How to Finance an Auto Purchase

When you walk into a dealership, you won’t be there long before a salesperson asks how you intend to pay for your new car.

When the dealer starts in, just explain that you intend to pay in cash. Saying you’ll be paying in cash doesn’t mean you’re going to open up a briefcase with bricks of money inside, it just means that you’re not interested in dealer or manufacturer financing.

In some cases (if you have perfect credit if the car is about to be replaced by a newer model) dealer-sponsored financing might be a good deal, but most of the time it isn’t. You can usually find better deals on car loans at credit unions and banks.

Telling the dealer that you’re not interested in their financing takes away an opportunity for the dealer to pad the deal with an extra profit. Dealers make money on charging you, so they have ways of slipping various extra fees and charges into your financing arrangement. Forgoing dealer financing also allows you to focus on the features and purchase price of the car you want — a far more important and useful task than focusing on the monthly payment figure.

After declining financing, your next task is negotiating the purchase price of the car. Some survival tips:

Resist the temptation to lease. Leasing is basically an extended car rental. When you lease a car, you must return it at the end of the lease or buy it from the dealer at a predetermined price — usually higher than what you’d pay for a similar used car. When you take a loan out to buy a car, you pay down the loan and then the car is yours, free and clear. The only payments you’ll have to make after that are for gas, repairs, and insurance.

Lots of people lease. Smart, respectable people lease. It’s not a terrible thing to do, but it’s not the best way to keep a car because you’re always making payments. Lease a car for three years and, when the term expires, you need to look for a new lease or shell out thousands to purchase the car you’ve been driving.

Consider factory certified pre-owned cars. “Certified pre-owned” is another term for “used.” But these cars do come with extra assurances about the car’s condition. Going pre-owned can be a really smart move because most cars lose 18% of their value in their first year. A certified pre-owned car is one that has been inspected and fixed before it goes on the market, and comes with a manufacturer-backed warranty like new cars do.

Size up your future car loan. Once you decide you want a new car, the first thing you should do is figure out how many cars you can afford. Calculate this amount before you go shopping; don’t let a car dealer influence your decision.

Figure out how big a loan you should get. A good rule of thumb: Your monthly car payment should be no more than 20% of your disposable income. That means that after you’ve paid all your debts and living expenses, take one-fifth of what’s left. That’s your maximum monthly auto expense. Ideally, this number should cover not only your car payment but also your insurance and fuel costs.

Decide how long you’ll give yourself to repay your car loan. A monthly payment is, essentially, the amount of your loan, plus interest, divided by the number of months you have to pay back the loan. The more months you have to pay it back, the lower the monthly payment will be. But stretching out a car loan too long—or any loan, for that matter—will ultimately cost you a truckload more in interest payments.

For example, say you take out a $20,000 car loan at 5%. If you borrow the money over four years, your monthly payment will be $460.59. At the end of four years, you’ll have paid $2,108.12 in interest.

If you borrow the money over ten years, your monthly payment will only be $211.12, but at the end of 10 years, you’ll have paid $5,455.72 in interest.

Keep your loan term to five years or less (three is ideal) and you should be in good shape. If the monthly payments are too much even for five years, the car you’re looking to buy is probably too expensive.

Consider all pools of money. Should you sell investments to pay for the car instead of borrowing at 7%? That’s a tough call; usually, we’d say no. Do not spend any of your tax-sheltered retirement savings (IRAs, 401(k)s), as you’ll pay through the nose in penalties and taxes and rob from your future. As for taxable investments, consider whether cashing out would have tax implications (you’ll pay 15% on capital gains for investments held longer than one year; investments held less than a year are taxed at your ordinary income-tax rate) or whether you may need that money for something else over the next two to three years.

Should you take out a home equity loan to pay for a car, since the interest of those loans is tax-deductible?

Many people think home loans are the perfect way to finance the purchase of a new car. But the length of the term for a home loan — most require payments over at least 10 years, with penalties for early repayment — will send your total costs through the roof, even after the tax savings. Borrow for no more than five years, lease (if you must) for no more than three. If you’re considering a home-equity line of credit to pay for your car, remember that most HELOCs have a variable interest rate, so it’s possible your payments will rise over time.

How to Find the Best Auto Loan

You’re going to show up at the dealer with your own loan, but where should that loan come from?

Begin by getting a sense of the prevailing rate for a new-car loan. Focus on is the APR or annual percentage rate offered by each lender. The APR is the annual cost of the loan or interest rate. With this number, you can cross-compare loans from one lender to another, so long as the duration of the loans is the same.

