Between finding the car that suits one’s budget and lifestyle and navigating the choppy waters of vehicle financing, car-buying mistakes are common, but they are not inevitable. Avoid these five common errors in order to improve negotiating power and save money.
Not knowing your credit score
Before entering into negotiations, the buyer should know his or her credit score.
“Knowing where your credit history falls in the range of risk is more important than ever before,” notes AutoCheck.com. “How you have paid your automotive accounts in the past strongly influences the loan amount and interest rate you can expect to receive on your next vehicle purchase. Knowing where your credit history falls in the range of risk may give you the leverage you need to negotiate for the rates you deserve.”
Failure to compare
It may seem easier at the time, but settling for dealership financing may not be the most cost effective approach.
“Dealership financing offices usually offer auto loan rates that are several points higher than what you could receive from an online auto lender or credit union,” explains Credit.com. “As part of the car buying process, you should shop and compare auto loan rates from various sources. Reducing your loan from 8% to 4% could save you a bundle on the car of your dreams.”
As an exception, dealership financing is appealing when the buyer qualifies for a special offer such as 0% financing.
Revealing monthly payment limits
Knowing one’s budget for monthly payments is obviously important, but revealing that dollar amount during negotiations could be detrimental.
“Once volunteered, a monthly car loan amount tells the dealer how much room is available to hide other costs such as a higher interest rate and add-ons,” says BankRate.com. Instead, “negotiate the price of each cost category separately,” including price, trade-in value and car financing.
Financing add-ons at the dealership
Once again, using the dealership as a one-stop-shop may seem convenient at the time, but getting dealership financing for add-ons might not be cost-effective.
“Even if you want an extended warranty or credit life insurance, these items are available at a lower cost from sources outside the dealership,” adds BankRate.com. “Folding them into your car loan and paying interest on them for the life of the loan can add hundreds of dollars to the amount you pay.”
According to BankRate.com’s analysis of "2009 F&I Statistics," published by Torrance, Calif.-based F&I Management and Technology magazine, “nearly 29 percent of the average gross profits earned in new- and used-car sales departments were generated in the F&I, or finance and insurance, office through aftermarket add-ons.”
In other words, buyer beware.
Failure to get pre-qualified
Consumers, explains, BankRate.com, “should go to a bank or credit union and apply for an auto loan before visiting the dealership. Even if they intend to take advantage of a deeply discounted interest rate offered by the auto manufacturer's lending agency, consumers can find out how much vehicle they can buy and the interest rate they qualify for by getting a preapproved car loan.”
With prequalification, buyers improve their negotiating power, and every little percentage point helps.
“Shaving just one percentage point of interest from a $15,000 car loan over 60 months would save hundreds of dollars in interest paid over the life of the loan,” continues BankRate.com.
Avoiding these common car-buying mistakes can only help consumers secure a more favorable loan. From now on, always have a current credit score on hand, compare different financing options, don’t reveal one’s monthly payment limit, avoid financing add-ons and always get prequalified before shopping.
