Are you about to head to the dealer to get a new car or truck? New and used car prices are at record highs. In fact, used car prices have increased over 30 percent in the last year. New vehicle prices have only increased about 5 percent, but the lack of inventory means that dealers are not negotiating much on price. MSRP is likely what you will be paying.
What all this means is that you need to prepare for your auto loan more than ever. You are not going to be able to work much on price, so you need to master all the other little details. Let us look at some things you will need to do in order to make sure that you end up with a manageable auto loan payment.
Get Qualified First
The last thing that you want to do is march into a dealership without getting a pre-approved loan offer. Doing so will put you at the mercy of the dealer’s finance department. You may not know it, but dealers make a lot of money off vehicle financing.
The “back end” of a vehicle sale can be very profitable for a dealer. In fact, they can sell a vehicle for a loss and still make thousands of dollars on the deal. They do that by adding one or two percent to the rate they offer you. This is known as the “dealer reserve” and they can use it to make hundreds or even thousands of dollars off your financing.
To protect yourself, get an offer for financing before you go to the dealer. This does two things. It lets you know what rate you qualify for, and it gives the dealer a rate to beat. Getting a loan quote is easy if you have good credit, just put in an application at your local credit union.
But, what if you have less than perfect credit? Even if you have poor credit, it is still beneficial to get a loan quote beforehand. In fact, it may be even more beneficial for you because dealers love to take advantage of those with bad credit. You can go to a website like www.loanmonkey.net and get a quick offer. Even if you decide not to accept a loan, it will give you an idea of what rate you really qualify for. Knowledge is power at the dealership.
Fight The Dealer Add-Ons
Some dealers like to increase their profit margins by installing dealer add-ons. It allows them to advertise a vehicle at one price and then sell it for a much higher one. Dealer add-ons can be anything from window tinting to theft deterrents to maintenance plans.
While some dealers are firm about their add-ons, most will negotiate. Keep in mind that they paid pennies on the dollar for them. That window tint that they want to charge you $600 for, probably cost them $100.
Do not be afraid to ask for the dealer add-ons to be greatly reduced or completely removed from the cost of the vehicle. If they refuse, just be prepared to walk. If you do so, they will either chase you down in the parking lot or you may be forced to find another dealer. In either case, you will come out on top in the end.
Pick The Right Vehicle
You have no chance of securing a manageable auto loan if you start out with a vehicle that is too expensive. You need to be realistic about which vehicle you can really afford, and you need to do so before you hit the lot. If you get your heart set on a vehicle you cannot afford, it can be hard to lower your standards.
To find your price range, take the payment that you want and fit it into an auto loan calculator to determine the maximum price you can pay.
Let’s say that you want to stick with a $400 loan payment. At 6 percent interest, for 5 years, that means that your loan would be $20,000. Before taxes and fees, you would be at around $18,000. Stretch the loan out to 6 years and you can afford around $24,000 or $22,500 before taxes and fees. We would not recommend going any longer than a 6-year term.
Once you have your maximum price, you can realistically shop for a vehicle that suits your needs. Just be sure to stick to your strict price limit because the dealer will try to push you.
We hit on this a minute ago with the “dealer reserve”. You need to realize that the dealer makes money on every part of the purchase process. That means that once you agree on a vehicle sales price, the negotiating should continue.
That GAP policy or extended warranty can also be negotiated. The dealer is likely adding hundreds of dollars to these extras and if you call them on it, you can realize some additional savings.
The problem is that by the time you get into the finance room, you will likely be exhausted and will just want to get out of there. The dealer realizes this, and they even count on it, so do not give in and accept the first offer. If you do, you will absolutely wind up paying more than you need to. No matter what, send the first finance contract back and ask for lower interest or a cheaper extended warranty.