You’ll probably get the best deal at a credit union— a members-only, nonprofit bank that can offer lower-cost loans than a traditional bank can. But check out rates at traditional banks and online-only car lenders such as YouAutoMotive Auto Loans.

Don’t be distracted by dealerships offering rebates or zero-percent financing if you obtain your loan through them. “Zero-percent financing” means you are not charged any interest on the loan. So if you were buying a car that cost $24,000 and you had a 48-month car loan, your monthly payment would be $500, without any added interest. A rebate is a money taken off the price of the car. Rebates are also called cash-back deals.

Here’s the thing about those offers: The money you save via interest and rebates is probably coming from somewhere. If you qualify for 0% interest (and most people don’t, as it’s given only to people with near-perfect credit), your dealer won’t budge on the sticker price. If you take the rebate, you won’t get a rock-bottom or 0% interest deal.

That’s why splitting up the financing and purchasing of your car is a good idea: First, you can shop around for the best credit-union car loan, and then you go to the dealer and focus on negotiating the purchase price of the car. Bundling the transactions can lead to lots of stress and added expense — you may be so focused on financing costs that you the punt on the purchase price — to keep them separate.

If you do choose dealer financing, be extra vigilant about what you agree to, and what you’re signing—it’s not uncommon for dealers to add in various unnecessary fees (rustproofing, extended warranty) that fatten their bottom line. Question everything that wasn’t explicitly discussed during negotiation, and don’t be afraid to walk away.

There are some easy ways to catch a break with your dealer when negotiating the price of your car. Timing can be everything:

Shop early in the week
. Weekends are prime time for dealers. But if you show up on a Monday, a salesman may be more motivated to cut a deal because business will be slow for the next few days.

Shop at the end of the month. Car dealers get monthly bonuses if they move enough metal. If you show up on the 30th and your salesperson is two cars short of a bonus, he or she may cut you a better deal so to make numbers.

Shop for a car that’s about to be replaced/discontinued. Pretty simple logic here: Things that are about to be considered “old” sell for less. If you’re looking at a 2008 Honda Accord and the 2009s are about to arrive at the dealer, you usually can get a bargain. If the 2009 model is completely new and different from 2008, you’ll save even more. (Who wants to be seen driving the old-looking model? Smart, frugal people, that’s who.) And if Honda decides the Accord isn’t selling much anymore and kills it after the current model year? (OK, fat chance, but this is just an example.) Untold riches await. As do potential maintenance headaches — remember, some cars are unpopular for good reason.

Share this post…

Should You Refinance Your Car Loan?



You’ve likely heard about the benefits of refinancing a home loan. With today’s low interest rates, those who have enough equity in their home and the credit required for a refinance could lower their monthly payments considerably.

But did you know that, similarly, you could lower your car payments by refinancing your auto loan?

A common misconception about auto refinancing is that it is similar to home refinancing in complexity and requirements, says Phil Reed, the senior consumer advice editor at auto information website Edmunds.com. The process is actually much simpler, in terms of both qualification criteria (there is more emphasis on the applicant’s credit than on the balance and value of the car, according to Reed) and the time and costs involved.

Here’s what you need to know about auto refinancing and how to determine whether it could help you save.

Are you a good candidate?

Thanks to today’s low interest rates, anyone who purchased and financed a car a few years ago could potentially find an auto loan with a lower rate. A few general guidelines:

* Is your current interest rate significantly higher than what you could get today?

In the fourth quarter of 2008, a 48-month new auto loan issued by a commercial lender averaged 7.06%. Today, the average rate on a 36-month used-car loan is 5.47%, according to Bankrate. And the average rate on a 48-month new car loan is 4.89%.

“Most people aren’t aware of the interest rates’ impact to their monthly payment,” says Reed. Edmunds and other online resources offer basic calculators that allow you to quickly determine just how significant a lower interest rate can be on a monthly loan payment.

Has your credit score improved?

 

You could save even more if your financial situation has changed for the better – and your credit score is higher — since you took out that original car loan.

As with any loan, you do need good credit to qualify for auto refinancing. However, the criteria is far less stringent than that associated with home loans, says Reed. According to FICO (the company that calculates the widely-used FICO scores), you need a FICO score of 720 or more to qualify for the best auto loan rates. On a $25,000 36-month loan at 4.784% (the national average as of March 30, 2011), your monthly payment would be $747. On that same loan, you’d have a $828 monthly payment if your FICO score was between 620 and 659, which would put you at an average 11.762% interest rate, according to FICO.

