To avoid being misled, know your credit score
before you head to the showroom. You can purchase your credit
score from any of the credit reporting agencies: Experian,
Equifax and TransUnion.
Also, check for errors on your credit report by requesting a
free copy of your credit report online at www.annualcreditreport.com,
which is the only authorized source where consumers can access
their annual credit report online for free, or by calling toll
free 877-322-8228. Thanks to the 2003 Fair and Accurate Credit
Transactions Act, every American has the right to a free copy
from each of the credit bureaus every year.
The transaction trick
Many people view buying a car as one transaction.
It's not, and dealers know this. "There's really three
transactions rolled into one -- the new car price, the trade-in
value, and the financing," says Brian Reed, director of
Internet channel at Capital One Auto Finance, San Diego. "The
dealer sees all three as ways to make money."
Treat each of these as separate transactions,
and negotiate each one. If you get a new car for $200 over invoice,
but only receive $1,000 for a trade-in car that's worth $2,500,
you haven't done as well as you could.
"You need to manage all parts of the
process by doing research ahead of time," says Joe Wiesenfelder,
senior editor of cars.com. "It's very important that buyers
not think of the dealer's finance department as their loan agent.
The dealer is not required to find you the best rate, and might
add to the number by serving as the middleman."
The payment ploy
A dealer might say, "We can get you
into this car for only $389 a month." Probably true, but
how? In some cases, the dealer may have factored in a large
down payment, or may have stretched the term of the loan out
to 60 or 72 months.
Focus on the price of the car rather than the
monthly payment. "Never answer the question, 'How much
can you pay each month,'" says James Walsh, editorial director
with Silver Lake Publishing, Los Angeles. "Stick to saying,
'I can afford to pay X-dollars for the car.'"
The
sticker shenanigan
The vehicle price listed on the window is
what's known as the MSRP, or manufacturer's suggested retail
price. Who cares? You want to know the invoice price -- the
amount the dealer paid for it. Working from the invoice up is
much easier than trying to cut dollars from the MSRP.
You should also find out what cars actually are
selling for, after taking into account any consumer and dealer
incentives. A number of Web sites provide information on the
actual selling prices of cars, as well as rebates and incentives.
These include Autobytel.com,
cars.com,
carsdirect.com
and edmunds.com.
Of course, some popular cars go for sticker
price. The Honda Odyssey minivan currently falls into this group,
says Wiesenfelder of cars.com.
The holdback hustle
Manufacturers often give cash incentives
-- sometimes called "holdback" -- to their dealers
to encourage them to move slow moving models, says Reed of Capital
One. However, this typically isn't mentioned in advertisements.
You'll want to search for holdbacks or other
factory-to-dealer incentives available for the car you're considering.
While it's not a given that the dealer will apply any of these
funds to the car you like, it doesn't hurt to ask.
The financing four-flush
Some dealers have been known to call customers
days or even weeks after they signed a purchase agreement to
tell them that the financing fell through. "It's a crock,"
warns Jeff Ostroff, president and chief executive officer with
ConsumerNet Inc., the Fort Lauderdale-based publisher of carbuyingtips.com.
"They can check your financing in 15 minutes."
The goal of these unscrupulous dealers often
is to put you into a more expensive car -- another red flag.
"If you didn't qualify for $299 per month, how would you
qualify for $450?" points out Ostroff. To avoid this, you
may want to have financing in hand before you head to the dealer.
The insurance illusion
Some dealers may try hard to get you to purchase
an insurance policy when you're buying your car. One type, gap
insurance, covers the difference between what the car is
worth and the amount you still owe on it. Say the car is worth
$10,000 but you still owe $12,000. If your car is a total loss,
a gap insurance policy will cover that $2,000 difference. Another
favorite, credit
life insurance, will pay the balance of your loan if you
die before you've been able to repay it.
These policies may or may not make sense
for you. In either case, you want to understand what you're
purchasing, and have the opportunity to decline it and shop
around for better prices.
The rate razzle-dazzle
It certainly sounds tempting -- zero percent
interest to finance a new car. However, this deal may not be
the best one for your pocketbook. For starters, "Most financing
incentives are for shorter terms and you need a stellar credit
record," says Wiesenfelder of cars.com. With very short-term
loans, such as 24 or 36 months, payments on even a moderately
priced car can be sky high.
In addition, you may be better off finding
your own financing, and then taking the dealer rebate, if one
is offered. Say you're looking at a $20,000 car and will get
$4,000 on your trade-in. You can choose between zero-percent
financing, or financing at 3.49 percent with a $2,000 rebate.
The term of the loan is 36 months. Over the course of the loan,
you'll come out ahead by more than $1,200 if you take the rebate
and the 3.49 percent financing, says Reed of Capital One.
The rollover ruse
Often, it's tempting to want to trade up
to a more expensive car -- even before you've finished paying
off the car you're currently driving. One way that some car
buyers do this is by "rolling over" the remaining
payments on your current car into a new car loan or lease.
While this isn't illegal, it's risky. Why?
You'll end up owing more on the second car than it's worth.
In the parlance of the automobile world, you'll be "upside
down" in the vehicle. If it's totaled in an accident, or
if you decide down the road to trade it in, you'll end up writing
out a big check to cover the remaining amount of the loan.
The balloon bamboozle
Similarly, there's nothing illegal or even
deceptive about dealers offering loan periods extending out
six or seven years. After all, many cars last longer than they
used to, and longer loan terms mean your monthly payments are
lower than they otherwise would be.
Still, there's a danger. "These loans take
forever to pay off," says Mark Perleberg, lead automotive
expert with NADAGuides.com.
You're likely to continually owe more on your car than it's
worth, because your car is depreciating faster than you're paying
it off. If you're considering a long loan period, you may want
to consider a less expensive car better suited to your budget.
Similarly, some dealers will encourage you to
purchase a car for unrealistically low monthly payments now,
but with a balloon (inflated or much larger) payment at the
end of the loan period. In a few cases, this can be a legitimate
way to finance a car. For instance, you may just have graduated
and can realistically assume that your income will rise by the
time the balloon payment comes due.
Be wary, however. "Make sure you know what
you're doing," says Wiesenfelder. "If you're only
paying $198 a month on a $35,000 car, there's a reason. Eventually,
you have to pay the principal."
How can you avoid all of these come-ons?
Educate yourself. "Many dealers are good and honest, but
there are some that you need to be more careful of," says
Reed of Capital One. "Know what you want to buy and know
your alternatives to dealer financing. Then, be careful of the
dealer selling you things you don't want."
