Tag: Cars

Advertiser Disclosure

Auto Loan

Why You Shouldn’t Take Out an 84-Month Auto Loan

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Advertiser Disclosure

Part I: The Truth About Long Term Auto Loans

When poor credit and high monthly payments are keeping you from buying the car you need, it may be tempting to lower your payments by signing up for a 72-, 84- or even 96-month term loan. Before you do, it’s important to know exactly what you’re signing up for — and be sure you’re making the right move for your finances.

Lower car payments with longer terms mean you’re paying more in interest, and loan companies love this for obvious reasons. Evidently, consumers do, too. In the first quarter of 2017, new car loans with terms from 73 to 84 months represented 34.9 percent of all auto financing. For used cars, they represented 19.5 percent.

Most of the big dealerships offer 84-month financing through banks like Ally Financial or Santander. Local dealers are also known to offer longer term financing offers, typically through third party financing companies, credit unions, or insurers like Nationwide.

Let’s take a look at what you’re getting into when you choose a longer term on your auto loan…

Note: These numbers don’t include tax, title, or registration, which will only increase the amount of interest you pay if you include those costs in the total amount you borrow. These numbers also don’t include any down payment or trade-in you may have, which will decrease the amount of the loan and the amount of interest paid.

5 reasons long auto loan terms are a bad idea

  1. More interest. As you saw in the example above, you’re going to pay a lot more interest on a car loan with a longer term. If you spend more than those average amounts on a new or used car, the amount of interest you pay is only going to go up.
  2. Your loan will outlast your warranty. Most manufacturer’s warranties last 3 to 5 years, so you’ll be paying on your loan for an additional 2 to 4 years after the warranty runs out. Which leads to…
  3. New car payment, old car repair costs. Think about this. You’re going to be making your car payment for the next seven years. With a shorter term, you’d have paid off your vehicle before you started paying for costly repairs. But with an 84-month loan, you’re going to be paying both your monthly loan and the inevitable repair costs that come with an older vehicle.
  4. Negative equity. Stretching out a car loan over time means you’re paying less on the principal and more in interest with each payment. As your vehicle continues to decline in value each year, you’ll continue to be upside-down on your loan unless you made a significant down payment.
  5. Unable to refinance. If you’re upside-down on your loan, meaning you owe more on your loan than the vehicle is worth, you’ll be unable to refinance your loan.

When it makes sense to get an 84-month auto loan

  • You absolutely can’t afford a car any other way. This is probably the number one reason why people choose longer terms on their auto loan. An 84-month auto loan will lower your monthly payment, allowing you to purchase that vehicle that otherwise would be just out of reach. However, you should consider whether you’re borrowing too much if you can’t afford the monthly payment on a shorter term loan. Can you compromise by buying a used car at a lower price point? Or, could you scrounge up more money for a larger down payment to reduce the amount you need to borrow?
  • You have higher interest debt to worry about. If you have other loans at a higher interest rate, it may make sense to get a lower monthly loan payment so you can free up capital each month. That way, you can use the extra money you’re saving to pay down higher interest loans.

How to make the most of a long-term loan

  • Compare rates. Companies like LendingTree and MagnifyMoney allow you to compare auto loan rates from multiple lenders. So you can make sure you’re getting the best deal and a low APR. (Disclosure: LendingTree is the parent company of MagnifyMoney)
  • Buy now, refinance later. If you’re absolutely bent on getting a certain car now, you can always choose to refinance down the road, when your financial situation improves.
  • Make a larger down payment. Getting out of a bad car loan can be difficult when you’re upside-down. By putting more down on your vehicle up front, you’ll prevent this from happening while saving money in interest and avoiding gap insurance.
  • Buy used. The average used car payment is $145 less than the average new car payment, according to Experian, so save yourself some money with a more affordable monthly payment by buying a used vehicle.

5 tips to lower your costs of borrowing

  1. Keep your car after it’s paid off. Once your car is paid off, keep it — especially if it’s reliable and gets good gas mileage.
  2. Make an extra payment each month. By paying an extra $100 per month, you could save $1,819 in interest and own your car in a little over five years when you buy a $30,534 new car with an 84-month loan. When it comes to that $19,126 used car, you’d save $1,598 in interest and pay it off in under five years.
  3. Compare rates. Shop around for the best rates, and get multiple offers from lenders to compare. A difference of 3 percent on your interest rate could save you $3,689 on that 84-month new car loan of $30,534 and $2424 on that $19,126 used car.
  4. Buy used. With used car payments an average of $145 less than new, you’ll save a lot when you buy used over new.
  5. Don’t finance extras. Pay up front for your license, tax, and registration. If you purchase an extended warranty or prepaid maintenance package, don’t finance those into your loan either.

Part II: Understanding the Auto Loan Process

84-month auto loan
Source: iStock

Most people do it backward — they go shopping for a car first, then shop for a loan. When you do this, you’re making yourself vulnerable to high-pressure sales associates and putting yourself at a disadvantage when it comes to financing your vehicle.

When you get pre-approved for auto loans before heading to a dealership, you have an understanding of how much money you can qualify for, so you’re not shopping for vehicles that are too expensive. You also have a loan amount and interest rate to compare any other financing that’s offered to you.