Are you in a lengthy loan (five- to eight-year term)?

Jack Nerad, executive editorial director and market analyst for Kelley Blue Bookadvises anyone in a lengthy auto loan (with an original five- to eight-year term), to research auto refinancing.

Many people only pay attention to their monthly payment when purchasing a car and have no idea how much of that payment is interest. The longer the term of the loan, the more interest you’ll fork over to the bank until it’s paid off, even if your monthly payment seems low. Refinancing into a loan with a shorter term will lower the total amount of interest you’ll pay, even if it doesn’t considerably lower your monthly payment.

Avoid Refinancing Your Auto Loan If:

* Your existing loan has a prepayment penalty or the new loan is fraught with fees that would negate the potential interest savings.

Anyone seeking an auto refinance should completely understand the details behind the new and existing loan terms, says Reed.

* Refinancing will extend the life of your loan.

Unless you’re seriously in danger of missing payments or defaulting on your loan altogether, avoid refinancing into a loan that would extend your current one. Your monthly payment may go down, but you’ll end up forking more money to the bank or dealer’s financing arm over the life of the new loan.

How to Get Started

 

Unlike refinancing a mortgage, auto refinancing is quite painless, according to Reed. It can often be handled online, and might take just one or two hours to complete. The first step is to understand your current loan terms (check your monthly statements for the interest rate, remaining balance, and payoff amount) — which you already should have done to determine if you’d benefit from refinancing to begin with.

Reed also advises informing your current lender that you are actively seeking a better deal. They may be willing to refinance your existing loan and save you from switching to a new a lender. As with any rate-based loan, negotiation is always an option, but Reed acknowledges that particularly when dealing with large banks, auto refinancing interest rates may be fairly fixed. Further, the person you are dealing with may not be authorized to make sweeping changes to your loan agreement.

Where to Look?

Don’t ignore dealer finance programs, either. They are currently subsidized by auto manufacturers, making them a potentially competitive resource,

Share this post…

Finding the Cheapest Car Insurance for Teens



If you’ve ever had to buy car insurance for teens, you know coverage can be brutally expensive.

That’s why it’s especially important for parents of teen drivers to compare prices from multiple insurance companies and look for discounts. Our research uncovered rates for families with a teen driver that ranged from about $1,200 per year to more than $20,000.

Car insurance for teens and their families

To give you a rough idea of how much it’ll cost to insure your teen driver, we looked at rates in the eight most populous states for a family with and without a teenager behind the wheel of two popular models. Here’s how much it cost to add a teen to an insurance policy:

ANNUAL INSURANCE PRICE INCREASE TO ADD A TEEN DRIVER

 

State 2015 Toyota Camry 2015 Ford Escape
California $1,208 $1,328
Florida $1,859 $2,267
Georgia $1,631 $1,904
Illinois $1,375 $1,665
New York $1,839 $2,038
Ohio $1,591 $1,923
Pennsylvania $1,644 $1,916
Texas $1,710 $1,901

 

How to score cheap car insurance for teens

If that sounds like a lot of money, a wide variety of discount are available that can help soften the financial blow of adding a teen driver to your policy. Amounts vary by state and company, but “up to” 10%, 15% or 25% off is a pretty common refrain.

Here are some ways to save money:

  • Add the teen to the parents’ policy rather than putting them on their own policy. NerdWallet’s research has shown it’s much less expensive to add a teen to a policy with parents.
  • Get good grades. Families with students with a B or better average in school are frequently eligible for car insurance discounts.
  • Take driver’s training. Young drivers who took a driver’s education course were less likely to get a traffic ticket, less likely to have an accident and less likely to be in an accident resulting in injury or death than those who didn’t, according to a 2015 University of Nebraska-Lincoln study.
  • Leave the car at home. Some insurers offer a discount if the student is attending school at least 100 miles away from home and doesn’t take a car. (Students are still covered when they drive while at home on breaks.)
Share this post…

Advanced Defensive Driving: Take it to the Next Level



According to the National Safety Council, a preventable accident “is one in which the driver failed to do everything that reasonably could have been done to avoid the crash.” Experts agree that driving defensively is your best bet at making sure a crash, collision, or accident doesn’t happen to you. We’ve already discussed the basic concepts behind defensive driving, which include scanning and visualizing everything, having an escape route, and not becoming distracted. Now let’s consider some more advanced, preventive measures a responsible driver can take to avoid a potentially life-threatening crash.

