Thursday, January 4, 2007

Buying Your New Car

I have worked in auto finance for many years funding contracts, answering phones in a dealer services group, customer service call center, and as a unit manager for those groups. Over the years I have learned alot about how dealerships sell cars and how finance companies finance those cars. I've learned alot of important tricks that dealers use to ensnare customers. I've also seen customers that have worked out some great deals! I decided to write a blog that shows you how to get a fair deal on a car without paying through the nose.
It's important to recognize that the dealership is in the business of selling cars. In other words, "he's gotta make a profit." Generally, car dealers aren't out to screw you. But, if you aren't paying attention, you may help increase a dealer's bottom line without realizing what you're agreeing to. Hopefully this blog will help you limit the dealer's profit to an appropriate level and keep you from getting into a deal that turns out to be a dud.


There are so many different car makers with so many different models. You can't just walk onto a lot and hope to find the perfect car. The first thing you need to do is think about what you want. Do you want a new or a used vehicle? New vehicles are nice, but they depreciate quickly. That means you may owe more than the car is worth for quite a while (the is called being "upside-down"). Used vehicles are cheaper, but have been driven by someone else. Often you don't know how well that person drove or maintained the car. Do you have a family or are you a bachelor? That may affect how many doors or how much seating you'll need. What kind of budget do you have? We'll talk about financing in a minute, but you definately know whether you're looking for a Kia or a BMW.
If you're reading this, you have online access. Use the Internet. Narrow your search to a few makes and models. Familiariaze yourself with the vehicle's options. Which model has the horsepower you need? Is a sun-roof important to you? Standard or automatic transmission?What about the car-audio, fog-lights, etc? If you're looking for a used car, review a dealership's inventory (most dealerships with a website list their used inventory online).

Now that you've narrowed your search a little, it's time to start thinking about how much car you can afford. The dealership will most likely provide you with a few financing options, but it's still a good idea to review other options as well. If you do business with a bank or finance company that you like, call them. See what they can provide. Call your insurance company and see if they finance cars or have a partnership with a finance company. Many organizations like AAA, CostCo, and AARP have partnered with finance companies to provide discounts to their members.
The important thing is to get an idea of the amount you can borrow, the APR, and the term (in months) that you will get from your choice of outside financing. An approval is your best bet (a pre-approval is not the same thing as an approval). If you get an approval then you'll know how much you can finance, at what APR, and at what term (in months). You'll also be able to calculate your monthly payment. You can use any simple interest calculator (most auto finance websites have calculators as well as websites like Bankrate or Yahoo! ). Play with different terms and finance amounts so that you have an idea of how much you can afford. An approval doesn't mean that you'll have to use that company. It just gives you a tool to make sure you get the best deal from the dealership. (I'll talk about that negotiation in a future posting).
Now that you have a basic idea of the car you want (or at least you know what you're looking for) and you have some ideas about financing, you're ready to make a trip over to the dealership!

Going to the dealership

The first person you'll meet is the salesman. The minute you set foot on a lot, the salesman's only goal is to sell you a car (which is good, because your ultimate goal is to buy a car). However, you need to think about a few things first. First of all, no matter where you live, there is always another dealership nearbye. You need to be prepared to walk away from this dealership at any time. Also, make sure that you do not show your excitement. There's no need to be rude, but make sure you never say things like, "Honey, I love this car!" or "Dear, I've always wanted one of these." It's important that the salesman need you and not the other way around.
When you go car shopping, make sure you have plenty of time (I'm thinking 3 - 4 hours). If you're in a hurry, or have a doctor's appointment in a few hours, it will limit your ability to negotiate a fair deal (I'll explain why in a minute).
Your discussions with the salesman are your opportunities to discuss the vehicle, the options, the availability, and the sales price. Do not discuss any finance details like APR and monthly payment. Your salesman will probably ask you, "What kind of payment are you looking for?" He does not need an answer. Do not give the dealership the opportunity to raise the APR to meet your monthly payment. When asked about the monthly payment, just ask about the total sales price.
Sometimes the sales price seems daunting. After all, a monthly payment is usually $300 - $600, but a sales price is $15,000 or $30,000. This is where the financing research you did earlier comes into play. It's important to know what kind of sales price you can afford. For example. If you want a $400 monthly payment and you got an approval from a bank for 6.95% for 60 months, you would know that you can finance about $20,225.
If you've decided that you will only pay $16,995 for this car and the dealership won't budge from his offer of $18,500 it's time to go. Remember that you'll have this car for quite a few years. Don't pay too much for a car that won't make you happy. Make sure the dealer has your phone number (he may call you with a lower offer later, maybe while you're shopping with one of his competitors).


