Vehicle Financing Tips

[08ChallengerDad]

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.
__________________

(continued)

[08ChallengerDad]

(continued from top)

- Payments -

It’s important to keep your payments current, so don’t fall behind. Your credit rating depends on you keeping your word (and making payments as scheduled). Additionally, late payments often incur late fees (which vary with the lender). On the other hand, DON’T make the mistake of doubling up your payments (making two monthly payments each month) on an installment loan to pay it off early!

Installment Loans (such as car loans) are calculated on the amount being borrowed at a specific interest rate based on a specific length of time (term of the loan). Usually, a shorter term (fewer payments) will be calculated on a lower interest rate, saving you money – less interest paid on the same amount but borrowed for a shorter time. If you can afford to double-up your payments, you took out the loan with too long a term and are paying too much interest. Making two payments every month doesn’t save you any money….it makes more money for the bank.

Instead of making two payments a month, make the required one payment a month as scheduled and put the second payment into a savings account. The savings account PAYS you interest on your money. When you’ve made approximately **60% of the scheduled payments on the loan, call the bank for a “payoff or close-out balance” on the loan. The payoff balance has the interest discounted for early payoff. The bank will also provide you with a “per diem” amount. That’s the amount of interest “per day” that the loan is accumulating at that time. Each day that passes after obtaining the payoff balance requires the addition of one “per diem” amount to the payoff balance to close the loan. The amount you have in the savings account should roughly cover the payoff amount and you’ll save yourself the cost of several (on average, two or three) payments (providing you’ve put the second payment into the savings account each month) by paying it off early this way.

**The reason you need to make about 60% of the payments is because the banks load the majority of interest to the “front end” of the loan. The first payment on a car loan will primarily be applied to interest, while the last payment will be primarily applied to principle. This is why the dealership calls the bank for a payoff or closeout amount on a trade-in with an outstanding loan balance, rather than calculating the number of payments multiplied by the payment amount to figure what’s owed on the trade-in.

If you have the option to get a car loan with bi-weekly payments rather than monthly payments, you’ll save a substantial amount of money by paying every two weeks. While the payment amounts are roughly half of regular monthly payments, the increased frequency of making payments every 14 day as opposed to every 30 days will reduce your debt quicker because you’re reducing the principle quicker. Granted, on an auto loan, the amount saved isn’t enormous, but it’s proportionate in principle to the savings found by choosing a bi-weekly mortgage payment over monthly payments where a 30 year mortgage is paid off in roughly 23 years.

- Other Financing -

Typically, the best loan for the purchase of a new car is a “new car loan”, but there are other options:

If you’re financing a large amount for a costly car, a Home Equity Loan or Line of Credit might be worth considering. While the initial cost of getting such a loan is high with points and closing fees, the lower interest rate in addition to the tax deduction of interest over the life of the loan would more than offset the cost of the fees. But this is speculative since the government could yank that tax deduction at any time, as they gradually did over a few years with the interest on consumer debt some 20 years ago. The drawback here is that the collateral on the loan is your house (not the car) so a default could leave you homeless, not careless.

Credit Cards are NEVER an option since the interest rates are too high and too volatile. The bank can increase the interest rate on a whim, and there’s usually little you can do about it.

Leasing, while a viable option for someone who’s self employed or who owns a business and is looking for a tax deduction or place to reinvest capital, is rarely beneficial for individuals. You need to bring a down payment to the table, make payments for (usually) three years, and walk away with nothing more than the possibility of paying additional fees for excess mileage and damage to the vehicle. You still need to maintain and insure the vehicle as if it were yours, and if you want to keep it, need to go through the financing process (for a used car) all over again when the lease ends.

While I can’t reasonably cover every possible situation you might encounter, I hope this has helped at least a few people to save some money in financing their next car.

08ChallengerDad