GUIDE TO BUYING A CAR

Transcription

1 GUIDE TO BUYING A CAR

2 CONTENTS INTRODUCTION... 3 SHOPPING FOR A NEW CAR... 4 SHOPPING FOR A USED CAR... 9 OVERVIEW OF LEASING CARS FINANCING A VEHICLE PURCHASE AUTOMOBILE WARRANTIES AUTOMOBILE INSURANCE GLOSSARY

3 INTRODUCTION For most of us, buying a car is not as exciting as shopping for a home or a diamond ring. For many, it is a drain on their aspirin supply. That s often due to the sales tactics they encounter when dealing with sales personnel. Then there are the options to consider, the insurance, and the warranties. If you are in this camp, you can rest easy. With a little knowledge, you can learn how the process works and how to turn it to your advantage. This guide will cover buying new cars and used cars, financing your chosen vehicle, dealing with warranties, insurance, and how to handle the negotiation process. In the end, you want to drive out of the lot with the same excitement you had when you first started dreaming of buying a car in the first place. 3

4 SHOPPING FOR A NEW CAR In an ideal world, a car dealer helps you find the perfect car for you at the perfect price, and you drive away with a smile on your face and many happy years ahead of you. And that's how it does work for many of those who did their homework in advance, learning how to navigate the process and how to work with dealers. Because some dealers put more emphasis on their profits than on their customers' satisfaction, an educated car-buyer must know what he wants and for how much, so that he makes the transaction smooth and comfortable with no regrets as he leaves the lot. 4

5 HOW TO START LOOKING FOR A NEW CAR KNOW WHAT YOU WANT The more clearly you know what you want, the less likely you are to be steered toward something you discover later you don't want, or can't afford. This includes the various options that come with a vehicle. If you don't know exactly what you want, at least have your preference narrowed down to a few choices. Research the vehicles on dealer Websites or automaker Websites. Also check out consumer publications such as Motor Trend, Car and Driver, and Consumer Reports' annual car-buying issue. Internet sites like Edmunds.com and JDPower.com are also valuable sources of information on new autos. Check the selection and pricing of several dealers in your area. KNOW HOW MUCH YOU WANT TO PAY How much can you afford to pay for a new car, truck, minivan, or other vehicle? Factor that in so that you don't get sold on something you can't afford. The dealer will most likely ask you how much you can afford so that he or she knows what to offer you. Having a specific number handy can help you when it comes time to negotiate with a dealer. A popular recommendation is that your total monthly car payments should not exceed 20% of your take-home pay. HAVE YOUR FINANCING IN ADVANCE If you can't pay for a vehicle in cash or have someone else pay for it, are you preapproved for a loan? Compare the financing options offered by the dealer (if it offers financing) against those offered by your financial institution. LEARN THE PRICING LANGUAGE Several different prices are used in new-car dealings. Invoice price. This is the price that the manufacturer charges the dealer for the vehicle. It may actually be higher than what the dealer charges you because dealers get rebates, allowances, and various incentives from the manufacturers. In addition to the price of the vehicle, the invoice price should have the destination and delivery cost built into it. Base price. This is the cost of the vehicle without any options. MSRP. The manufacturer's suggested retail price (MSRP) is the price that the manufacturer suggests the vehicle be sold. This price includes the manufacturer's installed options and the factory warranty. This price is also known as the Monroney sticker price, after the US senator who sponsored legislation to require disclosure of information on new autos. By law, a sticker with the MSRP and the fuel economy information must be affixed to the car window. Dealer sticker price. The dealer sticker price is the MSRP plus the suggested retail price of any dealerinstalled options and any dealer markups. ORDERING A CAR Sometimes dealers don't have exactly what you want, so you can work with a dealer to order a car directly from the automaker and have it delivered to the dealer, where you can pick it up. BUYING ON THE INTERNET You can also buy a new vehicle on the Internet, in which you will work with a dealer by or phone Financial Fitness Group All Rights Reserved 5