How to get pre-approved for an auto loan

You can get pre-approved with a bank, credit union, auto finance company, or dealership finance center.

  1. Research rates online. Many sites, like MagnifyMoney’s parent company Lendingtree.com, will offer auto loan rates online. It’s a good idea to check them out so you have an idea of what’s being offered. Keep in mind that your creditworthiness will affect the rates you’re able to qualify for, and the credit score for an auto loan is a little different from other loans.
  2. Gather your documents. Get everything you need together before calling or taking a visit to your lender. This may include:
    1. Personal information, like your name, address, phone number, and Social Security number.
    2. Employment information, like your employer’s name and address, your title and your salary
    3. Financial information, including what kind of credit you have available now, your current debts and your credit score.
  3. Apply. Choose a few lenders and apply online or in person for your auto loan.
  4. Get a quote. Once you’ve completed the loan application and you’ve been pre-approved, you’ll receive a loan quote showing how much you qualify for, the interest rate and the length of the loan. You can take this to the dealership with you when you’re shopping and use it as a negotiating tool.

For more information on your loan choices, check out these resources:

Getting a cosigner for an auto loan

Having a co-signer can help you qualify for a loan you wouldn’t otherwise get. As long as the co-signer has a strong credit score, it’s likely you’ll qualify for a better interest rate using a co-signer too. And making on-time payments on this type of loan will help build your credit.

The drawbacks of having a co-signer are that the cosigner is responsible for the loan if you fail to pay. If this happens, chances are you’ll negatively affect your relationship with whoever cosigned for you. If that’s a friend or family member, (which it usually is) look out! Think twice about the responsibilities of having a co-signer, and the importance of paying back the loan, so you don’t leave your cosigner on the hook for money you borrowed.

Understanding your auto loan contract

Here are some key terms you’ll need to know when it comes time to signing a contract.

  • Sticker Price – A manufacturer’s suggested retail price that is printed on a sticker and affixed to a new automobile
  • Purchase Price – This may be less than the sticker price, and is the price you agree to purchase the vehicle for from the dealer.
  • Amount Financed – This is how much money you are borrowing and the amount you’ll pay interest on. Be careful about financing extras into your loan, as doing so may put you upside-down in the vehicle.
  • Down Payment – An amount of cash provided at the time of vehicle purchase and credited toward the purchase price of the vehicle to reduce the amount financed.
  • Interest Rate – The amount of money charged for loaning money, expressed as a percentage of the Amount Financed.
  • Fixed-Rate Financing – With a fixed rate, your interest rate will never change and you’ll always pay the same amount each month.
  • Variable Rate Financing – A variable interest rate is subject to change and may increase your monthly payment amount.
  • Monthly Payment Amount – This is how much you’ll pay each month.
  • Finance Charge – This is a fee, charged by the lender, for extending you credit.
  • Annual Percentage Rate (APR)APR includes both the interest and fees expressed as a percentage, making it easier for you to compare multiple loan offers.
  • Term — This is the length of the loan expressed in months, usually 36, 48, or 60.
  • Extended Warranty Contract – An extended warranty covers the vehicle beyond the manufacturer’s warranty for a fee.
  • Guaranteed Auto Protection (GAP) – If you owe more than the car is worth, you’ll be offered GAP insurance, which will cover the difference if the vehicle is lost, stolen, or totaled.
  • DMV Fees – These may include title, license, and registration.
  • Title — The legal document proving ownership of a vehicle.

Auto loan contract traps

Here are few traps dealers can use against you. Know them so you can protect yourself and avoid getting ripped off

  • Rate mark ups. Your dealer is getting financing from a bank, and they mark up the rate, charging you an extra percentage or two when you could have just gone directly to the bank in the first place.
  • Yo-yo financing. The dealer says you’re approved and you drive away. Later, the dealer says you were denied, and asks for a larger down payment or increases the interest rate. If you refuse, you must return the vehicle, and the dealer may try to keep any deposit you made.
  • Falsified credit application. Sometimes dealers will falsify information on your credit application, like increasing your income, to help you qualify for a vehicle you wouldn’t otherwise qualify for. Be sure to check your credit application before signing.
  • Selling extras. Whether it’s GAP insurance, prepaid maintenance, or extended warranties, the dealership is going to try to upsell you on some extras to rack up the charges and, if you agree to roll it into your financing, increase the amount of interest you pay. Be careful when selecting these extras and make sure you understand what you’re getting and know it’s worth the expense.
  • Negative equity financing. If you owe more on your trade-in vehicle than it’s worth, dealers will try to offer you a deal where you roll the negative equity into your new auto loan.
  • Extra charges. Look over your contract for any extra charges. One way to spot these is if they’re pre-printed on the contract. Many of these charges are not required and can be negotiated down.

Using an auto loan to improve your credit

If you’re working toward improving your credit, there are two rules you must follow. And while going from good to excellent isn’t easy, there are a few ways your auto loan can help you improve your score.

  • Payment history. On-time payments are 35 percent of your FICO score, so paying your auto loan on time will help with your payment history.
  • Credit mix. Because having a mix of different types of credit (home loans, personal loans, credit cards) makes up 10 percent of your FICO, throwing an auto loan in there will certainly improve your mix.
  • Report to credit bureaus. Make sure the lender you’re working with reports your payments to the three major credit bureaus. Beware of “Buy here, pay here” dealerships who may or may not report your payments to the credit bureaus.

