Auto financing: how to come out ahead

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Financing a vehicle can be a potential minefield for the unprepared consumer. Both lenders and car dealerships often look to take advantage of the unwary borrower, and as such it pays to educate yourself before taking the step towards financing a car. The following are a handful of basic tips, designed for those who have no experience when it comes to auto financing. Absorbing this information will give the average consumer an edge when it comes to financing their car.

1. Don’t buy a used car!

Interest rates offered for new automobiles is currently running at 0.4% higher than for used cars. That doesn’t sound much, but over the course of a five-year loan on a $20,000 car, that can work out at an extra $400 that’s in the financier’s pocket and not yours. And a new car doesn’t hold its value either: when you drive it off the lot you may as well burn 1/3 of the car’s cash value! Don’t believe me? Buy a car and then try to sell it back to the dealer the next day – you’ll get the message. A 6-month to 1-year low-mileage automobile in perfect condition will save you that 1/3 anyway. There’s no need to get a new car, and believe me that chick you like won’t even care!

“The difference between interest rates offered for new and used automobiles are currently running at 0.4%. That doesn’t sound much, but over the course of a five-year loan on a $20,000 car, that can work out at an extra $400 that’s in the financier’s pocket and not yours.”

2. Put down a large deposit

That car will be sweeter to drive if you’ve made an effort to get it. Instead of signing on the dealer’s line, save for a few months until you’ve got a deposit big enough to make an impact on the length of the loan. That’s how to reduce repayments.

3. Avoid balloon payments

Low deposit, low repayments, short loan term – what can go wrong? The answer is in the small print: at the end of your repayment period you still only own 80% of your car. You have to pay that remaining 20% in a lump sum, or they send out the repo man. But your car isn’t the shiny new car you bought at the beginning of the term, it’s three years old and with a chunk of mileage and some dings. So that 20% is closer to 50% of its actual value. Plus, when you take out your loan you don’t know what your financial situation will be like by the end of the repayment terms. Unless you already have that money and can invest it while waiting to make that final repayment – but if you’re disciplined enough to do that, then you could just use that money to reduce the interest you’ll pay on the loan!

4. The golden rule: if you need to borrow, borrow from the bank or credit union

Bank loan rates are now running around 2.5%. If you have collateral to offer your bank manager, you’ll likely be able to get him (or her) to finance your car! This has the advantage of being more closely aligned to your financial position. Same with a credit union, where today you can get 2.1% on a 60-month unsecured loan if you’re a customer of good standing. The bank or credit union manager will deny your loan if s/he doesn’t think you’ll be able to repay it. Listen to him – because if you default it becomes their problem! Those car guys don’t care; they get their commission whether you default or not, and pass it on to a faceless auto financing company.

In conclusion, there is a huge number of ways you can be stung when buying a car, because a car is often an emotional investment more than a financial one. So listen to your head and not your heart. Be prepared to walk away or give it some time to think about it. It doesn’t have to be a new car. Don’t sign anything, especially not on your first visit. Talk to your bank.

And if you’ve saved up enough money you can play them at their own game: get them to agree a price based on financing, then at the last minute switch their loan for your cash. The dealer will likely be so invested in having made a sale that he will agree, even though he doesn’t get his financing commission. It’s mean, but car loans are a cut-throat business. Try to keep your throat untouched!

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