6 ESTIMATE THE TRUE COST OF OWNERSHIP OF A VEHICLE The following information is helpful not only for new cars but also used ones. THE TRUE COST Have you considered the true cost of ownership of the car you're interested in? Although one car you like might be less expensive to buy than another one you like, it may also carry higher ownership costs over time. This is important to remember when you just can't decide between two choices and you need a little nudge to move you in one direction. You might save $1,000 or so by going with one of the two, but the purchase price is only the most immediate and obvious price. Think of three, four, or ten years down the road. Is the insurance on one more expensive than the insurance on the other? How will the make and model affect your gas consumption? Will there be special maintenance needed? How does the depreciation compare? Does one of them get tax credits? WHAT IS INVOLVED IN THE TRUE COST? You might find that you can afford to buy the cheaper one but not afford to own it at time goes on. Here are the main factors to consider when thinking about the true cost of ownership of a vehicle: Price you paid Taxes Fees Fuel Gas mileage Insurance Maintenance Repairs Tax credits Financing (interest costs) Depreciation Trade-in value Dealer service contract Online calculators can help you plug in the variables above to arrive at an estimate that spans a certain time period. 6

7 STRATEGIC CONSIDERATIONS OF BUYING A NEW CAR Buying a new car usually means going to the dealer, choosing a make and model, discussing the price, and driving the vehicle off the lot. Sometimes it also means cringing at the thought that it will have depreciated in value by the time it arrives home a few minutes later! The discussion of price (haggling, in other words) is the part that's most exhausting for many buyers, a fact that has led some dealers to offer "no-haggle pricing." No-haggle pricing isn't always set in stone, however; there is sometimes a little wiggle room left. But the opportunity to save hundreds or even a few thousand dollars should be enough to convince you to learn some basic strategies. WHERE TO START For starters, experienced negotiators don't look at the asking price and then lower their offer. Rather, they start at the other end: they start with the dealer's cost (invoice price) and negotiate up from that. In case the dealer's cost isn't apparent or you can't get it from the dealer, you can find it online on sites like Autosite.com and Consumerreports.org. KNOW WHEN TO WALK AWAY FOR NOW Once negotiations have started and you are going back and forth on the price, you have some tools at your disposal. One of them is the ability to walk away during negotiations. That shows the dealer that you are in control and cannot be easily swayed. Walking away and then staying home for a few days (or visiting another dealer) often gets the dealer to call you and sweeten the deal a bit. This works best when the dealer feels that you are genuinely interested in the car. INDECISIVENESS = MONEY Another is the ability to be indecisive while on the lot. On one hand, you don't want to tie up a dealer's time needlessly, but taking more time to decide may persuade him or her to lower the price or toss in some free options. If it's the latter, know in advance that you actually want those options and that they are useful to the vehicle. COMPARE PRICES, TOO You can save money by comparing prices among several dealers. Get quotes and print them out. Using these printouts can make dealers compete for your business; they might match other offers. WHAT'S YOUR MONTHLY PAYMENT? A dealer will likely ask you how much you can afford for a monthly payment. While this is a fair question that helps him or her narrow down available choices for you, the dealer may stack on some options in order to make the final price match the monthly payment, if it didn't before. This is why many people prefer not to divulge their monthly payment; rather, they negotiate only with the price of the car in mind. Another thing to remember is rebates. The dealer may mention them as a reason to ask for a higher price on the car. Rebates, however, are not provided by the dealer, but by the manufacturer. SERVICE CONTRACTS A service contract is an extended warranty. The dealer may offer to sell you one. Since the new car will come with a warranty already, research the service contract to see whether it covers anything that the warranty does not. Find out how long it lasts, what repairs are covered, and who will do the repairs. 7