Now that you've found your car and agreed on a sales price, you've completed one of the most difficult parts of the negotiation. But, you're not done yet. The salesman will take a credit application (I know you already have an approval, but give the dealer the option to beat it). Then he'll refer to you his "F&I guy" (Finance and Insurance). You'll probably have to wait for him. You'll be shown in to a waiting room and told it will be a few minutes. There are two reasons for this. The first is obvious, the F&I employee is with another customer. The second is a "trick of the trade". The longer you wait, the more impatient you get. When you're impatient, you just want to sign the paperwork and get out with your new car. Don't get impatient! This is important. Make sure you're patient enough to read everything before you sign it. Take a book, take a nap, but don't get impatient.
Once you get past the waiting room, you'll be working with the F&I employee. He wants to talk to you about financing and "back-end" products. He's going to ask about your APR. Don't tell him. If you tell him you have a 6.95% APR, he may tell you he can get you a 6.49% APR. That's good, but if he doesn't know what your APR is, he may give you his lowest available offer - and that might be 5.99% (if the dealer can sell you a higher APR, the finance company will give him a share of the increased profit).
You also still don't want to tell the dealer your desired monthly payment. If the dealer gives you a low APR and figures your total amount to finance, he can calculate your monthly payment. If you tell him your desired monthly payment amount, he may increase the APR to match.
If the dealer beats your APR and you decide to sign a contract READ IT! I can't stress that enough. The contract will have a federal disclosure box that will tell you - among other things - the amount you are financing, the APR as a percentage, the APR as a dollar amount, the term (in months) and the monthly payment. Do not let the dealer tell you that the finance company will lower the APR later. If you sign a contract stating that you'll pay $650 a month for 72 months, the finance company will expect you to pay that.

The dealer will also try to sell you "back-end" products. I've tried to list many of these products for you. Some of sales amounts are limited by your state, you'll want to make sure to find out which ones, and what the limits are.

Sales Tax: This is a percentage based on the sales price of the car.
Title & License: This is the amount that the dealership will pay to your state on your behalf in order to get the title and license plates.
Doc Fee: This is a documentation fee that most dealers charge. Some states limit this to $50 (Texas), some to $600 (Florida) and some don't limit this charge at all.
GAP insurance: If you wreck your car, your insurance company will pay what it's worth. If you owe more than that amount, the GAP insurance company will pay the rest. Otherwise, you'd still owe money on a car that you no longer have. If you're buying a new car, have a term longer than 48 months, or have sub-prime credit and have a high interest rate, I would recomend you look into GAP insurance.
Service Contract: Most used cars no longer have a manufacturer's warranty. A service contract may be helpful if your car breaks down.
Life or Disability Insurance: This will pay off your car if you die or are disabled and can no longer make payments.

You are not required to buy any type of insurance or service contract from the dealership.

Now that you've found your car, negotiated the sales price, APR, term, and back-end products, you're ready to sign the contract. Make sure you read everything. Don't believe the dealer when he says it may change later. When you sign a contract, be prepared to make the payments listed on the contract. If you don't understand something, don't be afraid to ask plenty of questions. Once you've signed the contract, you can't take it back!

There may be a little more follow up in the days to come, I've listed that information in the next section.

I hope this has been helpful. Don't be afraid to make comments here if you have questions or need more detail. I'm more than happy to help.


Now that you've signed the paperwork and driven away in your car the dealer will submit your contract to a finance company (if you signed a contract with him). You or your employer may receive calls from the finance company in order to verify certain information from your credit application (i.e. your income, residency, etc).
You'll want to make sure to notify your insurance company of the new vehicle.
You should also receive your title or registration in the mail as well as the licence plates for your car. If you have not received those in a few weeks, call the dealership and ask. Sometimes the dealers wait until they have a bundle to submit to the state, and sometimes the state just works slow.

Enjoy your new car and don't be afraid to ask plenty of questions along the way!

1 comment:

Kevin said...

The link below leads to an article with some good information regarding online financing.