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car financing

It is important that you arrange your financing prior to negotiating price with a dealership--ideally, before you even visit a dealership. The financing "arm" of a new car dealership is a prolific profit center--dealers will often take smaller profit deals when selling the car (the "front-end" profit) if they know that they are going to make a nice profit on the financing of the car (the "back-end" profit). The problem with this is that it is you run the risk of giving all (or more) of your purchase savings back when it comes time to finance the car!

car financingDon't get hosed on the financing!

Don't make an expensive mistake. Check your credit and investigate all your car finance options before you start visiting dealerships. The dealer will work hard to get you to make all of your decisions in a single day. Don't get caught on an emotional highway that leads to less money in your pocket (and more in the dealership's)!

  • Check your credit upfront. Many financial institutions determine interest rates on a "tier" basis. The better your credit, and the more "in line" the price of the car is in relation to invoice (on a new car) or book value (on a used car), the lower your financing rate will be. It is a good idea, then, to make sure your credit score is acceptable before the bank sees it. Click here for a free copy of your credit score.

  • Make comparisons. A good source is Automotice.com, a popular online lender where you can apply in minutes and find competitive rates..

  • Check your local bank and/or credit union. The advantage of your local bank is that there is the possibility of a personal relationship with your banker. The disadvantage of a local (and smaller) bank may be an uncompetitive rate. If you have the availability of a credit union, the advantage here is the convenience of having your car payments deducted from your pay. The disadvantage is that you are tapping what may be an unsecured line of credit for a car--meaning what would normally be an easily accessible loan from your credit union (if, for example, you ever needed for an emergency) may no longer be available to you.

  • Home equity loans have become a popular way to finance a car in recent years. The advantage is the possible tax deductibility of the interest paid on such a loan. To get comparisons of home equity loans, visit Quicken Loans . Note: The IRS will only allow you to deduct interest on a loan amount that does not exceed the value of your home, for good reason. Borrowing in excess of your home's value is not recommended.

  • Dealer financing may or may not be the best option for you. The single advantage of financing a car at the dealership is convenience--you buy and finance the car at the same place. The main disadvantage is the variation of interest rates, since the difference between what the dealer "sells" you the financing for and what they "buy" it from the bank for, is their profit. Obviously, if you arrange your own financing with sources such as Automotice.com (or from a local bank) the profit stays in your pocket!

  • Investigate leasing to see if it would be advantageous for you. For some car buyers it is an excellent choice. For others, it can be one of the worst mistakes you can make. You will find a full discussion of the subject on our leasing pages.

Don't accept the financing rate that the dealer offers as gospel! You have far too many options that may save you money to just accept what the dealer puts on the table for you.

How to avoid being "heavy in the trunk"

Also known as being "upside down" or having negative equity. What it means is simple...a year or two (or three or four years) down the road you owe more on the car than it is worth. If you keep your cars for long periods (longer than the finance term), this isn't a problem. If you tend to trade frequently, however, it can become a nightmare. Imagine buying a car, driving it for two years, getting a case of the "new car fever" and finding out that, to trade, you will need to reach into your pocket for $1500 or $2000 to get the value equal to the loan balance. It happens all of the time. Here's how to prevent that situation:

  • Don't buy more car than you can comfortably handle financially. Stretching your budget to the seams is stupid when it comes to buying a car. If you are going to test your budget, do it on things that last--a house, your children's education or a worthy charity.
  • Don't overextend your finance term. Yes, 72 month and 84 month terms will reduce your payment (but probably not as much as you might expect), but they will also lock you into the car for at least 3 to 5 years. A lot of situations can change in that time--jobs, family size, and health among them. Don't hog tie yourself to a car you may no longer need or want.
  • Maximize your down payment. Don't take food out of your children's mouths and don't deplete your savings, but if you are going to stretch on anything, do it on the down payment rather than the monthly payment. The more you put into the car upfront, the less likely you are to find yourself with negative equity (and tears in your eyes).

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