Financing Your Vehicle? Here's How to Get the Best Deal
By: Nelson Smith on February 19, 2015
According to a study by Maritz Research, approximately 25% of people will pay cash for their next vehicle purchase. That leaves 75% of us who are either going to have to get financing or end up taking the bus.
The world of auto financing can be a scary and dangerous place, especially for people who haven’t done it before. But fear not; we have some great tips that will save you money and hopefully calm your anxiety about the whole experience.
Beware of the 0% financing offer
Since the U.S. Federal Reserve and the Bank of Canada took interest rates to nearly 0% in 2008, automakers have been using 0% financing to lure in customers. If you can leave your cash in the bank earning 2% during the life of the loan, it’s like the car dealers are paying you to take out financing.
Alas, this isn’t quite as good of a deal as it appears to be on the surface.
That’s because there are usually two different prices for a car. There’s the cash price, and there’s the 0% financing price. These two numbers can often be thousands of dollars apart, with the person financing the car always paying more.
Sometimes, the dealer will offer the same price for both financing and a cash deal. While this does happen sometimes as an incentive to buy a certain (usually slow selling) model, most of the time it’s the sales person trying to get a better price out of the buyer.
It’s impossible for auto companies to make money lending at 0%. But if they charge you 10% extra for the car in the first place, that easily makes up for it.
Shop for a loan before stepping foot on the lot
Since there are often two prices for a new car, showing up to the test drive with financing already in place means you’ll easily qualify for the cash price.
But shopping for a loan beforehand also takes the emotion out of it. You can go over the various payment options with someone before getting all excited about driving your new wheels home. And once you have a firm offer in your hand from your bank or another lender, it’s easy to compare it to what the dealership is offering.
Choices are a good thing, especially when borrowing money.
Pay attention to amortization
Car loans used to last a maximum of 3 years. These days, 6 year loans not only exist, but are common. I see them advertised all the time.
It’s obvious why the lenders are offering these types of loans. Many borrowers don’t look at anything past the monthly payment. By stretching out the loan, the monthly payment becomes lower but the interest piles up. It’s a reality of staying in debt for so long.
If you need a 6 year loan to be able to afford a car, my advice is pretty simple: it’s probably time to lower your expectations and go for something a lot cheaper.
Avoid getting upside down
Unless you have a big down payment, chances are you’ll drive off the lot owing more on your car than what it’s worth. This is called being upside down.
Entering into a car loan upside down might be unavoidable, but getting out of that situation quickly needs to be a priority.
Not only does being upside down limit your flexibility going forward, but it also puts you in a precarious spot if you have an accident. Your insurer will reimburse you for the value of the car, not the amount you have financed. If you’re upside down, you’ll be stuck paying on a car loan but not actually have a car to drive. Plus, it’ll affect your ability to qualify for another loan.
Don’t sweat it
Financing a car isn’t so terrible. All you need to do is be a smart shopper and perform a little prep work beforehand. Knowing dealer tricks helps as well. With a little patience, you can score a great financing deal!
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