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Getting a car loan can be a very difficult, emotional and at times costly experience. When you’re buying a car – new or used – there are usually not one but three micro-sales under one roof. Then there are three points of conversation:
- car price
- car trade-in value
- financing
Most salespeople at auto dealerships will try to merge them into one and negotiate only one final price with you and earn their extra money on the margin of each of the three micro-sales listed above. Make sure you understand this sales ploy and counter it properly.
car price
Check Exact Price
if you are buying a new car – Always check the car invoice price and not the MSRP (sticker price). Invoice price is usually much less than MSRP.
if it is a used car – Be sure to check CarFax, CarChex, or VinAudit services first to get a car history report to confirm you’re not buying a lemon. For example, the number of recently flood damaged and repaired “like new” cars on the market at amazingly low prices that you might not want to buy. Make sure you are not getting one of those.
Finally, check KBB (Kelly Blue Book) for an objective market value for that used vehicle. Once you know the value of your future car – go to step #2.
Check for Consumer and Dealer Incentives
Ask for first-time buyer discounts, manufacturer-sponsored discounts or dealer specific discounts/programs such as a lower pay rate or cash back value (remember that famous one – “Put down $4K we’ll add $4K from you”?). Don’t make any financial decisions at this stage – keep in mind that dealer financing, while very convenient, isn’t necessarily the cheapest.
car trade-in value
Know the trade-in value of your old car
Be sure to check Kelley’s Blue Book or something similar for the resale value of your car. Some dealerships offer car buy-back programs promising a better price for your car than the KBB price in exchange for selling you a new car. The over-the-kbb-delta is typically 10% of the kbb value and may seem attractive to many car buyers. Don’t get too excited here though – there’s a law of nature: “Nothing ever comes from nothing” – car manufacturers often offer solid discounts for each new car sale. These manufacturer-backed rebates are usually not publicly advertised by auto dealers. Many dealers only take a portion of that manufacturer-backed incentive and pass this portion on to you for the 10% discount. Check whether the manufacturer-backed incentive is over and above the extra 10% KBB discount that the dealer offers you. You can save a few thousand dollars here and there if you ask your dealer the right questions and do things right.
car financing
Know Your Credit Score
While there are always ups and downs in the loan market, better credit scores always lead to better loan rates. See the following table of actual data from 2012 to get a better understanding of score-rate dependence:
- FICO score, Rate of interest
- 720-850 ——> 5.73%
- 690-719 ——> 7.37%
- 660-689 ——> 9.40%
- 620-659 —–> 12.76%
- 590-619 —–> 17.68%
- 500-589 —–> 18.50%
As can be seen from the table, the interest rate paid by a customer with a FICO score in the 500-589 range is 3 times higher than that of a customer with a FICO score of 720-850.
Once you know your FICO score, you can get the most up-to-date interest rate you can expect – there are lots of free loan calculators on the Internet.
Shop for the Best Loan
Do not buy a loan based on how close the lender’s office is to your location
Don’t forget – you’re shopping for money, not geographic convenience. Also – there are many loans available online nowadays, so location doesn’t really matter anymore.
choose the right rate
Never settle with just one lender – shop around and get at least three offers from different lenders. Choose those lenders from different lending categories – Let banks, private lenders and other financial institutions compete for your business.
Choose the Right Loan Tenure
The typical loan tenure usually ranges from 36 to 72 months. Some lenders will try to sign you up for very long loan terms of 7 or 10 years – don’t go beyond 6 years unless it’s absolutely necessary for you.
Make sure your loan offer doesn’t have any prepayment penalties so that you can refinance your loan for a better rate if the need arises in the future.
Get your loan pre-approved first
Knowing what you are eligible for will go a long way in helping you choose the right car to buy. Know your affordability limit while seeking loan amount. A rule of thumb is: all your debts together, ie – home loan, student loan, auto loan, etc – should not exceed 25% – 35% of your gross income before taxes. If you already have a mortgage for your home, ask your mortgage provider about the combined mortgage + auto loan option – this option is always much cheaper than buying two separate loans.
Know the real value of what you are buying
Your real cost is not just the cost of the car. Don’t forget auto insurance: The actual price you pay is the monthly auto loan payment + the monthly insurance payment where the insurance premium may be even higher than your auto loan premium. Cars that are still financed or leased will require full coverage in your insurance policy which can be very expensive.
Choose the Right Loan Type
If you buy a car from an individual and need a loan – you may need to go to a bank as many smaller lenders typically don’t offer auto loans for that type of purchase. Personal loan (not auto loan) can be another solution here. Many private lenders will lend you money for any type of purchase as long as you are a “lending eligible” person. Those loans usually have higher rates and lower amounts than normal auto loans, but they may be a viable solution for you here.
Once you have all the pieces together – make your final buying decision. Driving is a very enjoyable experience, so enjoy your new car and drive safe.
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