to endure a strong sales pitch just to get simple information. If you visit the dealership when they are closed, you can look at the cars and read the information on the vehicles without worrying about the salespeople. You can also get a lot of information from the manufacturer’s Web site and literature, but stick to the facts they provide since much of the material will be heavily biased.
Great sources of information are your friends and family or even strangers. Find others who have owned the model you are interested in. Ask about their experience with it.
Take special care in buying a first-year model, meaning the first year a manufacturer produces a certain model of car. The first year is a time to iron out the kinks and you may become an unwilling guinea pig and have unforeseen problems that the manufacturer will correct for the next year’s model.
The Test Drive
You’ve compared numbers and features. You’ve checked into the gas mileage.
Now it’s time to put away all the theory and speculation and get to the point of choosing a car - how it drives.
You have to be able to focus when test-driving a car. If you go to a dealership to test-drive cars, make sure the salesperson gives you some space to make your decision. As a matter of fact, tell the sales team you have no intention of buying on that day. They should leave you alone long enough to test-drive without distraction. If they don’t, be sure to avoid them when you’re going to actually buy a car. If they get too pushy, go to another dealership for your test drives.
If you’re not comfortable with visiting dealerships just for a test drive, try renting the cars you are interested in. It may cost you $100 to try out your top favorites, but you’re paying for the freedom of driving a whole day without listening to any sales pitches.
Compare the Dealerships
Shopping for a dealership is just as important as the other comparisons you have been doing. It can help you save a lot of money AND ensure that you have some customer support while you’re still under warranty.
All dealerships pay the same price for the cars in the beginning. But don’t let them fool you. Dealerships with better CSI ratings (Customer Satisfaction Index ratings) often get better bonuses that allow them to offer you a better price.
Practical Money Skills If you think of the negotiating process of buying a car as a dance, you’ll find it a lot more tolerable and you might possibly enjoy it. It’s just two people suggesting and redirecting. And remember - you have the advantage. You have a long line of salespeople who would like to dance with you. If one isn’t a good dance partner and isn’t working with you to nail down a price, feel free to say, “Good night,” and find yourself another dance partner.
Another good attitude adjustment before you start: dealerships try to average a specific amount of profit on each car they sell. People who pay too much allow there to be people who pay too little. With some preparation and education, you can be one of the latter.
Dealers will pressure you to make all your decisions in a single day. They’ve been doing this for a long time. They have all the scenarios mapped out. So when they react, they’re acting with experience. For you, it’s probably unfamiliar territory so that when you react, you may be acting with emotion. Dealers and salespeople know how to use that to their advantage. So slow the process down, sleep on decisions overnight and it could save you quite a bit of money.
Also, the more proactive you are and the more you take control, the better the result. Educate yourself. Understand how the car business works. Know what price the dealer paid for the car and have some alternate financing options.
Some strong negotiation moves and redirects can help you come out ahead:
· Keep a neutral outward attitude. Don’t sell yourself. If you give the impression that you could take it or leave it, a salesperson will work harder and be willing to give more to sell you.
· Avoid financing questions. Even if you don’t have the money, tell them you’re paying cash. They won’t hold you to it. But it will force them to concentrate on the current price negotiation and not see a long-term strategy to inch up their profits.
· Be prepared to haggle back and forth for a while. The salesperson might try to tire you out with a prolonged negotiation session. Don’t give in. Stay strong and save money. Keep in mind an extra hour of persistence could save you a few hundred dollars.
· Watch for the good cop, bad cop move. The salesperson will tell you that he or she really wants to give you the price you’re asking for, but he or she will have to ask the manager. You may feel like the salesperson is on your team at that point. Just remember who signs their checks. It’s you versus them.
· Ask to see the invoice. If they are dead-set against showing you the invoice, there’s a reason why. They’re probably offering you a bad deal.
· Shop for a car later in the month. There are a lot of bonus and rebate programs that are based on monthly sales quotas. If a salesperson or dealership is short of meeting goals at the end of the month, you might find more willingness to sell the car cheaper in order to get the extra sale.