And if you want to prevent your credit from getting worse, make sure you don’t do any of the following:

  • Make late payments on your auto loan.
  • Stop making payments and get sent to collections or have your car repossessed.
  • Include your car loan in your bankruptcy (if applicable).

When it makes sense to lease vs. buy a car

If you’re taking out a longer term loan in order to lower the monthly payment, you may want to consider leasing as an option. There are some things you should know before leasing a car, especially if you’re comparing leasing to buying. And while leasing isn’t for everyone, it can be a viable alternative to taking out an 84-month lease. in fact, according to Experian data, the number of people taking out a lease continues to increase.

“Another reason why we see consumers increasingly choose to lease, is they’re generating around $100 lower payment. And the biggest difference is in non-prime, [where there’s a] $109 difference between a loan and a lease,” says Melinda Zabritski, senior director of sales at Experian.

The Pros and Cons of Leasing a Car

Pros:

  • Lower monthly payment. The payment to lease is an average of $100 less than buying according to Experian’s 2017 report.
  • Warranty coverage. The average lease lasts 36 months and during that time, you’ll have full warranty coverage for anything that goes wrong with the vehicle.

Cons:

  • Mileage penalties. Most leases have a limit on how many miles you can drive (10,000 per year for an average lease), and you’ll pay for additional miles you drive unless you secure an extra-mileage or unlimited-mileage lease upfront.
  • Wear-and-tear fees. Nicks, scratches, stains — they all amount to extra wear and tear on your leased vehicle, and you’ll pay for them at the end of your lease. So if you’re hard on your vehicles, buying may save you some money here.

The Pros and Cons of Buying a Car

Pros:

  • Ownership. Once you’ve paid off your loan, the vehicle is yours.
  • No mileage penalties. Drive as much as you like, you won’t pay a dime for “extra” miles you drive like you would with a lease.

Cons:

  • Maintenance and repairs. With ownership comes responsibility. In addition to being responsible for the maintenance, once the manufacturer’s warranty expires, you’ll be responsible for all any repair costs needed. That’s why some people consider buying an extended warranty.
  • Loss of value. Although you won’t pay fees for wear and tear, or extra miles you put on the car, those things will still lower the value of the vehicle when it comes time to sell it. And every year you own it, the value of the vehicle is likely to continue to decrease.

The Bottom Line: Is an 84-month auto loan ever a good idea?

In our opinion, no. Most people make the choice to take out a longer term auto loan in order to lower their monthly payments to afford the car they want. ‘Want’ being the operative word here. Chances are, you can purchase a less expensive car that would give you the same monthly payment. Although it’s difficult, putting your emotions aside can really help you make a financially sound decision when it comes to choosing the terms of your auto loan. If you know this is an area where you struggle, ask for help from a friend or family member who can be the voice of reason.

If you do choose to go with an 84-month auto loan, just understand that you’ll be paying more interest on your loan. And hopefully, you have a good job for the next seven years to help you pay for it.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Ralph Miller
Ralph Miller |

Ralph Miller is a writer at MagnifyMoney. You can email Ralph here

TAGS: ,

Advertiser Disclosure

Auto Loan

Shopping for a New Car? Use the 20/4/10 Rule

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Advertiser Disclosure

auto car driving drive

Imagine you’re in the market for a new vehicle. Where do you begin your car-buying process? Do you already have a dream make and model in mind? What’s your budget? Are you already browsing the interwebs for the car you want? If you are, you’re already starting off on the wrong foot — at least according to the 20/4/10 rule.

What is the 20/4/10 rule?

The 20/4/10 rule helps car shoppers figure out how much car they can actually fit into their budget before falling in love with a vehicle they can’t afford. It emphasizes calculating what you can afford before you set out shopping.

The rule might seem obvious — before you buy something, you should make sure you can afford it, right? — but it gets tricky when it comes to financing, and many don’t take the time to include annual ownership costs. If you don’t, you could end up with monthly transportation costs that could force you to live paycheck to paycheck or take on more debt.

Follow the 20/4/10 rule, and you might avoid accidentally biting off more than you can chew.

Rule #1: Put down at least 20%

A vehicle is a depreciating asset. The experts at Carfax estimate a new car loses 10% of its value the moment you drive off the lot. And the depreciation continues from there. Edmunds.com estimates a new vehicle loses over one-fourth of its value in the first year alone. For that reason, you should be prepared to put down at least 20% of the purchase price. If you do this, you’ll finance payments for the vehicle’s actual estimated value when you leave the lot instead of the full purchase price, which the vehicle isn’t worth anymore.

Take this example: You finance a new car for its full purchase price of $34,000, then lose your job the next day. Now, you might need to sell your new car, but you can sell it for only $30,600 — because the car already lost 10% of its value once it left the lot. Since you put $0 down at financing, you’ll still owe $34,000 after the sale. On the other hand, if you’d put down at least $6,800, you could sell the car that day for its estimated value and only lose out on half your down payment.

You might not be able to estimate exactly how much car you can afford, but if you are able to put down at least 20% of the purchase price, you should be in an OK financial position. On top of that, you’ll have smaller payments and possibly finance it for a shorter period.

