Car Financing Tips & Secrets

Car financing is one of the most misunderstood and abused areas of car sales. Did you know that car financing is a major profit generator for many car dealerships? In this article I will reveal how dealerships can take advantage of customers and how not to be one of those unfortunate people. I will also explore how you can learn more about your credit, how to shop for a loan, and take a look at leasing as an alternative to buying.

Knowledge is Power

If you are planning to go car shopping in the next few days, get a copy of your credit report and do some quick shopping for car loans. Both services are available online. If you want to know what money is going to cost you, go to PeopleFirst or E-Loan for loan calculators and current interest rates.

Buying a new car is often a big decision and a big investment. It`s worth your time to do some upfront work to make sure you get the best financing deal. Unless you`re in a hurry, plan to spend a few hours shopping for money.

Before you go looking for a loan, you should review your credit report. This is the information all lenders use to determine if you are a good credit risk. I recommend getting a copy of your credit report annually, at a minimum, so you can see what is being reported against you. I`ll talk about fixing negative credit reports later. You can get your credit report on-line from TrueCredit.

Once you have your credit report in hand, you will see your credit score. A high score is good, while a low score is not. If your credit score is above 680 points, you are considered a good borrower and qualify for "prime" credit opportunities. If your score is below 680, you are a higher credit risk and will pay higher interest rates or have fewer credit opportunities extended to you.

Until 2001, it was not easy to get your FICO Credit Score. Thankfully, the U.S. Congress fought hard to create law that gives us the right to our credit information. Until the recent changes in the law, lenders were able to keep beacon scores "confidential". As a result, many people were charged higher interest rates. It`s hard to shop when you don`t know what you`re being compared against. A good source to get your FICO Credit Score is Equifax.

Get your credit score before you shop. This keeps both lenders and car dealers honest. If you don`t know your credit score before you shop, you give the car dealer a lot of power. It`s not uncommon for the finance manager at a dealership to tell you your credit has some problems, so they need to charge you a higher APR. All they`re doing is getting a kick-back on the backend of the loan deal.

If you`re not familiar with credit scoring, you might be in for a shock when you get your credit report. The most common misconception is that prompt payment is what creates high credit scores. This is not true. While on-time payment is a significant contributor, it is only one of more than 100 factors that make up your credit score.

Good credit is built over time through the responsible use of credit. Lenders like to see a history of using credit responsibly and closing accounts. If you have more than a few credit cards or revolving credit accounts open, you can improve you credit score by closing account with a zero balance. Each credit account you have open is "potential credit liability".

Before you go loan shopping you should:

Get your Credit Report & Score.
Review your credit report and call all creditors or collection agencies on false reports.
Close old revolving credit accounts and consolidate credit card account with balances.
If you have any charge offs on your record, negotiate with creditors to have them removed.

After making positive changes, it will take a minimum of 60 days for your credit score to improve, 90 days is typical.

Shopping for a loan before you go looking for a new car will also help you decide how much car you can afford. You may have your heart set on that new $34,000 BMW 3 Series, but after shopping for a loan you may realize a good used BMW for $25,000 is what you can afford. Again, knowledge is power, and a good shopper has the information necessary to make good decisions.

Borrowing Money

I`m probably the last person that should be telling you how much money to borrow for a car. In my short 42 years, I have managed to buy more than 30 vehicles for my own personal use. I`m guessing that if I had bought only four or five cars, and invested the rest of the money, I`d be a pretty rich guy by now. Oh-well, I love cars!

The basic common sense rule is to borrow as little money as possible for as short a period as possible. If you find yourself borrowing for five years to get the car you want, you`re probably trying to buy too much car. This is difficult for most of us to understand, because we like the lower monthly payment of a longer term loan. Just keep in mind that the longer the loan, the higher the interest rate and the more interest you will pay. The following table shows how time and interest rates impact monthly payments and total interest paid.