There are some no-haggle dealerships, such as Saturn dealers. If you are really opposed to the negotiation dance, head there. The dealership is still making the same average profit on each car but there’s no way for them (or you) to use bad negotiators to an advantage.
Let’s Talk Price
Before you talk price, there are some terms you should know:
· Invoice Price This is the wholesale price the dealer paid the manufacturer before any rebates or incentives. Do some research on this number. If you can find out what the dealer paid for the car, you’ll know what the profit is on each car. Then you’re ready to strike a compromise between letting the dealer make a living and getting a good deal for yourself. The Internet is a great source for this information. Use it to decide on a number you’re willing to pay. Print out the invoice price when you find it and bring it with you to the dealership for back-up.
· MSRP - Manufacturer’s Suggested Retail Price Also called the “sticker price,” this is the number on the car window. Don’t pay this! It’s just a starting point for negotiations. If the model you’re interested in is in high demand, you probably won’t get much lower than this number.
· Dealer Incentives Manufacturers sometimes give dealers extra money, bonuses and rebates for selling overstocked and undersold cars. Find out if the car you’re interested in buying has any dealer incentives attached to it. Then subtract that amount from the price you’re willing to pay.
· Holdback The manufacturer often gives money to the dealership to help reduce operating overhead expenses - the cost of running the dealership. It’s often 2% to 3% of the sticker price. This information may not be very helpful in the negotiations, but if it comes up, you’ll know what it is.
· Sales Tax The sales tax is the same tax that’s charged on everything from candy bars to umbrellas. However, don’t try to go to a different county to avoid a higher sales tax. They charge it based on the county you live in, not where you buy the car. This cost, of course, is non-negotiable.
Beware Of The Add-On
The dealer will probably offer all kinds of add-ons after you’ve negotiated the price. The dealer makes extra money on almost every single one of them. You may find add-ons are included as if you have no other choice. You do. Feel free to refuse them. It will help if you know what these add-ons really are:
· Destination Charges Some manufacturers charge separately for shipping the vehicle to the dealer. You can’t get around this. But check the sticker to make sure it wasn’t already included in the price.
· Licensing and Registration Fees These are necessary, but call your state’s Department of Motor Vehicles to make sure the dealer hasn’t padded this price.
· Extended Warranties These are also called service contracts. Just buy a car with a good service history and an extended warranty should be unnecessary.
· Dealer Prep Part of a dealer’s job is to get the car ready for you and it’s one of the things the dealer gets paid for. Don’t pay this twice.
· Credit Insurance This insurance will pay off your car loan should you die while leasing it. As long as you have life insurance, this also is unnecessary.
There are many other fees that may be added. Ask directly what each one is for. If it seems unnecessary, it probably is and you should refuse to pay it.
If you think of the negotiating process of buying a car as a dance, you'll find it a lot more tolerable and you might possibly enjoy it. It's just two people suggesting and redirecting. And remember - you have the advantage. You have a long line of salespeople who would like to dance with you. If one isn't a good dance partner and isn't working with you to nail down a price, feel free to say, "Good night," and find yourself another dance partner.
Another good attitude adjustment before you start: dealerships try to average a specific amount of profit on each car they sell. People who pay too much allow there to be people who pay too little. With some preparation and education, you can be one of the latter.
Dealers will pressure you to make all your decisions in a single day. They've been doing this for a long time. They have all the scenarios mapped out. So when they react, they're acting with experience. For you, it's probably unfamiliar territory so that when you react, you may be acting with emotion. Dealers and salespeople know how to use that to their advantage. So slow the process down, sleep on decisions overnight and it could save you quite a bit of money.
Also, the more proactive you are and the more you take control, the better the result. Educate yourself. Understand how the car business works. Know what price the dealer paid for the car and have some alternate financing options.
Some strong negotiation moves and redirects can help you come out ahead:
· Keep a neutral outward attitude. Don't sell yourself. If you give the impression that you could take it or leave it, a salesperson will work harder and be willing to give more to sell you.