8 SUMMARY OF SHOPPING FOR A NEW CAR Buying a car is sometimes like shopping for groceries. If you don't have it planned out in advance, you can end up buying more than you really wanted or needed. Given that a car depreciates in value right after leaving the lot, you want to make sure you get your money's worth. Learn the best tactics for getting the best deal. Start your search even before you are ready to begin looking. Estimate the costs of ownership. New buyers are often pressured to buy more than they really need, and thus they may get stuck with a vehicle that they eventually owe more on that it is worth. PRACTICAL IDEAS I CAN START WITH TODAY Decide on a realistic price range for a vehicle and stick to it. Obtain financing on a vehicle. Purchase a vehicle. 8

9 SHOPPING FOR A USED CAR Getting a good deal on a used car involves both negotiating a good price and taking steps to make sure the car is reliable. Although buying a used car is often a smart financial decision, it's also a transaction full of potential for disaster. Many of us know someone who paid too much for a used car that fell apart soon after. To better your chances of getting a reliable car at a good price, follow these pointers. 9

10 HOW TO START LOOKING FOR A USED CAR BEFORE YOU START LOOKING It is a good idea to write down what you want in a used car so that you will not waste time. Otherwise, you could end up with a car you did not want at all. If you shop at a dealer, the salesperson will want to know your preferences anyway; this saves him or her valuable time. Write down requirements such as these: The price range you want to spend Type of vehicle (sedan, SUV, minivan, etc.) Make Model Features you want Mileage range Age range How much you can afford to spend each month, if you finance Any other preference, such as color, engine size, luxury options Keep this list handy when you go shopping. WHERE TO RESEARCH A simple Google search for a phrase like "used car sites" will bring up a plethora of Websites that list used cars being sold around the country, usually at dealerships. Sites like and are common. A search on your local Craigslist will bring up used cars from both dealerships and individuals. Of course, there is also your local newspaper, which will advertise available cars and dealer specials. There are also sites that provide more useful information than just listings. Edmunds.com and Consumer Reports are among the most popular. COMPARE PRICES Compare prices of cars you are interested in. The Kelley Blue Book ( lists both wholesale and retail prices for used cars. This book will give you a sense of what a particular make and model is worth, on average, so that you can assess what dealers or sellers are asking. You can also go to Kelley's Website and search for cars and get information, reviews, and car value information. The Consumer Reports Used Car Price Service, which you can find online, provides full reports on used cars. You can order a report from its Website. You may have heard of Carfax, a Web-based service that provides vehicle history reports on used vehicles. Many dealers now offer Carfax reports for their vehicles. You can also get them online by providing some basic information about the vehicle in question. Some services are free, and others must be purchased. 10

11 OTHER PLACES TO LOOK Oftentimes, auto mechanics will buy a used car that the previous owner decided was too expensive to fix, and offer it for sale on the lot. Many new car dealers will also sell used cars on their lots. And it doesn't hurt to ask family or friends if they are interested in selling a vehicle. Some of them are, and they can give you a good deal (and possibly interest-free financing). If you have a particular make in mind, check out used car dealers who do not specialize in that brand. For example, a Chrysler dealer may have some Chevys or Fords for sale. Dealers sometimes find that they can get good deals on other brands at auctions, and so they buy them for resale, often providing extra incentives to move them off their lots Financial Fitness Group All Rights Reserved 11

12 BUYING A USED CAR: PRIVATE PARTY OR DEALER? Some used car buyers swear by the advantages of buying from a private party. Others insist on going with dealers. Each side has its own rationales, and here are some of the advantages they cite: WHY BUY FROM A DEALER? Selection. You may have a make and model of car in mind, but a dealer may have several of them for you to look at. And it may have several of similar models. Financing. Dealers usually have more options for financing. Private parties usually demand cash up front. Certified used. Dealers often have certified used cars (which are used cars that are reconditioned, inspected, and given an extended warranty), which have many of the benefits that new cars have. Warranty. You have more options for getting an extended warranty from a dealer. WHY BUY FROM A PRIVATE PARTY? Negotiations. You might get more wiggle room with a private party because you'd be dealing with an amateur one who isn't being pressured by the dealership to hold firm on a certain price. Price. Prices are generally lower with private parties because they don't have the overhead that dealers have. Maintenance records. Private parties are more likely to have maintenance records than dealers are. USED RENTAL CARS It's worth mentioning that used rental cars can be a bargain, and their warranties may still be in effect. The stereotype of used rentals is that they've been used and abused by their renters, but this isn't always the case. OTHER STEPS TO TAKE Get the vehicle inspected by a good, trusted mechanic. Do a visual inspection first. Get the registration and title records. You can get a Carfax report from that shows the number of past owners and important mileage information; you can also find this information at your state's motor vehicle department. If the seller is a private party, make sure he or she actually holds the title to the car. Ask to see the title certificate. Read the Buyer's Guide. This guide is posted with every used vehicle. Check the little VIN (vehicle identification number) plate on the lower left corner of the front windshield. Does it appear to be tampered with? If so, the vehicle may have been stolen. 12

