Car Financing

 

At the Finance & Insurance office, you will not only sign all the legal papers and apply for your title and license plates, you will also give the dealer another opportunity to make additional money … with extended warranty, fabric protector, paint protector, insurance options – and the loan!
The answer is NO. New car warranties are so good these days, you gain very little from purchasing an overpriced extended warranty – these are mostly gravy for the dealership. In the dealerships I worked for, if you did not take the extended warranty, they mailed you a reduced price offer later – and still made lots of money.
But what if your car turns out to be a lemon? Shouldn’t you have an extended warranty just in case? Not really since there are lemon laws to cover that.
You might want to be aware that the F&I person is probably working on straight commission, so he has every reason to push the extras. Make sure this isn’t automatically added to your contract.
Fabric protector? Buy a can of Scotch Guard and do it yourself.
Paint protector? The manufacturer’s paint is fine. You can buy a paint protector kit at a car parts store for a few dollars.
Insurance coverages? Talk to your insurance agent about the vehicles you are interested in, the coverages you want, and the cost. I have seen people get rid of their car because the cost of insurance was so high – they lamented they hadn’t thought to check insurance rates before buying. Just be certain that you have done whatever needs to be done with your insurance agent so that your car is fully insured the moment you sign the contract. Take your insurance agent’s phone number with you just in case something comes up while you are signing papers and you want to call him.
Disability Insurance? If you become unable to make your car payments because of a disability, this insurance will make your payments. If you want this insurance, check prices with your insurance agent. Watch out that this or some other insurance you don’t want doesn’t automatically get entered on your contract.
Gap Insurance
There is one additional insurance well worth considering – and you should price it from your auto insurance agent and other sources before you get to F&I, and this is GAP insurance.
What does GAP insurance do? If your car is totaled out, it pays the difference between what your insurance company will give you (the wholesale value) and what you owe on your loan. Remember, in most loan scenarios, it will take until you are 2/3 or more of the way through paying off your loan before you reach a break even point. (The break even point is when your car is worth the amount you still owe.) If your car is totaled for any reason: theft, fire, accident, flood, tornado, vandalism - your GAP insurance would leave you not owing a cent.
Your car insurance may already have GAP insurance included, or your agent may be able to add it at a low cost to your policy.
I want to mention that GAP insurance is important if you are leasing a car also.
Some agents do not provide GAP coverage. You can purchase the insurance online with a one-time payment. Learn more about this important coverage at the
Gap Insurance Quotes website.
Be vigilant about examining and understanding all costs before you sign any papers!
Make sure that additional costs haven’t been tacked on – like a Delivery & Handling charge or advertising fees that are not on the manufacturer’s invoice. If there are dealer prep fees, ask what is covered – it may be cheaper to wash, vacuum and gas up the car yourself. Check that the original figures you agreed to for the price of the car and your trade-in are the same ones on the contract you sign. Confirm that the loan figure, interest rate, and term are what you agreed to. If they are in a hurry to have you sign – refuse until they have explained all costs to your satisfaction. Read the fine print. Some buyers have been shocked to find that what is written on the contract for them to sign does not resemble what they agreed to verbally.
Most of us can’t afford to write a check like the vineyard owner. But we can buy a good loan interest rate. The dealer and the F&I manager want to sell you their loan, and that can be quite profitable for them – they can easily pocket $2000 of your money.
Your bank wants to make you a car loan too. So start with your bank or credit union and ask them for their loan rate for the car make/model/year you plan to buy. If you have more than one financial institution, pit them against one another to see which will give you the best rate. Then when you get with the F&I manager and he announces his loan rate, tell him you can do it for less with your bank – assuming that is true.
 “How much less?” he will want to know. “Considerably less than that,” you tell him. You hope he will reply back with a figure that is less than the bank told you, but if you can’t get that out of him, tell him your bank deal. We have always had the dealership beat the bank deal.
You might also want to consider loan shopping online. There are many places to shop for loans online, but our favorite is e-Loan. E-Loan offers a wide variety of loan options, allowing you to choose the loan that is perfect for you. Their rates are very favorable as well, and their system is incredibly easy to use. We’ve even used them twice for home mortgages. Click here to check out today’s e-Loan auto rates. You make the application online but an agent comes to your house to close on the loan.
If you do get your loan through the dealership, the finance manager will need to run a credit check on you before offering you the loan. You should also check your credit report ahead of time so there are no surprises. You are entitled to one free credit check per year at the major credit reporting services. These credit bureaus are: Equifax, www.equifax.com, TransUnion, www.transunion.com, and Experian, www.experian.com. If your score is over 700 you should be able to get one of the better interest rates.
If you need to bring your credit score up before your purchase, it’s a good idea to use myfico.com to monitor your credit. This service will help you increase your score, as well as notify you by email whenever your credit score changes. This will increase your chances of getting the best auto loan rate available.
Note that low interest rates are often used as buying come-ons. When my son-in-law asked for the 0% interest loan, the F&I manager smiled and said no one had ever qualified for it. However, his credit score was 805 and he took home their 0% interest and the rebate.
At F&I you will be adding state sales tax and licensing fees to the negotiated cost of your new car. You will want to sort out the plusses and minuses you can expect at F&I to get your on the road cost.
Determine your “out the door” cost as follows:
Your negotiated cost of the car (before any customer rebate or cash incentive)                                         $   .00
          Sales Tax in your state                 + $   .00
          Title, Registration fees                  + $   .00
                   Subtotal                             $  .00
          Cash Rebate from manufacturer      - $   .00
          Cash Down Payment                     - $   .00
          Trade-In car value                       - $   .00
                    Subtotal                             $   .00
          Payoff on your Trade-in                + $ .00
                   TOTAL to Finance                  $ .00
Tip: Be sure you check with your Department of Motor Vehicles ahead to time so you know what the licensing fees are in your state. Also, if your state allows you to deduct the value of your trade-in before figuring sales tax, deduct the trade-in before figuring state sales tax.
Interest calculator
Use an online interest calculator to determine your monthly loan cost for different periods of loan. Just enter in your figures and the interest calculator will do it all for you.
There are many interest calculators on the Internet.
Click here to use one at Edmunds. 
Example:
          Your negotiated cost of the car         $22,000
          Sales Tax (in your state) @ 7.00% +$ 1,540
          Title, Registration, Other               +$     330
          Cash Rebate                               -         0
          Cash Down Payment                     -$   1,000
          Trade-in value                             -$  1,000
          Payoff on Trade-in                       +$     700