· Avoid financing questions. Even if you don't have the money, tell them you're paying cash. They won't hold you to it. But it will force them to concentrate on the current price negotiation and not see a long-term strategy to inch up their profits.
· Be prepared to haggle back and forth for a while. The salesperson might try to tire you out with a prolonged negotiation session. Don't give in. Stay strong and save money. Keep in mind an extra hour of persistence could save you a few hundred dollars.
· Watch for the good cop, bad cop move. The salesperson will tell you that he or she really wants to give you the price you're asking for, but he or she will have to ask the manager. You may feel like the salesperson is on your team at that point. Just remember who signs their checks. It's you versus them.
· Ask to see the invoice. If they are dead-set against showing you the invoice, there's a reason why. They're probably offering you a bad deal.
· Shop for a car later in the month. There are a lot of bonus and rebate programs that are based on monthly sales quotas. If a salesperson or dealership is short of meeting goals at the end of the month, you might find more willingness to sell the car cheaper in order to get the extra sale.
There are some no-haggle dealerships, such as Saturn dealers. If you are really opposed to the negotiation dance, head there. The dealership is still making the same average profit on each car but there's no way for them (or you) to use bad negotiators to an advantage.
Let's Talk Price
Before you talk price, there are some terms you should know:
· Invoice Price This is the wholesale price the dealer paid the manufacturer before any rebates or incentives. Do some research on this number. If you can find out what the dealer paid for the car, you'll know what the profit is on each car. Then you're ready to strike a compromise between letting the dealer make a living and getting a good deal for yourself. The Internet is a great source for this information. Use it to decide on a number you're willing to pay. Print out the invoice price when you find it and bring it with you to the dealership for back-up.
· MSRP - Manufacturer's Suggested Retail Price Also called the "sticker price," this is the number on the car window. Don't pay this! It's just a starting point for negotiations. If the model you're interested in is in high demand, you probably won't get much lower than this number.
· Dealer Incentives Manufacturers sometimes give dealers extra money, bonuses and rebates for selling overstocked and undersold cars. Find out if the car you're interested in buying has any dealer incentives attached to it. Then subtract that amount from the price you're willing to pay.
· Holdback The manufacturer often gives money to the dealership to help reduce operating overhead expenses - the cost of running the dealership. It's often 2% to 3% of the sticker price. This information may not be very helpful in the negotiations, but if it comes up, you'll know what it is.
· Sales Tax The sales tax is the same tax that's charged on everything from candy bars to umbrellas. However, don't try to go to a different county to avoid a higher sales tax. They charge it based on the county you live in, not where you buy the car. This cost, of course, is non-negotiable.
Beware Of The Add-On
The dealer will probably offer all kinds of add-ons after you've negotiated the price. The dealer makes extra money on almost every single one of them. You may find add-ons are included as if you have no other choice. You do. Feel free to refuse them. It will help if you know what these add-ons really are:
· Destination Charges Some manufacturers charge separately for shipping the vehicle to the dealer. You can't get around this. But check the sticker to make sure it wasn't already included in the price.
· Licensing and Registration Fees These are necessary, but call your state's Department of Motor Vehicles to make sure the dealer hasn't padded this price.
· Extended Warranties These are also called service contracts. Just buy a car with a good service history and an extended warranty should be unnecessary.
· Dealer Prep Part of a dealer's job is to get the car ready for you and it's one of the things the dealer gets paid for. Don't pay this twice.
· Credit Insurance This insurance will pay off your car loan should you die while leasing it. As long as you have life insurance, this also is unnecessary.
There are many other fees that may be added. Ask directly what each one is for. If it seems unnecessary, it probably is and you should refuse to pay it.
Just because you’ve figured out what you can afford, it doesn’t mean lenders will agree. That’s where your credit report comes in. Lenders decide how large a loan you qualify for strictly by looking at your credit report. It’s nothing personal. They don’t care what you look like, what you think about the status of your personal finances or how nice you are to small animals. They only care about the numbers that appear on your credit report.
