New Auto Financing Tips

Car Dealer Scams

There are many ethical, honest car dealers. Unfortunately, there are just as many unethical new and used car dealers.

Number 1 on this year's list is the "Double Dip Advertising Fee" scam. How it works is the dealer slips an advertising fee into your vehicle contract. The problem is, however, that advertising is already built in to the car dealer price. If you see this fee on your contract, demand that the dealer remove it. If the dealer tells you the factory doesn't charge it an advertising fee on the invoice, make the salesperson show you the dealer invoice. If there is no fee on the invoice (which is highly unlikely) then it is okay for the dealer to charge 1-3% of MSRP for an advertising fee. Keep in mind that if the fee is not charged by the factory, it is 100% negotiable just like any other part of the deal.

Unfortunately, advertising fees that appear on the factory invoice are considered part of the dealer cost and are not negotiable.

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Sub-Prime Loans

Calm down—even if you have bad credit new car loans are not out of your reach. However, you need to beware of predatory lending practices. Some lenders, including many less-than-reputable online lenders, will offer financing to anyone but may require you to pay high fees or exorbitant interest rates meaning you pay hundreds or even thousands more in interest over the life of the loan.

Your best bet to avoid being charged fees that are too high for a loan is to educate yourself on what's called sub-prime lending rates. Sub-prime lending are loans made to people with less than perfect credit.

*You can also learn more about predatory lending and the laws pertaining to it by visiting the Center for Responsible Lending's Web site.

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Car Shopping Guidance

If you ever hear a new or used car dealer ask you, "What do you want your monthly payment to be?" a little red flag should go up in your mind. That's because buying based on a target monthly payment is a surefire way to get locked into a loan that's a bad deal. A dealer can wheedle the term of the loan and other factors to shoehorn many loans to fit a certain monthly payment range.

In reality, the total cost for the loan will be much more than it would be if you negotiated on price alone. If you have ever fallen into this trap, you should check out Edmunds.com's DealSmart service. The subscription service helps you become a savvier car shopper. A free trial is available.

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Dealer vs. Bank Financing

If you are in the market for a new car, chances are you'll need to finance a portion of the purchase price. If leasing is not an option for you, there are two avenues you can pursue: dealer financing and bank financing.

While dealer financing generally is at higher rates than you can get if you shop around at your local lenders, it does offer several benefits. Dealer financing offers convenient, one-stop shopping. Dealers are also able to offer you a variety of financing options thanks to their multiple backend relationships with lenders. And, very often, dealers offer special, low-rate financing on new car loans to customers with good credit.

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Free Credit Reports

Before you shop for a new car loan, you should get a copy of your credit report and take steps to improve your credit rating if it is below 680. Credit ratings of 680 and higher qualify for the best financing deals. There are three credit reporting agencies:

• Experian
• Transunion
• Equifax

A recent amendment to the Fair Credit Reporting Act (FCRA) requires each of the nationwide credit reporting agencies to provide you with one free copy of your credit report each year. The program is being phased in based on geographical location. For example, residents of the Northeast don't qualify for a free report until September 2005, at the earliest (this is to make sure the credit reporting agencies don't get overwhelmed with requests).

Aside from car shopping, privacy experts recommend you rotate your requests with the three agencies and get one report from each at four-month intervals to make sure no one is opening new accounts in your name without your knowledge. For more information on free credit reports, visit the Federal Trade Commission's Web site and search on "free credit report."

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Loan Shopping

Before you shop for a new car, shop for a new car loan. If you have perfect credit you can get a steal of a deal by financing through the dealership. However, low- or no-interest loans offered by many auto dealers are being offered less and less. Plus, they are usually only available to those people with top credit ratings.

Check with your own bank plus a couple others to make sure you are getting the best rate for which you can qualify. You can actually get pre-approved by many banks before you even step foot in the dealership.

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Study Up for the Best Deal

Negotiating a new car deal doesn't have to be such a shell game if you take some time to educate yourself before you go to the dealership. Don't just consider the pricing and vehicle options when doing your research. Spend a couple of hours online or at your local library boning up on things like:

• Safety ratings
• Crash test results
• Quality and customer satisfaction
• Cost of ownership
• Expert opinions (such as the National Highway Transportation Safety Agency)
• Side-by-side comparisons of your top three or four picks

Many Web sites, such as Edmunds and Intellichoice, offer information and tools to enable you to collect and study all of this information efficiently.

