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Auto Finance Tips

Determine your budget (podcast 201)

  • While cars come in all price ranges, they are still one of the most expensive purchases you will make, so it's important to be sure you can afford it.
  • A good rule of thumb is to budget no more than 25% of your monthly household income for all the cars in your household.
  • Your calculation should include your monthly auto loan payment as well as operating costs such as fuel and car insurance. If you're not sure of your monthly expenses, use

Decide if you're buying new or used, or leasing (podcast 202)

  • The array of vehicle choices within your budget can be dizzying.
  • Regardless of your budget, you can find choices of new cars that you can buy or lease, certified preowned cars or used cars. You should decide what direction to take, since there are trade-offs with each.
  • You're likely to get the best value if you buy a used car, though you'll pay a higher interest rate, have a shorter warranty period and won't know the car's full history.
  • You'll be able to get a high-end car if you lease, but you won't own the car, and you'll need to be careful to stick within the parameters of the lease to avoid penalties.
  • Buying a new car means you'll get fewer car features for the same amount of money, but you'll get the full warranty and lower interest rates, as well as free maintenance and roadside assistance in many cases.
  • For many, a certified pre owned car is the ideal compromise. These cars are cheaper than their new car counterparts, but they usually have some warranty left and must meet certain criteria to help ensure their reliability and condition.

Determine your overall ownership costs (podcast 203)

  • Once you have your short list of cars, circle back to see if they really fit into your budget by estimating the ownership costs for each.
  • An auto research website like Edmunds.com will help you with a general overview of the ownership costs for your area, but remember that these numbers will vary depending on your personal situation.
  • Use these numbers for a more accurate budget, but do your own calculation for fuel based on the number of miles you drive annually and by calling your car insurance agent to get a quote on the cars you are considering.
  • Make sure you give the agent the exact model, including engine type and other specifications, to get an accurate quote.

Nail down financing before you visit the dealer (Podcast 204)

  • Don't let your eagerness to test-drive a car send you to the dealership just yet.
  • Dealers don't just want to sell you a car; they want to give you the car loan because they typically receive a flat fee or a commission on the car loans they facilitate. They get that kickback regardless of whether the loan is from the manufacturer or a local lender.
  • As a result, dealers sometimes promise a great interest rate before they have final approval, which can get you in a pickle if you sign a contract.
  • Use Bankrate's rate search tool to see current interest rates. Check with local lenders, including credit unions, which offer loans that are 1% to 2% lower on average than conventional banks. Many community credit unions are open to anyone living in their area, eliminating the need to work at a certain company or in a specific industry to join.

Automaker's promotion may not be the best interest rate (Podcast 205)

  • You probably have seen the ads from automakers for 0% interest rates or low interest rates and have decided the car was within your budget because of the low monthly payment quoted, but the likelihood is you won't qualify.
  • Only about 10% of car buyers qualify for the 0% or low interest rate deals. Even if you do, you may be better off taking the cash rebate and getting your financing at a bank or credit union.

Know the invoice price (Podcast 206)

  • While invoice pricing on auto research websites isn't completely accurate, it's a good indicator of what the dealer paid for the car. You'll want to keep this number in mind as you negotiate the purchase of your next car.
  • If your research didn't include the invoice price for new cars or the wholesale price for used cars, go back to the auto research website you visited earlier to check it.
  • You'll want to aim for a sale price that is close to that number before any applicable discounts. Keep in mind that running a dealership is a costly endeavor with a lot of overhead. The dealer needs to make at least a few hundred dollars of profit to cover costs.

Use smart negotiating strategies (Podcast 207)

  • When you are ready to buy, be sure to keep in mind all the discounts you researched.
  • It's easier to get the best price for each if you negotiate the sale price of your new car and the trade-in value of your old car separately, so don't factor in trading in your car as part of the deal for the moment.
  • Make sure you do your research about your current car's value online in advance so you know whether you are being offered a fair price.
  • Go over the list of fees associated with the deal to ensure they are accurate, and make sure you aren't paying any unnecessary dealer fees
  • Once you've agreed to the price with the dealer, be prepared to say "no" to all the extras you may be offered. You can always buy them separately later, after you've researched pricing.

Vehicle or dealer preparation fees (Podcast 208)

  • Extra charges that the dealer adds to get the car ready for delivery. These include washing the car, removing the "bump protectors" from the doors or disposing of the protective coverings for the seats or floor.However, employees in every retail setting, such as your local department store, also need to unpack the merchandise and prepare it for sale. Yet, you don't pay any additional fees for the shirt or shoes you buy. Why should you for a car? Unless the dealer has done something above and beyond basic preparation, refuse to pay these dealer fees.

Documentation fees, (Podcast 209)

  • Cover the costs of processing all the paperwork associated with a new car purchase, are something new car buyers need to pay.
  • Look at this line item carefully and consider negotiating these dealer fees if it is significant.
  • Some states charge a flat fee for this item that is typically well under $100. Other states have no specific requirements, so a dealer can charge whatever it wants. To learn the process in your state, visit your state's Department of Motor Vehicles website. A complete list of DMV sites by state can be found at Dmvlist.com.

Dealer-installed accessories and extended warranties (Podcast 210)

  • Extra items that you should pay for at the time of your sale, but only if you requested them and if you've determined that you are being charged a fair price for the item or service.
  • These items might include a stolen vehicle recovery system like LoJack, paint sealant, an extended warranty, or aftermarket wheels or sound system. If a dealer tries to charge you for any of these items and you did not request them, refuse to pay the associated dealer fee. If you did request them, shop around to ensure that you are getting a fair price because you can obtain any of these items elsewhere after you own the car.

Floor plan fees (Podcast 211)

  • The charges the dealer incurs to keep the car in his or her inventory. Similar fees are incurred in many retail stores, when the manufacturer ships that store inventory to stock its shelves.
  • Just like with vehicle prep fees, you don't pay extra when you buy a shirt from a retail store just because they had the color you wanted on the shelf.
  • There's no reason you should pay this dealer fee on your new car purchase.

Administrative fees (Podcast 212)

  • Can sometimes be a generic line item that allows the dealer to make a few extra dollars. Other times it can be a legitimate cost from the manufacturer.
  • Ask to see the factory invoice for the car you are buying. Make sure the VIN, or vehicle identification number, on the invoice matches the VIN on your sale paperwork and see if it's listed there as a line item. If yes, then it's a fee the manufacturer is charging the dealer and a legitimate cost.

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