The credit report will tell them your credit worthiness (How well have you paid past debts?), financial means (Do you have sufficient income to repay a loan?) and debt load (Do you have too much debt to be able to take on more?).
Pre-Approved Financing
Many lenders will pre-approve a certain loan amount based on your income and credit history. You’ll know exactly how much car you can afford and be able to leverage your financing deal against financing offered by the dealership.
Financing Options
·Dealer Financing The big advantage of dealer financing is convenience. You buy and finance the car all at once. But if the dealer is just reselling a bank loan to make a profit, the rates won’t be the best. Occasionally dealers offer special rates to get rid of overstock, especially at the end of a model year. So make sure you ask them about financing and compare their offer to your prearranged financing.
·Banks You can usually get a lower interest rate at a bank than a dealership, especially if you are an existing bank customer. They’ll probably require a 10-20% down payment to cover the depreciation of the car in case you default on your loan and they need to repossess your car. Smaller banks offer personal relationships, which are important, but may not be able to compete with rates of bigger banks.
·Credit Unions Credit unions have lower overhead costs than banks which allows them to offer lower financing. Sometimes it can be a full percentage point lower.
·Home Equity Loans You need to own a home to get a home equity loan. You use your home as collateral for the loan - which is a little bit scary. If you can’t pay the loan, they can take your house. But if you’re sure you can afford it, a home equity loan is a great way to go because not only can you get a lower interest rate, your interest is tax deductible!
·The Internet As with everything else these days, you can shop for car loans on the Internet. You miss out on any kind of personal relationship, but you can get quick approval and very competitive pricing.
·Trade-In Your old vehicle is basically a very large coupon that you can trade for a discount when you buy a new vehicle. If it’s worth enough, you may be able to use it as a down payment. Trade-ins are a convenient way to use the car you already own to help purchase a new one.
Negative Equity
The value of a new car drops dramatically as soon as you drive it off the lot. That’s because it then becomes a used car. It doesn’t matter that you only used it for five minutes - it’s still used and is worth much less because of that fact.
This depreciation is an important concept to understand when dealing with financing because while the value of your car drops immediately, your loan principal drops more gradually. So if you try to sell the car too soon, you may end up owing more on it than you can sell it for. That’s called negative equity.
You can avoid getting into negative equity situations by following these simple rules:
1.Keep your car until it is paid off completely. Obviously, no matter how much your car depreciates, you won’t have negative equity if you don’t owe anything.
2.Don’t buy a car that is too expensive. If you struggle too much to make the payments, you may decide to sell the car earlier than is financially prudent.
3.Don’t drag out your payments. You might get a slightly better interest rate and your monthly payment will be smaller. But it will staple you to that car for the financing term. Five years later you’ll still be paying for a car that may no longer fit your needs.
4.Make the biggest down payment you can. This will help offset the effect of depreciation and start giving you some positive equity.
Some people seem to get a new car every year or so. What happens to all the ones they’ve gotten rid of after just a year? People buy them and sometimes get great deals.
A large part of a car’s depreciation happens as soon as you drive it off the lot. So the main advantage of buying used is that you’re buying after this huge drop in price. That makes a used car less of a long-term investment.
Shopping for a Used Car
Used car salesmen have one of the worst reputations of any profession. While most will not live down to this reputation, some will. You’ve heard the term “too good to be true.” It applies double to used cars. That motto will help you avoid some of the car sharks.
Shopping for a used car can be much harder than shopping for a new one. They’re like snowflakes. Each one is unique. That makes comparison shopping more of an art than a science. And dealers have a little bit of an advantage since you can’t just leave and buy the exact same car at another dealership.
There are three main sources of used cars:
Used Car Dealer Dealers often offer you a warranty on a used car - which is comforting when a previous owner may have used it to haul chickens down an uneven gravel road every day for the past three years. But you probably won’t get as good a price as you will if you buy from the Average Joe/Jane.