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Know Your Credit Rating

Before you shop for new car loans, pull your credit report to make sure it's in order. Your credit report score is one of the key determining factors in what interest rate you are offered by lenders. Those who receive the best financing terms generally have a credit score of 730 or higher. If your credit score doesn't fall into that range, there are steps you can take to improve your score before you apply for financing.

• Pay all your debts on time
• Pay off or pay down your credit cards
• If you have a lot of credit cards, consolidate them and cancel a few
• If there are any errors on your credit report—dispute the error in writing and keep all documentation
• Don't hire a credit repair agency (most are scam artists who provide services you could do yourself)

If you feel you do need help sorting out your credit, visit the Web site of the National Foundation of Credit Counseling (NFCC). It is the oldest network of nonprofit counseling agencies in the U.S.

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Negotiating the Best Deal

New car loans and new car financing is not something to dive into blindly. Make sure that you take the necessary precautions so that you can get the best deal possible. You shouldn't pay more if you don't have to.

The Federal Citizen Information Center is in your corner when it comes to getting a great deal on a new car. Visit the organization's Web site and download "How to Get a Great Deal on a New Car." The free, four-page PDF includes step-by-step details for proven negotiation techniques that will save you money on your next car.

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Total Loan Cost

Many people assume when they finance a new car that as long as the monthly payment fits their budget, it's all good. This isn't always the case. Sometimes lenders and car dealers will approve longer-term loans (say 60 months instead of 36 months) to shoehorn a monthly payment into a customer's price range. However, what that means is that the customer is actually paying more because it takes them longer to pay off the loan.

If you are borrowing $20,000 at 8% interest, your monthly payment for a 60-month term will be $406, whereas the monthly payment for the same amount and rate for a 36-month term will be $627. The lower monthly payment on the 60-month loan can be deceiving. By the time you pay off the 60-month loan, you'll actually have paid $4,332 in interest vs. $2,562 on the 36-month loan.

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The Terms of New and Used Car Financing

Understanding the terms of car financing can save you from paying more than you should for a new or used car. Familiarize yourself with the terminology outlined on a car loans and purchasing documents:

Annual Percentage Rate (APR) is the percentage of the amount borrowed charged in interest each year.

Down payment: the initial agreed amount to pay up front before acceptance of the car. Higher down payments represent minimal loan amount and payments.

Loan amount is the dollar value of the borrowed amount needed to make a purchase.

Monthly payment is the amount needed each month to pay the car note.

Payment period refers to the number of months necessary to satisfy the car loan

Sales price is the agreed amount to remit for the car

Trade-in value: the amount a dealer will deduct from the purchase of an old car in exchange for a newer model.

Total car cost is the sum of the monthly payments, the total of the down payment and the entire cost the car will actually cost. (This number may be significantly higher than the actual sales price.

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Shopping for Loans

Gone are the days of old when new car financing bore interest rates as high as 13%. Today, people with good credit can get new car financing as low as 1.9%. Even most people with less than perfect credit can get new car loan rates in the 8-9% range.

It can be tough to compare loan products from different sources given the various fees each may charge. To make sure you are getting the best rate available, compare the annual percentage rate (APR) of each loan being offered. The APR is the total rate you pay on an annual basis for your loan, including interest, any fees, and taxes, if any. This will level the playing field so you can compare apples to apples.

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Understanding Cost of Ownership

When you are considering a new car purchase, make sure you consider the cost of ownership—buying a new car isn't just about the sticker price. Let's say you are trying to decide between an Infinity G35 and an Acura TL. Once you weigh the cost of ownership for each vehicle, that will likely help you focus your choice. Cost of ownership includes things such as:

• Insurance costs
• Registration fees
• Fuel efficiency
• Routine
• Extraordinary maintenance

The cost of ownership varies widely depending on the make, model, and style of car you choose, so pick wisely.