Rule #2: Finance the vehicle for no more than four years

The longer your financing agreement is, the more you’ll pay in interest over time. So don’t be swayed by dealers or lenders who try to sell you on a lower monthly car payment — chances are your payment is so low because the term of your loan is long.

You can use the MagnifyMoney loan calculator to see this rule at work. If you borrow $25,000 to purchase a car (at a 4% APR) and agree to a six-year financing deal, you’ll wind up paying $3,161 in additional interest charges by the time you pay off the loan.

If you agree to a four-year loan instead, you’ll pay just $2,095 in interest — a savings of over $1,000. Of course, that shorter term loan also comes with a higher monthly payment — $564 versus $391 — but you are saving more over the long term.

Think of it this way: If you can’t afford the monthly payment required to pay off the car in four years or fewer, it’s probably outside of your budget.

Rule #3: Keep your total transportation costs under 10% of your monthly income

This last part is where it gets easy to overspend. You should try to keep your total transportation costs — your car payment, insurance, gas, and maintenance — under 10% of your monthly income.

So, if you earn $5,000 per month, your total transportation costs shouldn’t cost more than $500.

How to save on the cost of a new car

Try these tips to keep your overall transportation costs low.

Get pre-approved for financing

Avoid financing your vehicle through the dealer, and get pre-approved for financing at a lower rate before you show up at a dealership. Financing your auto loan at a lower rate can reduce your monthly loan payment. If you walk onto the lot with a pre-approved auto loan rate from a bank or credit union, you can use that as leverage for negotiation.

However, if you let the dealer find the loan for you instead, you’ll lose negotiating power, and there won’t be a way for you to tell if the dealer’s loan rate is the best offer you can get. Avoid making these other common mistakes when searching for a car loan.

Buy used

More people are purchasing used cars than ever before and saving a bundle in the process, according to Edmunds. Over 38 million vehicles sold in 2015 were used, a year-over-year increase of 5.6%.

When you buy used or certified pre-owned vehicles, you avoid financing a larger balance, and could even skip financing altogether if you’ve got enough cash on hand. If you buy used, avoid engine trouble by having the vehicle inspected by an independent mechanic before you sign off. You can use a resource like Car Talk to find a mechanic in your area.

Buy a car that holds its value

Depreciation is a car owner’s largest transportation expense during the first five years of ownership, more than fuel, maintenance, and even insurance.

A car that holds value well will depreciate less over time compared to the average vehicle, so you may not lose out on as much in depreciation costs if you sell the vehicle after a few years. Carmakers like Honda and Porsche are known for building vehicles that hold their value well over time according to Kelley Blue Book.

Lease instead

Leasing a car will usually result in a lower monthly payment, and you’ll likely save money with a lower down payment and lower tax fees over time. However, you could be subject to extra charges if you ding up the vehicle, or drive more miles than stated on the lease agreement. It doesn’t always work for everyone, so consider your personal needs first.

On the plus side, you’ll upgrade to a new vehicle every few years and won’t need to deal with the hassle of selling a car.

Look for gas savings

Gas isn’t always an unavoidable expense. You can make a few changes to your fueling habits like filling up before you hit “E” or signing up for a gas rewards credit card to save money. You could also cut down transportation costs by cutting back how often you drive or by carpooling some days to school or work. Learn more ways to reduce your gas spend here.

Comparison shop

Don’t get lazy with must-haves like maintenance and insurance for your vehicle. Comparison shopping is the best way to save on costs like these that may differ from provider to provider. Insurance companies have made it easier to compare quotes with online comparison portals like this one from Progressive. You could also try going through your bank or credit union for discounted rates with select companies.

Don’t just take the first estimate you get for a repair. Mechanics are known to pad the bill with unnecessary repairs from time to time. After you figure out what’s wrong with you vehicle, get an estimate from a few different mechanics in your area. That way you’ll make sure you’re getting the best value before paying for maintenance and repairs.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

TAGS: ,

Advertiser Disclosure

Featured, News

5 Lies Your Car Mechanic Might Tell You

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Advertiser Disclosure

 

By Kelsey Green

Whether you’re getting an oil change, having your tires rotated, or facing a more complicated repair, like replacing the alternator, it’s possible your visit to the auto repair shop will end up being more expensive than you anticipated.

Automobile maintenance costs an average $792 per year, according to the AAA’s 2016 “Your Driving Costs” study, and you don’t need mechanics padding their bills with unnecessary repairs and charges.

Most technicians genuinely want to help, says Lauren Fix, who is known as “The Car Coach” and is the spokesperson for the nonprofit Car Care Council. But there are times when you should question what the mechanic tells you.

Here are five common lies and ways to combat them.

1. “You can use any kind of oil in your car.”

Technicians often say you can use any oil in your car despite what your service schedule or car manual states.

“Run the oil that your service schedule tells you,” Fix says. “Running the wrong oil in your engine can void your warranty.”

If your car needs synthetic oil, which is for turbocharged, supercharged engines, or high-performance vehicles, make sure your technician uses that kind.

2. “You need to fix this now before it’s a problem.”

Sometimes a technician may exaggerate a problem because he wants to talk you into paying for a repair you may not need at that time.