Average Joe/Jane A little negotiation can really drop the price to something that’s fair to both of you. But you won’t get a warranty. And to look at five cars, you’re most likely going to have to visit five different people.
Public Auctions You can get some incredible deals at public auctions. There is no dealer to haggle with and only other potential buyers will increase the price. The downside to these auctions is that you usually can’t test drive the car and it is extremely rare to get a warranty on an auctioned car.
Research is Important
The point of buying a used car is to save money. But if you don’t research the car you buy, it could end up costing you more than a new car! First, look up the Kelly Blue Book value of the car so you know what price range to start in. Then get the history of the car. Ask the seller what it was used for. If it has been used just for driving on relaxing tours of the countryside several times a year, no problem. But if it was used as an off-road race vehicle, you might want to reconsider.
Get the VHR (Vehicle History Report) using the Vehicle Identification Number. It will cost about $10-$15, but this report will let you know if the car has been in any major accidents that may have weakened the frame.
When it comes time for the test drive, be relentless and thorough. Ask the seller about any strange noise the car makes. Anything. It might just be an odd quirk. But it could be a telltale sign of a much larger problem. Use everything in the car. Press every button. Open every window. Open and close every door. Once you are sure there is nothing wrong with the car, get a professional mechanic to do the same. Subtract any small thing wrong with the car from the price you are willing to pay for the vehicle. Realistically, you’ll end up paying that money back to get it fixed.
Here’s another choice for you. Do you want to buy or lease a vehicle? There are pros and cons to both.
What is Leasing?
When you lease a new car, you’re paying to use the car during its first few years. Here’s how it works. You go to the dealership to lease a car. The dealership actually sells the car to a leasing agency (sometimes owned by the dealership). This part is transparent to you. You put some money down on a lease, just like a down payment.
Your monthly payment is determined by the total price of the vehicle minus your down payment, minus what they expect to be able to sell the car for at the end of your lease. That number is than divided by the number of months in the term of the lease. Then they add a finance charge and a profit margin. That sounds complicated, but in the end, you’re paying for the depreciation of the vehicle while you use it. The lease is actually a loan for the amount of the depreciation.
Benefits of Leasing
A lease will offer you a lower monthly payment compared to buying a vehicle. Plus, a much smaller down payment or trade-in is required.
If you like to get a new car every few years, a lease is probably a good option for you. If you buy a car and sell it every few years, you’ll end up with loads of negative equity - that’s bad.
At the end of a lease you have the option of giving the car back or buying it as a used car. If you plan on buying it at the end of the lease, it may be a better idea to just buy it new to start with. If you lease and then buy, the cost of the lease combined with the purchase price of the used car is often much more than the new price of the car. If it weren’t, the leasing agency wouldn’t make any money.
Disadvantages of Leasing
Since you are paying the difference between the new price and the used price of the vehicle, you will be charged extra at the end of the lease for anything that decreases the resale value of the car. You will have to pay to fix any abnormal wear and tear on the car including scratches and dings. You will also have to pay if your mileage surpasses the limit you have agreed to in your lease contract. At 10 to 15 cents per mile, that can become a major cost. If you’ve customized the vehicle in any way, even if it seems like added value to you, you will probably have to pay extra at the end of the lease.
You’re also locked into the lease for the specified term. If you decide you want to break a three-year lease after two years, you’ll have to pay the remainder of the lease PLUS any termination fees in the contract.
These are just some of the stipulations set forth in the lease contract. So make sure you read your lease contract in full before signing it.
Also, make sure your contract specifies a closed-end lease. A closed-end lease is standard and sets a specific amount for a depreciation cost for you to pay. In an open-end lease, the leasing company estimates the depreciation cost and you pay any difference at the end of the lease. This can be a very costly mistake.
Choosing a car is a little bit like dating. There are so many different cars out there. What do you need in a car? What do you prefer in a car? Is there that special connection when you’re driving it?