<TABLE id=AutoNumber7 style="BORDER-COLLAPSE: collapse" borderColor=#111111 cellSpacing=0 cellPadding=0 width="100%" border=1><TBODY><TR><TD align=middle width="20%">Percentage</TD><TD align=middle width="20%">Months</TD><TD align=middle width="20%">Loan Amount</TD><TD align=middle width="20%">Payment</TD><TD align=middle width="20%">Total Interest</TD></TR><TR><TD align=middle width="20%">1.9%</TD><TD align=middle width="20%">24</TD><TD align=middle width="20%">$24,000</TD><TD align=middle width="20%">$1019.91</TD><TD align=middle width="20%">$477.88</TD></TR><TR><TD align=middle width="20%">5.9%</TD><TD align=middle width="20%">24</TD><TD align=middle width="20%">$24,000</TD><TD align=middle width="20%">$1062.61</TD><TD align=middle width="20%">$1502.73</TD></TR><TR><TD align=middle width="20%">5.9%</TD><TD align=middle width="20%">48</TD><TD align=middle width="20%">$24,000</TD><TD align=middle width="20%">$562.64</TD><TD align=middle width="20%">$3001.97</TD></TR><TR><TD align=middle width="20%">9.9%</TD><TD align=middle width="20%">60</TD><TD align=middle width="20%">$24,000</TD><TD align=middle width="20%">$508.75</TD><TD align=middle width="20%">$6524.94</TD></TR></TBODY></TABLE>

Looking at the table, it`s not hard to see why a short loan with a low interest rate is best. Just think what you could do with the $6,000 you save? It would buy one heck of a vacation or pay the down payment on your next new car.

Common Loan Mistakes

Some people think it`s best to finance as much as possible. After all, the annual return on stocks, mutual funds and other investments is often much higher than consumer loans. If you have a good investment strategy, it might make sense to invest cash and not use it as a down payment, but not likely. Most of us don`t invest disposable income. The rule on automobile down payments is to apply as much as you can.

When shopping for money, search for the best loan, not a monthly payment. One of the biggest mistakes people make is answering the "how much you you want your payments to be?" If a car salesman asks you this question, and you answer it, rest assured the salesman will find you just the right car for that payment, probably with a 60 month loan and a nice double-digit interest rate.

If you own a home, try to get a home-equity loan. Many people think home-equity loans can only be used to home improvement, but this is not true. You can use most home-equity loans to consolidate bills and buy a new car. Using this tool, you can use the loan interest as a tax deduction, and you have the car title, not the bank.

If you don`t shop for a loan on your own, be careful accepting a loan from an unknown lender. There are some unscrupulous lenders and dealers out there. One loan to look out for is the balloon loan. Although it may seem to good to be true, it`s trap. The payments on balloon loans are very close to those of a lease. That`s because all you`re paying is the accrued interest and the estimated depreciation of the car each month. Then "BAM!", at the end of the loan term you still owe the estimated value (residual value) of the car. This can really hurt you if you`re not able to sell the car for the residual value. This is where most people get screwed, because the residual value is almost always over stated.

Leasing

Leasing is becoming more and more popular. This is primarily due to the cost of luxury cars, sports cars and SUVs, as well as the loss of car loans as a tax deduction. Leasing allows must of us to afford a more luxurious car, because the payments are typically lower than financing a car for 36 months with 20% down payment.

A lease is nothing more than a an agreement to pay for the use of a car for a period of time. The payments on a lease are lower because you`re only financing the amount of the car you use.

Some people also lease cars because it is easier to use a lease as a business tax deduction. With a lease you don`t have the hassle of asset depreciation and asset disposition. Leases make car deductions much easier on tax returns.

Are leases a good option? They can be if you drive less than 15,000 miles a year, can use the lease as a valid business deduction (self-employed or small business), or like to trade-in your car for a new one every two or three years. Some people also think leases are an okay way to go if you don`t have a lot of cash to put down, but I hesitate to use this issue as a reason to lease. If you drive over 15,000 miles a year, or do not keep your cars in excellent condition, a lease is a bad idea. The fees for over-mileage and reconditioning on lease return can really add up fast.

A car lease payment is calculated using several numbers: selling price, residual value, lease rate (money factor), and down payment. If you are thinking about leasing, negotiate your deal as if you are going to pay cash. It`s very important that you know the selling price of he car.