          Total to finance                              $22,570
          Loan rate                     7.5%
          Finance Term – if 48 months
               Monthly payment                      $  545.71
          Finance Term if 60 months
              Monthly payment                        $ 452.25
With the interest calculator, you can play with different figures and payoff periods.
About paying off loans
Take a look at the monthly payments in the above examples. If you calculate the monthly payment of $545.71 X 48 months, the total loan cost will be $26,194. If you calculate the monthly payment of $452.25 X 60 months, the total cost is $27,135 - a difference of about $1000 more for the privilege of having an extra year to pay off the loan. That is the first downside of a long term loan.
But now consider this: if you drive 25,000 miles per year, at 4 years your car will have 100,000 miles, and at 5 years your car will have 125,000 miles. Once you get over 100,000 miles on your car, you start having increasing repair and maintenance costs which must be added to your car expenditure budget. With a 4 year loan, you reach a break even point about 2/3 way through the loan, and you can expect to drive your car and have a few thousand dollars of equity to apply toward your next car purchase should you decide to purchase as soon as your loan is paid off.
But when you get a 5 year loan, even though you drive your car for 5 years and 125,000 miles, your car (hopefully still running) has very little equity left.
Consumer statistics show that only about 20% of new vehicle loans are for 4 years or less. Some dealers are even writing six and seven-year loans. How realistic is that? In most cases there is no way the car will even last for the period of the loan.
So what can happen? Say the owner has a 7 year loan. At 6 years, the car stops running and is no longer drivable. But the owner still has a year of car payments left. She has what is called “negative equity” – she owes more than the car is worth. So she buys another car and rolls over her debt (negative equity) into the next car. She is now “upside-down.” This negative loan relationship can continue and grow through owning several more cars. It then becomes a weight that drags you down. I know one couple who is now upside down $15,000 – yes, if their car quit today, they would owe $15,000 – which is affecting the quality of the rest of their lives. And dragging down their credit score too.
Do whatever it takes to avoid this trap. Buy a car you can afford at the best purchase price. Get the lowest possible interest rate. Pay off your loan in the shortest time possible. Save for your next car so you have a sizeable down payment. Drive your old car for as long as you can – at least until the cost of repairs and maintenance outweighs keeping it. Buy a quality used car that has already had major depreciation instead of a new car.