But unlike dating (or just like dating, depending on your outlook), you can settle for a vehicle that fits your needs right now, even if you can’t see yourself in it long term. And as long as you’re smart about the financing, it’s easy enough to trade it in for a newer model when it no longer suits your needs.
Make an inventory of your needs:
· What will you use the car for most? If you’re just driving back and forth to work, all you need is a dependable car with good gas mileage. If you have to haul around kids, you need it to be roomy. If you entertain clients, it needs to have some style and class. You get the idea.
· Where do you live? You may need four-wheel drive or front-wheel drive. It needs to be able to withstand some major wear and tear if you live on a bumpy gravel road.
· Do you drive in stop-and-go traffic often? That may make an automatic transmission a necessity.
Comparing Vehicles
Now that you have a list of your needs, it’s time for more research. There is an awful lot of research, isn’t there? There are thousands of models to choose from. But your needs should help narrow them down fairly quickly.
Auto magazines are a great place to get less biased information about particular models and the advantages/disadvantages associated with them. Consumer Reports is a very thorough publication with a reputation for bias-free reporting.
Dealerships are often the worst place to get information. They have a lot of material, but it is very heavily biased and you may have to endure a strong sales pitch just to get simple information. If you visit the dealership when they are closed, you can look at the cars and read the information on the vehicles without worrying about the salespeople. You can also get a lot of information from the manufacturer’s Web site and literature, but stick to the facts they provide since much of the material will be heavily biased.
Great sources of information are your friends and family or even strangers. Find others who have owned the model you are interested in. Ask about their experience with it.
Take special care in buying a first-year model, meaning the first year a manufacturer produces a certain model of car. The first year is a time to iron out the kinks and you may become an unwilling guinea pig and have unforeseen problems that the manufacturer will correct for the next year’s model.
The Test Drive
You’ve compared numbers and features. You’ve checked into the gas mileage.
Now it’s time to put away all the theory and speculation and get to the point of choosing a car - how it drives.
You have to be able to focus when test-driving a car. If you go to a dealership to test-drive cars, make sure the salesperson gives you some space to make your decision. As a matter of fact, tell the sales team you have no intention of buying on that day. They should leave you alone long enough to test-drive without distraction. If they don’t, be sure to avoid them when you’re going to actually buy a car. If they get too pushy, go to another dealership for your test drives.
If you’re not comfortable with visiting dealerships just for a test drive, try renting the cars you are interested in. It may cost you $100 to try out your top favorites, but you’re paying for the freedom of driving a whole day without listening to any sales pitches.
Compare the Dealerships
Shopping for a dealership is just as important as the other comparisons you have been doing. It can help you save a lot of money AND ensure that you have some customer support while you’re still under warranty.
All dealerships pay the same price for the cars in the beginning. But don’t let them fool you. Dealerships with better CSI ratings (Customer Satisfaction Index ratings) often get better bonuses that allow them to offer you a better price.
Practical Money Skills If you think of the negotiating process of buying a car as a dance, you’ll find it a lot more tolerable and you might possibly enjoy it. It’s just two people suggesting and redirecting. And remember - you have the advantage. You have a long line of salespeople who would like to dance with you. If one isn’t a good dance partner and isn’t working with you to nail down a price, feel free to say, “Good night,” and find yourself another dance partner.
Another good attitude adjustment before you start: dealerships try to average a specific amount of profit on each car they sell. People who pay too much allow there to be people who pay too little. With some preparation and education, you can be one of the latter.
Dealers will pressure you to make all your decisions in a single day. They’ve been doing this for a long time. They have all the scenarios mapped out. So when they react, they’re acting with experience. For you, it’s probably unfamiliar territory so that when you react, you may be acting with emotion. Dealers and salespeople know how to use that to their advantage. So slow the process down, sleep on decisions overnight and it could save you quite a bit of money.
Also, the more proactive you are and the more you take control, the better the result. Educate yourself. Understand how the car business works. Know what price the dealer paid for the car and have some alternate financing options.
