Vehicle Financing Tips
I’ve worked for a number of banks over many years, and have a great deal of experience and education in banking and economics. I was a consumer credit underwriter, with the majority of my experience in automobile loans – indirect. I was the guy that the dealership’s F&I manager would fax your generic auto loan application to when the salesman told you “
We’ll arrange the financing for you!”[/color]
I assure you that I have no affiliation with any financial institution other than from a consumer/customer standpoint. My main objective here is to give you some simple guidelines for getting the most out of auto-financing. Hopefully, using these guidelines, you’ll save a lot of money on your next car purchase.
- Rates & Terms -
Shop for your car loan! You’d do the same to get the best deal on a car, why not the financing? You can usually save a great deal of money by shopping for the best rates and arranging the financing yourself! Yeah, it’s a bit of a pain, but when you consider the money you’ll save compared to the time it takes, you’ll basically be paying yourself a substantial hourly rate of pay for relatively little work.
Look at your Credit Union’s rates first (if you’re a member). Usually Credit Union rates are lower than commercial banks, BUT their lending requirements are a bit stricter, so it may be harder to qualify. On the other hand, Credit Unions are owned by the depositors not shareholders, so the service is more personal and it’s usually a friendlier place to do business. Additionally, CU’s tend to have more variation in their interest rates, so it’s usually easier to find an interest rate and loan term better suited to your needs than at a bank or through a dealership.
Check out “Dealer Incentives” on financing. They’re typically in a “Cash Back OR X.xx% financing” form. Do the math! Have the dealer calculate the payments BOTH ways (with cash back AND discounted interest financing) before agreeing to one or the other. It could be advantageous to take the cash back offer over zero/near zero percent financing when interest rates are low OR when you’re financing substantially less than the MSRP on the car due to a substantial trade or down payment.
Calculating the payments and comparing is the only sure way to determine what the best deal is for you! Additionally, Cash Back can be applied to a deal as a down payment, making it appear that you have more equity in the car at the onset than you actually do. This can make for a more appealing application to a credit union, bank or finance company (and lower interest rate for you) – especially if your credit isn’t “exemplary”.
While incentives such as “Employee Pricing” save you money, they rarely benefit you in financing a car. BUT every dollar saved is another in your pocket, so get whatever you can as it’s available!
BEWARE! DON’T be sucked into the pitch from the salesman that goes something like “What kind of payment are we looking for to get you into this car today?”
Payment amounts have nothing to do with the financing deal you’ll be looking for on a car. Make sure the salesman knows that right up front! You want to address ONLY the bottom line/sale price when making the deal. Worry about financing AFTER the price has been negotiated.
Dealers have many options for arranging financing, ranging from the manufacturer’s finance company (Ford Motor Credit, Chrysler Credit, GMAC) to a varying number of local banks (with varying terms, interest rates, and lending policies). Often, they will be offering financing incentives to help boost car sales.
They’ll never tell you about this, but dealers like to provide financing for the customer because they receive a “dealer reserve”. This translates into is a “fee” for providing the financing for you, and doing all of the paperwork for the bank. For this, the dealer gets either a flat fee (if the dealership writes the note at the same rate that the bank charges them – typically $25.00 - $50.00), or a percentage of the finance charge (if the dealer writes the loan at 7.50% and the bank’s standard interest rate on new car loans is 6.50%, the dealer keeps that 1.00% difference, which could amount to several hundred dollars, depending on the amount being financed). That cost is passed on to you in your monthly payment!
Don’t be too willing to have the dealer arrange your financing! They do what’s best for them, not you! Besides, they’re already making money on the sale – you don’t need to pay them more than what they’re making on the sale alone.
Banks tend to be more forthcoming than dealerships about financial details. They’ll usually give you the best deal that meets your needs and their guidelines without being coerced. Banks don’t make money if they don’t lend money, so they’ll do their best to get you into the right loan for you.
Regardless of where you get your financing, look carefully at the term of the loan. Many times, the difference in payments between a 48month and 60month loan is minimal (depending on the amount financed), and a longer term could actually mean a BIGGER payment than a shorter term. Why? Because the interest on a longer term is more than the interest on a shorter term! I’ve seen this happen many times (through dealer arranged financing in particular), and the customer had no idea they were getting soaked!
Get the shortest term you can afford the payments on! You’ll save many $$$ in interest that way.
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