Check your service schedule before saying yes, because it’s the “Bible for your car,” Fix says. If you’ve lost your service schedule or you bought a used car, check out carcare.org for a customizable service schedule specifically for your vehicle. This will act as your guide.

You can save more than $1,200 a year in repairs if you follow your service schedule and are proactive with any problems, the Car Care Council states.

Fix also warns that sometimes a technician will exaggerate to make you understand that there is actually a problem with your car. Ask for a second opinion if you’re unsure.

“Even if he finds a new problem with your car while working on a problem you have already discussed, you have to assume that it is possible,” Fix says.

3. “That damage didn’t happen here.”

Sometimes it’s just a small scratch or ding. Accidents happen, even by people who are paid to repair your car.

A California shop tried to cover up severe damage to Michelle and Albert Delao’s automobile after it fell several feet from a lift in 2015, the couple says. Employees didn’t tell the Delaos what happened to their car, instead saying that the shop was waiting on a part. The store offered to pay for a rental car while their vehicle was being worked on.

When they finally got their car, Michelle says she immediately knew something was wrong.

“I could tell from little things about the way the car was driving,” she says. “It was wobbly, and we could hear glass in the passenger window, which was weird, because we never had a glass or window problem before.”

To try to resolve the problems, they purchased a new set of tires to stop the wobbling. But they got a call a month later from a technician at the shop, they say. The couple learned that the car fell several feet onto its side, piercing the bottom and shattering the front passenger window, along with other damage to the car’s body. When the technicians could not get the car off the lift, a tow truck was called to pull the vehicle down, causing more damage, they say.

When she called the manager and store to ask about the incident, Michelle says both denied anything happened until she showed the owner the pictures from the technician.

After finding out the true extent of the damage, the Delaos took their car to the dealership, which confirmed all the damage at over $20,000, totaling their car. The couple has filed a lawsuit against the auto repair shop.

The incident has given the couple a severe distrust of technicians, Michelle says.

“It’s just sad, really,” Albert says. “It’s like when people need to go to the doctor. We have to have our car. We don’t know anything about it. We’re not mechanics.”

4. “This part cost more than we anticipated.”

An easy way for technicians to make more money is by overcharging for a part or repair. If you’re not sure how much a repair will cost, get multiple quotes in writing.

“Never do anything without getting a quote in writing,” Fix says. “That is how you know someone knows what they’re talking about and will uphold that when you get it in writing.”

If you don’t like to go in blind, you can get a general idea of what a repair or part will cost with research.

“Education and information are power,” Fix says.

Fix suggests RepairPal.com, which helps people not well versed in car mechanics be more prepared for when someone gives them a quote. You can type in your car’s mechanical issue to research the problem and the reliable cost for the part and labor for your area.

5. “The cheap tires will be just fine.”

When it comes time for new tires, technicians may try to talk you into buying the cheapest brands. Don’t listen, Fix says.

“When people come in saying they need to replace tires, they need to use the same tire brand and size,” she says. “The size and brands of the tires impacts your handling, traction, and safety for your car.”

Tires recommended by Consumer Reports, for example, range from $64 to $121.

Tips for finding a reliable car mechanic

  • Go to a certified technician. Look for signs that state the shops are certified by the Automotive Service Association (ASA) or the National Institute for Automotive Service Excellence (ASE). “Find a master technician when you can,” Fix says. “They are the best in the business.”
  • Ask your friends and family. Personal experience is the best way to find a reliable technician, so ask the people you trust.
  • Check with a dealer. Along with specializing in your car, they can also help with recalls or possibly help find you a new technician if your warranty has expired.
  • If your vehicle is safe to drive, take it to another mechanic for a second opinion.
  • If your check engine light comes on, head to your local auto parts store, not a mechanic. Their equipment will find the issue, which empowers you with information before you schedule your car for service.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

MagnifyMoney
MagnifyMoney |

Have a question to ask or a story to share? Contact the MagnifyMoney team at info@magnifymoney.com

TAGS: ,

Advertiser Disclosure

Auto Loan, Featured, Personal Loans

5 Things You Should Do Before You Buy a Car

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Advertiser Disclosure

When it comes to buying a car, whether used or new, the real work should happen before you even set foot on the lot. Taking the time to go through a few crucial steps will make your time at the dealership a breeze. To top that, a few pre-checks could save you money, time, and the hassle of dealing with a bad auto purchase in the future.

When you finally get to the dealership, Jack Nerad, executive market analyst at Kelley Blue Book, says it will pay off to come with a price in mind and all of the legwork done. The salesperson is going to ask you questions like what you’re looking for, how soon you’re going to buy, if you’ve looked at other dealerships, and what you do for a living, because they want some sense that they aren’t wasting their time with you.

“Demonstrate to them in your answers that you know about your own finances and that you know largely what you want in terms of a vehicle, and it will go pretty well for you,” says Nerad.

 

Step 1: Set a budget

When you get to the lot you should already know your credit score and how much you can afford for a car. Make sure to set a budget, and stay under your budget if you can. Unless you’re paying cash for your car, you’ll likely finance or lease your vehicle, so you should figure out how much you can afford in a monthly payment. Generally, all your monthly debt payments — credit cards, auto loans, student loans, and mortgage — should not exceed 50% of your monthly income.