Some strong negotiation moves and redirects can help you come out ahead:
· Keep a neutral outward attitude. Don’t sell yourself. If you give the impression that you could take it or leave it, a salesperson will work harder and be willing to give more to sell you.
· Avoid financing questions. Even if you don’t have the money, tell them you’re paying cash. They won’t hold you to it. But it will force them to concentrate on the current price negotiation and not see a long-term strategy to inch up their profits.
· Be prepared to haggle back and forth for a while. The salesperson might try to tire you out with a prolonged negotiation session. Don’t give in. Stay strong and save money. Keep in mind an extra hour of persistence could save you a few hundred dollars.
· Watch for the good cop, bad cop move. The salesperson will tell you that he or she really wants to give you the price you’re asking for, but he or she will have to ask the manager. You may feel like the salesperson is on your team at that point. Just remember who signs their checks. It’s you versus them.
· Ask to see the invoice. If they are dead-set against showing you the invoice, there’s a reason why. They’re probably offering you a bad deal.
· Shop for a car later in the month. There are a lot of bonus and rebate programs that are based on monthly sales quotas. If a salesperson or dealership is short of meeting goals at the end of the month, you might find more willingness to sell the car cheaper in order to get the extra sale.
There are some no-haggle dealerships, such as Saturn dealers. If you are really opposed to the negotiation dance, head there. The dealership is still making the same average profit on each car but there’s no way for them (or you) to use bad negotiators to an advantage.
Let’s Talk Price
Before you talk price, there are some terms you should know:
· Invoice Price This is the wholesale price the dealer paid the manufacturer before any rebates or incentives. Do some research on this number. If you can find out what the dealer paid for the car, you’ll know what the profit is on each car. Then you’re ready to strike a compromise between letting the dealer make a living and getting a good deal for yourself. The Internet is a great source for this information. Use it to decide on a number you’re willing to pay. Print out the invoice price when you find it and bring it with you to the dealership for back-up.
· MSRP - Manufacturer’s Suggested Retail Price Also called the “sticker price,” this is the number on the car window. Don’t pay this! It’s just a starting point for negotiations. If the model you’re interested in is in high demand, you probably won’t get much lower than this number.
· Dealer Incentives Manufacturers sometimes give dealers extra money, bonuses and rebates for selling overstocked and undersold cars. Find out if the car you’re interested in buying has any dealer incentives attached to it. Then subtract that amount from the price you’re willing to pay.
· Holdback The manufacturer often gives money to the dealership to help reduce operating overhead expenses - the cost of running the dealership. It’s often 2% to 3% of the sticker price. This information may not be very helpful in the negotiations, but if it comes up, you’ll know what it is.
· Sales Tax The sales tax is the same tax that’s charged on everything from candy bars to umbrellas. However, don’t try to go to a different county to avoid a higher sales tax. They charge it based on the county you live in, not where you buy the car. This cost, of course, is non-negotiable.
Beware Of The Add-On
The dealer will probably offer all kinds of add-ons after you’ve negotiated the price. The dealer makes extra money on almost every single one of them. You may find add-ons are included as if you have no other choice. You do. Feel free to refuse them. It will help if you know what these add-ons really are:
· Destination Charges Some manufacturers charge separately for shipping the vehicle to the dealer. You can’t get around this. But check the sticker to make sure it wasn’t already included in the price.
· Licensing and Registration Fees These are necessary, but call your state’s Department of Motor Vehicles to make sure the dealer hasn’t padded this price.
· Extended Warranties These are also called service contracts. Just buy a car with a good service history and an extended warranty should be unnecessary.
· Dealer Prep Part of a dealer’s job is to get the car ready for you and it’s one of the things the dealer gets paid for. Don’t pay this twice.
· Credit Insurance This insurance will pay off your car loan should you die while leasing it. As long as you have life insurance, this also is unnecessary.
There are many other fees that may be added. Ask directly what each one is for. If it seems unnecessary, it probably is and you should refuse to pay it.
Read through the wiki-How to buy a car and answer the questions.
Credit Cards
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