Getting the Best Lease Deal

To get the best lease payment, choose a car that has a high residual value at the end of the lease term. If you are trying to decide between two cars, for example a BMW and a Lexus, the residual value might help you decide. All things being equal (price, money factor, down payment, etc.) The car with the higher residual value will have the lower lease payment.

The best lease deals typically come from the manufacturer. What you need to know to compare leases is the money factor. In simple terms, the lease money factor is the interest you pay. It`s not as simple as an interest rate, but you can compare it to the interest applied to a loan. Lease money factors will be expressed as a fraction, such as: 0.00245833. This equates to a loan interest rate of 5.9%. The calculation is {money factor x 2400 = APR}, or 0.00245833 x 2400 = 5.9%. When shopping for a lease, always ask for the money factor.

One of the main reasons people lease cars it that they require very little money up front. Typical leases require a security deposit and the first month`s payment. However, it is possible to decrease your monthly lease payment even further by pre-paying a lease. This might offer a tax benefit if you are trying to increase your expenses for the current year. Inquire with your accountant before pre-paying a lease.

Leasing Pitfalls & Fees

Some leases will have a "hidden" up-front cost called a lease origination fee. If you see a lease origination fee on your lease, typically a few hundred dollars, I recommend asking to have the fee waived. This is additional dealer profit for processing the lease. The dealer profit comes from the sales of the car and future service, they don`t need to charge to to process the paperwork, too.

Did you ever wonder how some advertised lease deals seem to good to be true? Most of the low lease deals advertised in the paper are open-ended leases. If you shop for a lease other that what`s offered by the manufacturer, make sure you don`t accept an open-ended lease. All manufacturers will establish a residual value for their cars, but this is not true of all independent leasing companies. Some leases value car at the end of the lease. If the car has a higher value than what`s owed on the car, that`s great, because you get the windfall of cash. However, this is rarely the case, and you could end up owing hundreds, even thousands of dollars to turn the car back in to the dealer.

Now for the downside of leasing. First, if you want to get out of a lease early, you`re going to pay through the nose. Most leasing contracts do not favor early termination. My experience is that you can trade the car in for a new lease after the mid-point of the lease, as long as you work with the same manufacture. I have done this several times with my Porsche. Once I even came out ahead because the car had increased in value, and the dealer had an immediate buyer. This is very rarely the case, though, so only lease if you know you plan to stick with it. If you are stuck in a lease, there is a slick new service I found called SwapaLease. These people help you find someone interested in your car that will take over the lease.

Another gotcha with leasing is lease disposition fees, damage fees and over-mileage fees. If you don`t take excellent care of your car, you can expect to pay a hefty fee when you turn it back in for cleaning and repair. Repairs can be anything necessary to recondition the car for resale that`s not considered normal wear and tear.

When the Lease Terminates

Most dealerships and car salesmen love leases. They know that at the end of the lease, 90% of the time you will return to them to trade-in the car. They also know that most people will pay full price for the car (the full residual value from the lease) if they chose to buy it after the lease, or they will trade up to a more luxurious car.

If you want to buy the car you`ve been leasing, you have every right to negotiate a lower price. In fact, it`s often to the dealer`s benefit to sell it to you for a lower price, as they don`t have to recondition the car for resale or take it in to inventory on their lot.

More Shopping & Financing Tips

We`ve all seen the incredible 0% APR loans offered by car manufacturers. By now, you should also be familiar with the term "OAC" or "On Approved Credit". The fact is, fewer than 20% of all buyers qualify for 0% financing, and those who do don`t typically buy the kind of cars offered with 0% terms. So, don`t get too excited until you see what it takes to be approved.

Some car makers offer great financing terms or a rebate. Which is better? This will depend a lot on how much money you plan to put down. By the way, rebates also apply to leases, so don`t let a dealer tell you otherwise. To figure out if you should take low factory financing or a factory rebate, use E-Loan`s auto loan calculator.

