One of the easiest ways of throwing away your hard earned money, next to taking a trip to Las Vegas, lies in buying a car. The auto retail industry is one of the greatest money traps ever devised and the average consumer has little hope of beating the odds when purchasing a new or used car. Here are some tips on how to avoid losing your shirt at the dealer’s table next time around. Read to the bottom of the page and you will find a car loan calculator for estimating your payments.
Doing your research
Never walk into a dealership before researching your intended purchase by talking to friends, your neighborhood mechanic or trolling the internet. There are many internet sites that offer free information on prices for the basic car, and in particular, option packages. Markups on some of these packages can run as high as 100%. Having narrowed your choices to a few models you may want to start thinking about the long term effects of what you are buying by running the numbers through a car loan calculator.
Start by gathering information on reliability issues and repair costs. This can save you some grief later if anything breaks just outside of the warranty period. You may want to think about buying an extended warranty while you are doing your research and now is the time to start adding that figure to your total purchase price. If you intend to keep the vehicle for the life of your loan and beyond, an extended warranty could save you gobs of cash should your transmission or engine fail. Many vehicles come from the factory with expensive navigation and audio systems installed so make sure your intended warranty covers those as well. And never, ever purchase an extended warranty from the dealership as the price will include their markup too.
Here’s where you can avoid a nasty surprise. Let’s say you bought a car for $20,000 and after two years you are broadsided at an intersection by the town drunk. You would expect to call your insurance company who would cut you a check for the value of the car so you could pay off your note and go buy another car. But you may be surprised.
After two years, you may owe $15,000 say on your car loan. But as car values often plummet 25% in their first year, by year two your vehicle may be worth only $12,000. Guess how much money you will recover from your insurance company? You will find yourself on the horns of a dilemma as you are $3,000 short of paying off your loan. Of course, this is a rough example and gaps may vary. Gap insurance covers the difference between the insurance valuation and the remainder of your loan. And, as before, don’t buy this at the dealership either.
The fine print
Having done your research and walked the gauntlet at the dealership, you will be invited into the inner sanctum of the finance office. This is where the dealership often recoups what they lost on the sales floor in order to make the deal. And this is where the numbers often do not add up. The finance office makes its money by selling you extras that don’t come from the factory, such as the aforementioned extended warranty and gap insurance deals. The markups can often be more than they made selling you the car itself. Then there’s the paperwork.
Quite often you have been left in a weakened state sitting in the sales office for three or more hours. I have a friend who spent 7 hours in a dealership buying her dream car and was very groggy by the time she got to the finance office. She did, however notice that the finance manager was offering her a 10% car note despite the fact that her credit score hovered around 750. This is the point at which your laptop or car loan calculator becomes your friend.
Add the numbers
Make sure you inspect, then add the numbers on the contract and ensure they add up correctly. You would be surprised! Your next step is to run the numbers through a car loan calculator or downloaded program that will tell you whether the cost of the vehicle plus junk fees at the quoted A.P.R ends up at the monthly payment you expected to find. A ten dollar difference over the life of a 73 month car loan means a whopping profit for the finance office, on top of the markup they made on the car, the dealer junk fees and the check the manufacturer mails them as part of their incentive program. But you knew about those checks didn’t you?
If you suspect the numbers are not adding up you may want to consider walking away. Remember, no matter how much you love the car, there’s another one very much like it on the way from the factory to the dealer down the street. Now is a good time to visit your bank or credit union with the negotiated price of the vehicle in hand. I prefer credit unions whose rates are often the lowest available. Arrange your financing there and return to the dealership with your check in hand. You may find that you have saved yourself several hundred, and sometimes, several thousand dollars over the life of the loan.