Make smart decisions when taking out a car loan
By LAURA T. COFFEY
Published April 24, 2005
Paying cash for a car, ideally for a well-built used car, will save thousands of dollars in finance charges. But if that simply isn't an option, the following tips will help you protect yourself when taking out a car loan.
1. EAT A GOOD MEAL. Sound like a crazy tip? It isn't when you consider how much a visit to a car dealership can wear you down. If you progress all the way to having a contract drawn up, the experience can last up to four hours.
2. QUALIFY FOR INDEPENDENT FINANCING. It's a common mistake to think that the dealership needs to arrange your car loan for you. Before you show up at the dealership, get preapproved for a car loan elsewhere. That will elevate you to the status of a "cash buyer" who can concentrate on negotiating the price of the car.
3. KNOW WHERE TO LOOK. You can go to Bankrate.com (www.bankrate.com) to scan interest rates being offered by a variety of lenders. Some lenders promise to give you an answer within 15 minutes by phone or e-mail at no obligation.
4. FIND OUT YOUR CREDIT RATING. Arm yourself with this information to make sure you're getting a fair interest rate. Contact the three major credit reporting bureaus: Equifax, 1-800-685-1111, www.equifax.com Experian, 1-888-397-3742, www.experian.com TransUnion, 1-800-916-8800, www.transunion.com
5. KEEP IT SIMPLE. It's easy to persuade yourself to spend more than you planned once you get to the dealership. Instead, set a reasonable price limit ahead of time and stick to it. (All of your car-related expenses should cost a maximum of 20 percent of your monthly net income.)
6. KNOW WHAT CARS COST. Another way to save is to have reasonable prices fixed firmly in your mind. Pricing information and reviews are available through Kelley Blue Book (www.kbb.com) Edmunds.com (www.edmunds.com) and Consumer Reports (www.consumerreports.org)
7. UNBUNDLE THE TRANSACTIONS. Insist that the car dealer break the deal down into three distinct transactions: the price of the car, the financing terms (if you get your loan through the dealership) and the trade-in value of your current vehicle. It's much too easy to get confused otherwise.
8. DO THE MATH. Many dealers will give you a choice between, say, zero-percent financing or a rebate. Don't immediately assume that the zero-percent loan is the best deal. Make the dealer explain both scenarios for you.
9. STEER CLEAR OF LONG-TERM LOANS. It's also becoming common for dealerships to offer six-year, zero-percent loans with low monthly payments - but watch out. The car could depreciate in value dramatically well before you pay off that loan, and the warranty is likely to expire within three or four years. You could get stuck making payments on a car you no longer have or want.
10. ASK ABOUT PENALTIES. Find out whether you will be hit with any fees if you pay the loan off early.
Sources: Edmunds.com (www.edmunds.com) Consumer Reports (www.consumerreports.org)