Outside of the value of the car, you should budget for the taxes and any other one-time costs such as title fees and dealer fees. It could also be beneficial to create some space in your personal budget for costs such as gas and insurance. You may also want to open an alternate savings account to allocate separate funds to recurring costs such as ongoing maintenance, car insurance, and any future repairs.

“They are going to try to sell you more stuff like the insurance, treatments, etc. Most of that stuff is not worth nearly what they are selling it to you for,” says Nerad. “It could hurt the deal that you’ve worked hard to get. Just say no to most of it or do it aware of the financing.”

Don’t forget to weigh your savings options. Consider putting down a larger down payment if you can. If you won’t need it anymore, selling or trading in your current vehicle can help you come up with extra funds for a down payment. You could also consider a less-expensive vehicle, cut back on the add-ons and features, or improve your credit score, to save on the overall cost of the vehicle.

Step 2: Get pre-approved for financing

Shopping for an auto loan is another tedious process, but you should have already completed the first step in setting your budget.

Your next step will be to shop for the best used-auto loan rates and get pre-approved for the best offer for which you are eligible. What’s better, you won’t need to leave your computer to shop for an auto loan. A growing number of online-only banks, such as LightStream, PenFed, and Capital One, offer competitive interest rates on auto loans. Your best bet is to get pre-approved for financing before you get to the dealership. Coupled with your budget, getting pre-approved will help you have an idea of what your monthly payment will be.

When shopping online for a used-auto loan, the application process will look like that of a brick-and-mortar bank, but more streamlined. You should have the following information at hand:

Your contact information: Name, address, phone number, email address

Vehicle information (if known — required for lenders that do not offer online pre-approval): Make, model, mileage, VIN, dealership information

Your financial information: Employment information, gross income, and expenses

While you’re at the dealership, negotiate the price of the car before telling the salesperson that you are approved for financing. When the salesperson tries to get you to finance the purchase through the dealership’s affiliated lender, you can show them your pre-approved financing offer. There is a good chance they will try to beat your pre-approved offer, which could save you thousands of dollars in interest over the life of the loan. If they can’t beat it, you’ve already found your lowest rate and can continue your vehicle purchase.

Step 3: Choose your vehicle

Research and make a decision regarding what kind of car you want. You can use websites like Kelley Blue Book, Edmunds, and TrueCar to figure out a fair purchase price.

During your search keep in mind all of the specifications that are most important to you. You should think about how you intend to use the vehicle, not just how cool you’ll look in it. If you have a long commute to work, fuel economy may be important to you. If you have small children, having enough space for a car seat could possibly weigh in your options. If you live in the city, you might want to consider how much parking parking space you’ll have access to. Get the picture? A few other considerations:

Do you want a new car or a used vehicle?

Do you want to lease or purchase?

Do you need all-wheel drive?

Do you need a lot of cargo capacity?

How many passengers do you need to carry?

What type of driving do you do: highway, surface streets, off-road?

What safety features are important to you?

Will you drive in ice and snow?

Will you be doing any towing?

Again, think about what you need in addition to what you want.

When it comes to add-ons, remember anything you add — line items such as tire treatments, insurance, etc. — will be factored into the total purchase price and financing. The salesperson at the dealership may try to get you to purchase more than you bargained for, so come in knowing what you want to add on and where your line is drawn in your budget.

Step 4: Pick the right dealership

Next, you should find out who has the car you want within your budget. Back in the day, you would have combed through newspaper advertisements or had to visit several dealerships in person to see the cars you’re interested in. Now, with the internet, you can view multiple cars at several dealerships in your area and set filters to make sure they have what you want, for the price you want.

“More often than not the sales process is going to depend on the dealership and training of the salespeople there. If you come in knowledgeable, then you are going to be in a way better position,” says Katherine Hutt, director of communications at the Better Business Bureau.

After you get a healthy list of the dealerships in your area that have the car you want, you should check out their ratings on the Better Business Bureau website. Search for auto dealers in your area to find out which ones are BBB accredited, then look at the company’s profile to see if and why they have had any complaints filed against them.

Checking the dealerships for any serious complaints regarding their sales tactics or a negative rating will help you decide which ones are worth visiting.

Step 5: Run a background check on the car you want

Consumers for Auto Reliability and Safety (CARS) is a consumer advocacy group for the auto industry best known for leading the nationwide adoption of the lemon law, which entitles consumers to reimbursement or compensation if they are sold a vehicle that fails to perform as it was expected to within a certain amount of time.

Founder Rosemary Shahan encourages consumers to check the vehicle’s background by getting a vehicle history report through resources such as the National Motor Vehicle Title Information System, CARFAX, and AutoCheck.

In the vehicle history report you should check…

Name and description

Check the name and description that pops up to make sure the car you are looking at is the same as the car in the report. This will help you avoid VIN cloning, a type of vehicle fraud that involves using a VIN from another registered car and putting it on a stolen or similar vehicle, as well as other forms of vehicle fraud. Check for the name, color, and even details like the engine type to make sure you have the right car.

Number of owners

The number of owners a vehicle has had should be weighed cautiously in your consideration. You can’t be sure that each owner was a responsible and caring car owner like you, but the chance that the car has had a bad owner rises with the number of owners it has had. However, there is no magic number of owners that will disqualify a used car. Overall, you should place more import on the vehicle’s mechanical condition and how it has been cared for than on the number of owners it’s had.