Here`s a biggie: make sure your loan is approved and finalized before you drive away in your new car. I`m had a few sad stories dropped in my lap lately, regarding loans that didn`t go through. How can this be, you ask? Simple! If you sign an agreement to buy a car, but not a final loan document, the dealer is free to shop your loan. If they can`t find financing at the rate they quoted you, their fine print may give them an out. If this happens, you still own the car and are responsible for finding financing. Make sure you have a completed loan agreement before you take the car.

Just remember, in all 50 States of the USA, you have the right to know how much you`re paying for a car, including trade-in, loan interest, fee and taxes. Be sure to ask for all of this information, broken in down in clear terms you can understand. If you don`t understand a fee or credit, ask. If you want time to review it, take the time. Don`t be pressured into making an on-the-spot decision.

As I said at the beginning of this articles, it`s best to go shopping for a loan before you shop for a car. If you do, you can walk into a dealership with a loan draft already prepared. This makes you a cash buyer, and you hold more of the negotiating power. Use car load web sites like PeopleFirst or E-Loan to shop for rates and apply for a loan. Both of these organizations can approve very fast, and have a draft out to you wining a few days.

Here`s how to shop for a car on-line:

Find the car you want (try AutoWeb, CarSmart or CarsDirect);
Check loan rates;
Calculate your monthly auto loan payments to determine if you can afford the ca;
Use the online loan application and get a response back same business day;
Wait for your loan draft to be delivered; and
Go shopping at your local dealers to find the car you want and negotiate cash terms.

For used cars get a person-to-person loan. Give the seller a small down payment to hold the car for several day while you wait for the draft to arrive.

You can also shop for loans on-line to save money on your current car (lease or loan). Shop for a Auto Refinancing Loan or a Car Lease Buyout Loan.

Low Payment Alternative to Leasing

It`s an apples to oranges comparison when you evaluate the monthly payment of a lease versus a loan. With a lease, you never really own the cars. So, if you`re truly looking for the lowest payment, and you don`t care about owning the vehicle, compare a lease to a long-term loan that you don`t plan to keep.

With most cars, the break-even point of a long-term loan (60 months) and the car`s resale value is between 24 and 36 months. It is at this point on a 60 month loan that you can sell the car for the amount owed to the bank.

If you buy cars based on a "no asset" approach, you are free to trade-in your vehicles every two and a half years without the problems associated with breaking a lease. Plus, a 60 month loan payment will always be less than a 3-year lease schedule.

Down Payment Strategies

When making a down payment on a new or used car, never with cash (personal check). If for any reason the deal sours, it is very difficult to get your deposit back.

Instead of writing a personal check, use your credit card or checks drawn off of a credit card account. This way, when trouble arises, you can dispute the credit card transaction and get your money back. Some car dealers have a limit they will allow you to apply on a credit card, or they will try to charge you a fee for using a credit card. This is why I suggest using checks drawn off of a credit card account.

I also recommend working in advance to take advantage of low or even 0% APR introductory offers. Often times, you can get a much better short-term rate on a new credit card than you can on a new car loan. This may help you if you need a little more money for a new car down payment.

Down Payment Amount

How much money should you put down on a car purchase? This is always a heated topic, because it brings into question the issue of investment versus debt. My personal strategy is to use as little cash money as possible when buying a new car.

Credit Opportunities

Looking for credit opportunities for your down payment? Find a credit card that offers a low APR for the first six to nine months. An excellent low initial APR card is the NextCard Visa. Their initial rate is only 2.99%! There are many opportunities like this available.

If your credit is ok, but not perfect, use Lending Tree Credit Card Search to help you find credit card opportunities. This easy-to-use, free service will find up to four banks that will issue you a credit card. This service is worth a look. If you keep getting rejected, I suggest using Credit Card Finder. This service is specifically for people with credit problems.

Whatever you do, don`t apply for credit where you might be rejected. This creates reject notes on your credit history, so other lenders can see that you have applied for credit and were rejected. Find out who will approve you prior to applying for credit.

If your credit is really bad, and you`re in over your head, buying a new car won`t help. Look into a debt reduction program. iDebtAssistance.com offers excellent help and advise.