The last time you bought a car how much research did you do? Did you check Edmunds.com to see what options were available? Did you check Kelly Blue Book to figure out what the price ranges were for the car you wanted? How about taking a few test drives in different vehicles? You probably spent many hours finding the perfect vehicle.
And about how much time did you spend shopping for your financing?
I’m not a fan of car financing. In fact, I recommend people buy a car they can afford – in cash. But 99% of people who buy cars finance them.
If you aren’t getting your finances set up before you head to the car dealer, chances are you’ll end up paying thousands of dollars more over the life of your loan.
How car dealers make money
Car dealers make money in one of three ways.
- The profit they get from selling the car
- The resale of a trade-in
Most dealers don’t make the bulk of their profits on that new car they sell you. When you trade-in your car you’ll get a low-ball offer. The dealer can turn around and sell your used car and can make another $2,000.
But the real money is in the financing. When you finance a car, the dealer can easily make $3,000 alone. And that’s your money!
It’s so simple for you to save money if you choose to finance a car. By getting your financing set up at a local credit union or local bank you can save big bucks. If you go to a credit union, you might find rates up to 2.5% lower than what the dealer will offer you.
How much money do car dealer’s make on financing?
Why is that? As I said the dealer’s make the bulk of their money through financing. The dealer may be able to get you financed at 5% through one of their lenders. But what they tell you is the interest rate is going to be 7%.
How your bad credit can hurt you
If you have bad credit or no credit the dealer may mark up the rate for you even more! Instead of offering you 7% interest they may tell you your credit isn’t good enough and try to get you to pay 8% or 9% or even more!
But they probably won’t emphasize the percent – they are going to focus on how much your monthly payment is going to be. And they will tell you how they were able to help you out and get you into this car.
They won’t be telling you how much extra in interest you’ll be paying over the life of the loan at that higher interest rate. How many extra thousands of dollars.
What if the dealer has a lower interest rate?
Let’s say you got approved for a low-interest rate loan at a credit union. If you go into the dealership, and they want to offer you a lower interest rate at the same terms, go ahead and take it. Just make sure they aren’t offering you a lower rate and switching you from a 3-year to a 5-year loan or something shady like that.
If the rate is lower for the same length of time as you’re already approved for, make sure there aren’t any extra junk fees and take it.
How long should I finance a car?
If for some reason you have to sell the car because you can no longer afford it, you’ll need to come up with the difference between what you can sell the car for and the amount you still owe on the loan. That’s an oops moment you don’t want to happen to you.
There are too many stories of people who got into financial trouble:
- too much debt
- losing a job
- becoming unable to work
- having a surprise child
Don’t take the risk of getting more car than you can afford. And the reality is if you have to take out a car loan, you can’t afford the car. But since 99% of people don’t follow this advice, you might as well get the best deal you can.
Get your financial house in order first before you ever start researching cars. Decide how much you can afford to buy a car for, get approved for a loan, then find a car that fits your budget.
Or better yet buy a cheap used car and pay cash for it. You’re on your way to financial freedom with that choice.