Routine maintenance

Check to see that the car was regularly serviced. If it was, it will usually last longer and may be more expensive in general. The details about the vehicle’s maintenance may also help you answer any questions you may have about its repairs or servicing. If you know where its other owners took it for servicing, you can call up those locations and ask them if they can clear up anything that concerns you.

Anything suspicious

Be sure to ask about records that don’t quite line up. For example, if you see any records of body work but no reported incident, you should look into why the vehicle got work done. It’s not often that owners want a new side door and coat of paint just to spruce up the vehicle. It’s more likely that there may have been an accident that prompted the body work.

Finally, have the car looked at by an unaffiliated mechanic before buying no matter who you choose to purchase from. You can use a resource like Car Talk to find a mechanic in your area.
When you’ve checked off these steps, pay attention to what the salesperson tells you to make sure you get the best deal.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

TAGS: ,

Advertiser Disclosure

Featured

3 Mistakes People Make When They Need a Car Loan

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Advertiser Disclosure

Car Loan

Shopping for a car loan can be a financially and mentally draining experience. More than 86% of car buyers used at least some amount of financing to purchase cars in the beginning of 2016, according to the latest data from Experian.

Unfortunately, many car buyers make crucial, yet preventable, mistakes when they take out a loan for a new car. The MagnifyMoney research team decided to find out just where shoppers are going wrong. We asked more than 600 car owners a series of questions about how they shopped for a car loan.

The answers we received were pretty troubling, to put it mildly. Read on to see where buyers are going wrong:

1. Too many people let their car dealer do the homework for them.

Nearly two-thirds of the drivers we surveyed committed the ultimate auto financing mistake: they let the dealer find their loan.
When you let the dealer decide find the loan for you, you have no way to gauge whether what’s presented to you is in fact the absolute best offer you can get. You also forfeit pretty much all of your negotiating power right off the bat. Only about one-third of the borrowers we surveyed shopped online for a loan with a lower interest rate before walking onto the dealer’s lot. Spend some time on comparison websites before you go to the dealership to get the best rate.

[Disclosure: LendingTree is the parent company of MagnifyMoney.]We recommend starting with LendingTree. There are hundreds of lenders participating on this platform. Once you complete the application, you can then see real interest rates and approval information. Some lenders will do a hard pull on your credit, which is normal within the auto lending space. Remember, with auto loans, multiple hard pulls will only count as one pull. So, in this case, the best strategy is to have all your hard pulls done at once. You can shop for the best rate on LendingTree’s website.

Once you get the rate, you can always try to make the dealer give you a better deal. But you should never walk onto the lot without a low rate in your pocket.

“Many otherwise-savvy consumers feel intimidated by the car buying experience and react by letting the dealership take control of the deal,” says Thomas Nitzsche, a credit educator at Clearpoint Credit Counseling. “Some consumers also feel their credit is barely good enough to secure an auto loan, so take whatever they are offered or buy into the dealers telling them that they are doing them a favor.”

Tips on pre-shopping for an auto loan:

Empower yourself by shopping for auto loans before you head to the dealership. When you walk into a dealership with a pre-approved auto loan rate from a bank or credit union, you can use that as leverage. Your dealer will be more inclined to match that rate or find you a better deal, explains Matt DeLorenzo, a managing editor at Kelley Blue Book.

“With the resources available on the internet, from financing to determining what your trade-in is worth, there’s no excuse for walking into a dealership not knowing the prevailing interest rates, what sorts of incentives are out there, and what sort of pricing and what others are paying,” he says.

Have your credit score in hand to ensure your credit info is accurate. A dealer can easily say that you don’t qualify for a better rate without having run a proper credit check.  You can check your credit score on a number of sites for free.
Don’t shop at the last minute. We can’t predict things like car accidents, but there are steps you can take to be sure you won’t get caught in a desperate car buying situation. Dealers will smell that desperation from a mile away and take full advantage of it. If your car is showing signs of needing repairs, take care of them right away. If you’re in a pinch, think about renting a car temporarily, taking public transit or carpooling until you’ve had time to get your ducks in a row.

2. More than half of car buyers never had their income verified.

Car dealers should verify your income when they take your loan application. But that doesn’t mean they always do. More than 52% of our survey respondents said their income wasn’t verified. When irresponsible dealers don’t verify your income, they could potentially give you a loan that you can’t actually afford. Some dealers skip this step in order to speed up the application process and increase your chances of getting approved for a loan.

To get a sense of what you can reasonably afford to buy, use a free tool like this cost calculator from Edmunds. It allows you to take into account not just your income but also the value of any car you are trading in, how much you can afford to put down on your new car, and any balances on existing car loans. If you go into a dealership knowing what you can afford, they will be less likely to sell you something you know is outside of your budget.

3. Most people agreed to a longer-term loan to make their payments more affordable.

A whopping 82.6% of drivers we surveyed said they took out a loan with a term longer than 5 years to lower their monthly payment. This may seem like a great way to save on your monthly payments. But you will wind up paying more in the long run, thanks to interest. Auto loans with longer terms usually carry a higher interest rate.  Not surprisingly, nearly one in five car buyers told us they signed up for a long-term auto loan because it was the dealer’s idea.