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Additional New Car Costs

When most people purchase a new car they will tediously research the best new car financing rates and negotiate a low purchase price with the seller. One thing buyers unfortunately forget sometimes, however, is that there is much more to purchasing a new car than getting a good loan and a good price. After you get over the initial feelings of euphoria which can be brought on by buying a new car, you will realize that it is not quite time to put your wallet away. When you head to the Department of Motor Vehicles to register your car you will be faced with the additional registration fees and any taxes which weren't paid at the dealership. You should also consider the fact that your car insurance premiums may go up based on the purchase of the new car. You can always check these things out beforehand, and it is better to be prepared for the extra expenses before making your purchase. If you are able to budget for these extra expenses you won't need to roll them into the loan, which some lenders allow. That puts you in the unenviable position of owing more on your car that it is worth, although that can be the case with any new car purchase once the car is driven off the lot.

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Dealer Loans

Dealerships do sometimes offer excellent loan products for new auto loans, but that doesn't mean you should rely on them solely when the time comes to purchase a new car. You should never walk on to a car lot and expect to receive the best interest rate available from the dealer without first having done some research from other lenders.

You should always secure financing for a new car before you head to the dealership. It doesn't matter if you haven't even picked out a car yet; you can get pre-approved for a dollar amount instead of for a specific car. If the dealership can get you a better interest rate then take it, unless the terms are tricky and extra fees are added to the loan. Many times, however, dealerships are indeed able to provide quality new auto loans with competitive interest rates. Just be sure that you don't limit yourself to a dealership loan without first checking out other options.

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Down Payments

Obtaining a loan for new auto financing is usually pretty simple, and in many cases the lender won't even require any type of down payment on the new car at all. This may leave some borrowers to wonder if they should even bother putting down any money when purchasing a new car. Of course, giving a sizeable down payment when you purchase the car will result in a smaller loan, possibly amortized over a shorter period of time. This can result in lower interest rates.

One the other hand, if you have high-interest credit cards, it may make more sense to put the money towards the cards in an effort to pay them off, since your new car loan is probably at a lower interest rate than the cards. If you are in the position of simply not having any money to put towards a down payment then your question is answered, although you may want to think twice about buying a brand new car if you can't scrape one or two thousand dollars together for a down payment.

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New Auto Loan Rebates

Dealerships will often offer low interest rates or big rebates in an attempt to get new customers in the door, but rarely are these perks both offered at the same time. When financing a new car, buyers need to choose between the big rebate and the low interest rate. Which one is the better option depends largely on the buyer's individual situation. Financially, it can make sense to choose either one, although in many cases the best option is to take the lower interest rate instead of the big rebate. This can depend largely, however, on how the buyer intends on using the rebate. If the rebate will be put right back into the balance of the new car loan, this may make more sense than taking the low interest rate. It all depends on the individual circumstances. Luckily, there are plenty of calculators online which will crunch the numbers for you and tell you which scenario is most financially advantageous. It may be tempting to take a big rebate instead of the lower interest rate, but if you do the calculations and find out that the low interest rate saves you money in the long run then you should take it.

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New Car Financing

It is a great idea to secure financing before you begin shopping for an automobile. Having an approved auto loan before you visit the dealership gives you the negotiating advantage of being a cash buyer. How do you know how much to apply for, though?

You probably already have an idea of how much money you plan on spending based on the type of car you want purchase. When applying for your new car loan, you should apply for the amount which is the maximum amount you can afford to spend. You are under no obligation to spend the entire amount when you pick out a car. In other words, if you are approved for $40,000 but purchase a car for $32,000, the loan amount will only be $32,000. It is nice to have the leeway of having a larger loan already approved, but it is also nice to know that you can spend less if you would like to.

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Advantages of New Cars

There are more advantages to getting a new car than just the new car smell. New cars haven't been owned by anyone else, so you aren't inheriting someone else's mechanical problems. A new car should be in tip-top order because it's brand new. If something does go wrong with a new car, the warranty should be sufficient to fix any problems for the first few years. You will also have the advantage of getting a lower interest rate with a new car loan than you would if you obtained an auto loan for a used car.

The very lowest interest rates go to applicants with good credit who purchase new cars and keep the terms low; instead of amortizing the loan for seventy-two months, for example, the loan is amortized for thirty-six months. In addition to all the aforementioned reasons to purchase a new car instead of a used car is the fact that new cars are generally cleaner and dent-free as opposed to used cars. There is just something nice about owning a car which nobody else has driven for anything other than a test drive.

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