Car Financing Essentials: What You Should Know Before Buying Part 1
written by Credit-HQ ExpertYou should know the status of your credit history if it is good or bad credit. You may have had your eye on a particular automobile at a nearby auto dealer for some time now. However, before even checking it out up close, you need to arm yourself with some valuable information on car financing which may save you upwards of $1,000.
Prospective buyers often make the mistake of shopping at the dealership and leaving everything – including car financing – up to the auto dealer, thinking that these experienced people know all the ins and outs of car financing and that they can give you the best deal. Sure enough, they do know the ins and outs, but keep in mind that they also need to gain from the credit companies they push to buyers, and this amounts to markups that you can live without.
It must be pointed out that not all auto dealers use unscrupulous sales tactics, but many do take advantage of buyers, especially those who obviously have not done their homework regarding car financing. The most common ruse is for the dealer to offer to arrange for your car financing. Studies have shown that financing schemes offered by auto dealers are likely to have higher interest rates than payment plans that the buyer can get on his own, either from banks or from credit unions.
This is because the auto dealers get kickbacks from the credit institutions they push, and there’s nowhere else to get this added expense from but the buyer’s own pocket. Before you dismiss vehicle financing scams as simply rare occurrences, read on: From sales research financed by organizations such as the Nissan Motors Acceptance Corporation (NMAC), the General Motors Acceptance Corporation (GMAC), and the Ford Motor Credit Company (FMCC), it has been gleaned that between a quarter to approximately half of car buyers have fallen victim to questionable car financing schemes.
Although car dealers are authorized to negotiate a car’s retail price or throw in items to add to a unit’s sale price, they actually don’t have the authority to offer loans to their buyers or alternatively act as the representative of a financing bank, but many will entice you into signing up for a financing scheme by claiming that they can negotiate with the bank on your behalf so you can get the lowest possible rates.
So where do financing institutions heap on the commission that they hand over to the sales agent? This is usually factored in by increasing the original percentage rate of the loan, and the consumer then ends up paying much more than if he scouted for a lending institution on his own.
This looks simple enough, and the dealer can always show the prospective buyer how the interest rates on what they’re offering are much lower than this or that bank, right? But it’s really not as simple as checking the interest rates. The padded amounts can be spread over the number of payments, squeezed into a higher initial payment (which the buyer may not mind paying because of all the freebies thrown in at the last minute) or included in a hefty balloon payment at the end of the payment period.
Balloon payments are the final payments which are considerably larger than the monthly amortization amounts. These figures are often included in the fine print or are disclosed only towards the end of negotiations, but can easily turn a great deal into a bad situation for the consumer.
There are also instances when the auto dealer may offer you a choice between a lower rate or an up-front discount. It may seem more tempting to grab the latter because the reward is more immediate, but watch out – if you don’t carefully calculate the total cost over the life of the loan, you’re likely to end up paying more because of the effects of the higher interest rate, albeit they’re spread out over several months.
You should also ask about the special manufacturer finance rate, which most sales agents don’t offer. This is because they would gain more from the more expensive loan from which they can get handsome commissions.
Click here to see Part 2: Car Financing Essentials: What You Should Know Before Buying Part 2
No related posts.
Related posts brought to you by Yet Another Related Posts Plugin.