“The dealer is going to suggest the longest term possible, because it means selling a more expensive car—and likely [earning] a higher commission,” explains Nitzsche. Because dealers want you to focus on the monthly payment and not on the total cost of the car, it’s easier to mask the total cost of the car by stretching out the length of the loan and lowering the monthly payment.

People with poor credit are much more likely to take out these longer term loans. The fact that poor credit customers also wind up with loans with the highest interest rates, they can actually wind up really hurting themselves here.

In a worst case scenario, you could find yourself owing more on your auto loan than the car is actually worth. New cars lose up to 25% of their value every year according to Edmunds. To save the most money, get a loan with monthly payments you can afford for the shortest term possible.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Jackie Lam
Jackie Lam |

Jackie Lam is a writer at MagnifyMoney. You can email Jackie here

TAGS: ,

Advertiser Disclosure

Featured

Being Poor Can Cost You Big on Your Auto Insurance

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Advertiser Disclosure

 

Auto Insurance
Flickr/m01229

If you’re single, a renter, out of work or haven’t owned a car in a while — even your perfect driving record won’t be enough to get a good auto insurance rate.

It’s no secret that auto insurers consider a lot more than just your driving record when they calculate your premium. New customers are routinely asked to provide personal details, such as whether they’re married or single, renters or homeowners, unemployed or employed, college- or high school-educated.

It is how you answer these personal questions — not your driving record — that can result in higher premiums, a consumer advocacy group argues in a new report.

In a study of five of the leading auto insurers in the U.S., the Consumer Federation of America found drivers with a good driving record pay 59% more — or $681 per year on average — when their answers to these personal questions point to a lower income status (e.g.: people who answer that they are single, out of work, or have only a high school education). The CFA has long studied how economic status can be tied to higher auto insurance premiums.

For this report, they used the online quote features at Geico, State Farm, Farmers, Progressive, and All State. They created four driver profiles to test — two men and two women, each pair including a high and low socioeconomic status — and requested quotes from each insurer in 15 major cities.

All four drivers shared characteristics in common. They each had a stellar driving record, with no prior accidents or traffic violations. They were each listed as 30 years old living at the same address in each city tested.

Where the two test groups (we’ll call them Group A and Group B, for simplicity’s sake) differed was in how they answered the personal questions on each quote request. In group A, one woman and one man were married homeowners with executive level jobs, a master’s degree and three years with the same insurance company.  In group B, the man and woman were single renters with high school degrees, and neither had owned a car in the last six months.

When the insurance quotes rolled in, an obvious trend emerged: across the board, Group B drivers were hit with higher premiums. On average, Group B drivers were quoted an average annual premium of $1,825. On the other hand, the married, home-owning, college-educated drivers from group A were quoted $1,144 per year.

Source: Consumer Federation of America
Source: Consumer Federation of America

GEICO and Progressive turned out to be the most costly option for drivers in Group B, charging premiums that were 92 percent and 80 percent more expensive, respectively, than premiums for Group A. In one extreme case from the report, GEICO quoted a man living in Minneapolis, Minn. from Group B two and a half times as much as the man from Group A – $1,840 per year compared to $528. The difference between premiums GEICO quoted for a low-economic status and high-economic status woman in Minneapolis was even more staggering — $2,158 vs. $528, amounting to a 300% upcharge.

MagnifyMoney reached out to all five insurers included in this report for comment. Each declined to comment.

James Lynch, senior actuary for the Institute, which represents the interests of insurers in the U.S., said insurers use personal information like marital status and education for a simple reason: they are highly predictive of whether a potential customer will cost the insurer in the future.

“Driving record is an important factor but it’s not the only predictor,” he added, noting insurers use upwards of 20 different factors to assess rates.

Screen Shot 2016-06-28 at 11.34.27 AM

 

Get the best auto insurance rate possible

Short of state regulator intervention, auto insurers will be able to assess risk in their customers however they see fit. It’s up to drivers to do their due diligence in order to get the best rate possible. Even then,

Start with your state’s insurance department website. Since insurance is regulated at the state level, Hunter recommends checking your state’s office of insurance website to find out what average premiums are like in your area. This website should also list a number of reputable insurers you can contact for quotes. Take those names and check them out on the National Association of Insurance Commission’s database, which maintains a history of service issues and complaints.

Never accept your first offer. Asking several different insurers for auto insurance quotes is an important yet often overlooked part of the shopping process. As the CFA found in this report (among others), premiums can vary widely by state by state and insurer by insurer.

Let your good driving speak for you. Some auto insurers today offer usage-based tracking technology that allows them to see just how often and how well (or, how poorly) you drive. This technology can be a boon to good drivers who have low annual mileage and aren’t hit with any traffic violations. You’ll likely qualify for insurance discounts. It is entirely optional to allow your insurers to track you, as it obviously requires you to forfeit some privacy while on the road.

Have a question for us? Send us a note at info@magnifymoney.com 

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Mandi Woodruff
Mandi Woodruff |

Mandi Woodruff is a writer at MagnifyMoney. You can email Mandi at mandi@magnifymoney.com

TAGS: , ,