Potential Hazards When Financing Your Vehicle
Millions of people visit their local car dealership each year with the hopes of driving home in a brand new vehicle. Many of them even research MSRPs and other data that help ensure they secure a good deal. But, a lot of buyers would be floored if they knew how a dealer’s profit can be added into the financing process.
If you’re thinking about purchasing a new car and have already secured financing from your bank or credit union, the only step remaining is to negotiate the price. But, if you’re allowing the dealership to carry the financing, beware. The interest rate and monthly payments they offer can be padded in order to eliminate any savings on the price of the vehicle. To help you prepare, I’ll describe 3 hazards that can siphon thousands of dollars from your bank account.
#1 – Not Setting Your Budget
Before stepping onto the dealer’s lot, establish a budget and stick to it. That includes the price you’re willing to pay for a car and the amount of the monthly payments. Often, prospective buyers are lured into paying more than they should or assuming higher monthly payments than is reasonable. Over the course of a 5-year contract, that can add hundreds of dollars to the amount you end up paying for your new car.
#2 – Get Third Party Financing
A lot of people underestimate the value of third party financing as a negotiating tool. If you arrive at a dealership without an approved auto loan from your bank, you’ll be far less likely to get the best deal on a new vehicle. Remember, the numbers can hide plenty of profit. An interest rate that is 2 percentage points above what your bank would offer you can add thousands of dollars to the price of your car.
Before going to a dealership, speak with your bank, credit union, or an auto loan company to secure financing. In most cases, you’re not obligated to use it; if the dealer offers better terms, accept them. But, at least you’ll have the option.
#3 – Know Your Credit Score
Your FICO score will be the determining factor in the interest rate offered to you. However, it’s worth noting that a lot of dealers will try to pad the rate. The reason they do this is because an extra percentage point can yield hundreds of dollars in profit over a 60-month contract. Know your credit score ahead of time and research the prevailing interest rates in your area.
Buying a new or used car is a simple process of negotiating price if you’re a cash buyer. However, if you intend to make monthly payments to the dealer, use the tips above to avoid paying more than you should. The more prepared you are when you arrive at the dealership, the better the bargain you can expect to negotiate.
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