Maintain Your Car

Regular maintenance on your car significantly helps its road performance, especially in potentially hazardous driving situations. You can’t drive a car defensively if its tires are in need of air, windows, rearview mirror, and signal lights are dirty, and brake pads are worn to shreds. Here are a few steps you should take to keep your car running safely and efficiently:

  • Check Your Tires Make sure your tire pressure is where it should be. The recommended pressure for your car’s tires will be in your owner’s manual or in the driver’s side door jamb. When it comes to purchasing new tires, take into account the weather in your part of the country. Four snow tires total is the safest way to go if you anticipate driving in snow and ice.
  • Align Your Tires If while driving your car seems to drift to one side or the steering wheel vibrates, you may need to have the tires aligned. Alignment actually refers to a car’s suspension, which can move out of alignment over time due to normal driving, a minor accident, or bumping against a curb. Check your owner’s manual to see how often your car’s manufacturer recommends aligning your car’s tires. Alignment helps to ensure better handling, which is crucial for good defensive driving, as well as better gas mileage.
  • Clean Your Car A dirty windshield or rearview mirror will prevent you from scanning and visualizing the road for potential dangers. And grimy signal lights or head lights will prevent other drivers from seeing you in bad weather or at night, which pretty much negates any effort you make to be a good defensive driver.
  • Change Your Brake Pads If when braking, you hear squeaking or grinding, your brake pads may be worn out and in need of replacement. Knowing how and when to brake, especially in inclement weather, is a crucial skill for defensive driving. If you have an antilock brake system and need to stop in on an icy road, stomp on the pedal and when you feel the system’s pulses or hear it working, ease up a bit on the pedal until it’s only pulsing about once a second. If you don’t have ABS, you should push the brake hard and when the wheels stop turning, lift your foot so the wheels turn and rapidly press the brake again.

Other Advanced Defensive Driving Tips

  • Yield, Move, Get Out Of The Way Driving defensively, for the most part, involves avoiding overly aggressive drivers. It may be frustrating to just step aside in order to give a bad driver room to do whatever they want, but it is the safest thing to do, not only for yourself but for everyone else on the road. When you encounter a speeding driver pressuring you to go faster, move into another lane, even if it means going slower. As a defensive driver, accept the fact that you may have to sacrifice your right of way in order to avoid a speeding ticket or collision.
  • Plan a Route To avoid a time-consuming and potentially dangerous drive, plan out your route out in advance based on current weather, traffic, and road conditions. Local websites, radio, and even iPhone apps can provide you with the information you need before you hit the road and find yourself navigating road construction or an end-of-the-week traffic jam.
  • Take a Course There’s nothing wrong with taking a driving course to brush up your skills, even if you’ve been driving for years. The AARP even offers a very inexpensive driver safety course in both classroom and online environments. Check with your agent to see if completing a driving course will give you discount on your car insurance or on roadside assistance plans.
 

 

Share this post…

Extended Car Warranty, How To Choose The Right Plan…




There are many extended car warranty programs to choose from but it can be a bit tricky to find a “reputable” plan to suit your needs. The best way to choose a reliable extended car warranty program is to find a company that makes the following criteria…

1. Make sure the company is in business for 10 years or more. This assures you that they are not only in the business of selling coverage but also successfully paying claims.
2. You want to choose a company that has an A+ rating with the Better Business Bureau and perhaps more importantly, is accredited by the BBB which holds them to a much higher standard of excellent business practices and customer service.
3. You want the warranty program to be directly underwritten by a US-based insurance carrier holding at least an A rating with an industry rating service such as AM Best or Standard & Poors. This will assure you that if any part of the claims administration process fails the underwriter will directly pick up all claims if needed.

There are also many different levels of coverage available for your vehicle. These levels are Power train, Major Component Plus, High-Tech Component, Component Type Bumper-To-Bumper, or Exclusionary Bumper-To-Bumper coverage. Depending on the age and mileage of the vehicle all or most of these levels could be available. It is important to look through the different levels of coverage for any companies you are considering side-by-side to make sure that you are purchasing the best coverage available for your needs. Do not rely on plan names such as Platinum, Elite, or Gold as they do not always correctly define the level of coverage you are purchasing. Some less than reputable companies will take a very basic plan and label it with a very fancy name. You want to look at the actual list of what is covered to make sure you are getting what you’re paying for.

All in all, an extended car warranty is an excellent investment and can save you thousands of dollars over the term of the coverage. To begin researching the different types of coverage you can visit Auto Advantage and see what the choices are. It is a great idea to fill out the quote request form and let them send you the specifics including coverage details and pricing.

 

Share this post…