Everyone dreads going to the car dealership and the inevitable swarm of salesmen as you pull into the lot. You can immediately feel the pressure to purchase and things can get out of hand quickly. I’ve outlined several steps to take before arriving at the dealership to keep you in control of your finances. Know Before You GoBefore you head to a car lot, it’s important to make some commitments with yourself and/or your partner that you agree to stick to before you even leave for the dealership.
Ask these questions and make a financial commitment to yourself:How much are you willing to spend in total and how much can you afford?Will this increase your insurance payment? If so, how much?Will you need extended warranties, GAP, or AD&D?How many months are you willing to finance your loan?Will you be using any savings as a down payment?Will you be trading in a vehicle? If so, how much are you willing to part with it for?What monthly payment can you afford (as well as factoring in your potential insurance increase)?
The Golden Rule of Car Buying: Be Ready to Walk AwayAlways be prepared to walk away, even if you have fallen in love with the car. If the dealership won’t meet your needs for the cost of the car, or there are fees that they won’t cut down, be prepared to walk away from the car and the dealership – do not compromise on the financial commitments you made to yourself before you went to the dealership. Do not succumb to the dealer pressures of statements like “This is the last one on the lot, and 20 people have looked at it today, not sure when we will get another”.
LoansBefore you shop for cars, shop for loan rates at your local credit union or community bank to determine who has the lowest rates and fees. Once you feel satisfied that you have found the best option, consider getting a pre-approval for the amount you are willing to borrow (this will require a credit check). A pre-approval doesn’t commit you to the loan, and you don’t walk out with the cash or a check right then and there. It does, however, afford you the confidence that you will be approved for a loan in the range you are committed to and that the lender will give you a loan on the car as long as the Loan to Value (LTV) is in line with their lending standards. Your lender will let you know what paperwork they require from the dealer, such as a Purchase Agreement once you find the one. Talk with your lender about what the process will look like once you choose your car and how the payment will get to the dealer once ready.
Ask your lender about what type of payment options are available such as monthly/weekly/biweekly payments, payroll deductions, automatic transfers, etc.
While you can get a loan from the dealer, typically they have more, or higher fees and they usually also run your credit for several lenders. Dealers may not have the same payment options that you may find at a bank or credit union.
Warranties, GAP, and Accidental Death and Dismemberment InsuranceWarranties, GAP, and Accidental Death and Dismemberment Insurance (AD&D) are common offerings for your vehicle/vehicle loan offered at both dealerships and credit unions/banks.
Warranties can be a great idea to consider depending on what is covered and for how long. If you are purchasing a new car rather than a used car, make sure you understand what the warranty covers (and the length of the warranty). There is typically a manufacturer’s warranty, and you don’t want to pay for something that you are already getting with the purchase of the car.
Often credit unions/banks offer the same or similar car warranty as the dealer, but at a cheaper cost. If you bring in the warranty paperwork, some lenders will help you compare the options to find similarities/differences and compare the cost.
Similar to warranties, GAP insurance (Guaranteed Asset Protection) can be sold by a dealer or by your credit union/bank, but it’s often cheaper at the latter. GAP can be a great option to consider if your LTV is very high, especially over 100%. A higher LTV is more typical if you are buying a new car, or if you are not putting any cash down. The use of GAP takes place if your car is totaled, you still owe money on the loan, and insurance says your car is worth less than what you owe on it. GAP will pay off the rest of what you owe on the loan after insurance pays what they are willing to pay.
If you pay off your loan early, you may qualify for a partial GAP refund. If you make a large payment towards your loan, you may consider asking your lender to book out your car to determine the new LTV. If your LTV is low enough you may want to cancel GAP and ask for a partial refund.
Some car insurance policies include GAP. Be sure to reach out to your insurance company before you add GAP.
Accidental Death & Dismemberment (AD&D) Insurance is another option to consider when getting a car loan. The main considerations for adding AD&D are what will happen to the loan and the car if you have an accident or pass away while you still owe money on the loan. If you get into an accident and are unable to return to work, can you still afford these loan payments? Is someone else dependent on this car for transportation? If so, can they afford the payment if you can no longer make them? Depending on your answers to these questions, AD&D may or may not be right for you.
For example, if you are employed and your partner is a homemaker, and you get into an accident that leaves you unable to work or if you pass away, can your partner still afford to keep paying for the vehicle? If they are unable to keep paying the loan and must sell or surrender the car, are they left carless? If the answer is yes, you may want to consider adding this insurance. Similarly, do you have someone who would be dependent on your savings or life insurance if you pass away? If so, after this loan is paid off with your savings, will there be enough money left for them? If not, you may consider AD&D.
Extended warranties, GAP, and AD&D are the three most common add-ons to car loans. It’s important to factor the cost of these into your total cost. You will likely be able to finance these options into your loan which could result in a higher payment or extending your total number of payments. If you have money for a down payment, you may want to use these funds to pay for the extra you choose, to avoid paying interest on these items. It’s important that whatever options you choose still satisfy the commitments that you made to yourself before heading to the dealership.
Sharing Information with SalesmenWhen you get to the dealership, play your cards close to the vest. One of the first questions most salesmen will ask is what type of monthly payment are you looking for? The answer to this question gives your salesmen power, do not give them this power. Once a salesman knows what you can pay monthly, they will start running the math of how to get you into a more expensive car by assuming you will fall in love and be willing to finance the car for a longer term. The only financial information your salesman needs to know is the maximum dollar amount you’re willing to spend. The details you need from your dealer are car performance, safety, and features, nothing financial.
Keep in mind that a typical car loan is 60 months (5 years), and this is sometimes extended out to 66 months if you choose to add on warranties, GAP, and AD&D.
Do not tell the salesmen that you are preapproved for a loan. Keep your conversation strictly about the cars that you are interested in and the maximum amount that you are willing to spend.