13 GETTING A GOOD DEAL ON A USED CAR For some people, negotiating for a good price on a used vehicle ranks up there with getting a root canal. For these people, there may be a fear of being taken advantage of. Many used-car buyers leave the lot with a nagging suspicion that they paid too much for their vehicle. But learning to negotiate can save you a lot of money if you go through with it. BEFORE YOU NEGOTIATE It helps to have the preliminaries taken care of first. This means identifying the car you want, arranging financing, and locating some sellers. Also, know what kinds of add-ons, if any, you are open to buying. By the time you get to negotiating, the price should be the only thing that is not settled on. A point to remember: even if a vehicle is advertised with a "no haggle" price, there is still sometimes room to haggle, so it is worth considering. Know the value of the vehicle you're negotiating. This can work in your favor if the salesperson is asking a price that's higher. Consult a source such as the Kelley Blue Book for values. Check more than one price guide. Different price guides, such as Kelley's and Edmunds, can quote different prices for the same make and model, so the best you might find is a range rather than a specific value. THE ATTITUDE Cultivating an air of detachment also works for you (in other words, be ready to walk away if need be), because a salesperson who sees that you are attached to a car has a lot of leeway with you. In cases in which you might need to walk away, it is good to be aware of other sellers who are offering the same vehicle. In fact, mentioning that you know of other sellers who are selling your desired car can make the dealer more competitive. TRADE-INS Knowledgeable negotiators recommend not bringing your trade-in into negotiations until you have first agreed on a price for the car. HOW IT BEGINS The dealer will likely ask you how much of a monthly payment you can afford to pay for a vehicle. This helps the dealer arrive at a price range, but that price range can rise higher than you are comfortable with. Because dealers have ways of arranging financing, they know how to squeeze extra dollars out of you even while staying within your monthly payment range. This is why some negotiators put off telling the dealer how much of a monthly payment they can make until after they have settled on a price. THE PRICES INVOLVED When you negotiate, you want to pay close to the wholesale price, which is typically what the dealer paid for it. The dealer will want to stay close to the retail value for maximum profit. There will also be the "blue book value," which will not be listed and which will most likely be somewhere in the middle. Experienced negotiators wait for the dealer to name the first price; that way, they can go lower, something they probably couldn't do if they were the one to name the first price. They offer a price that is between the wholesale and "blue book value," aiming to stay closer to the wholesale. The dealer may go along with that price, but if so, will try to sell you various add-ons, such as an extended warranty. Know in advance what add-ons, if any, you are interested in. Alternatively, the dealer may insist on a higher price, and you and the dealer will go back and forth until you reach a compromise. 13

14 BRINGING IN THE MANAGER The dealer may also bring in a manager (also called a "closer") to provide some extra "reasoning" aimed at raising the price. This reasoning may be quite persuasive and economically sound. Buyers often feel intimidated by the manager if they aren't aware of how negotiating works. TAKE CONTROL It's important to be the one in control of the negotiations. That might mean telling the dealer you need to go home to think about it. Dealers expect that this will happen. They will likely call you over the next few days to sweeten the deal, either with a lower price or some free add-ons. Once you have agreed on a price, you will get the sales contract. This contract will list additional costs such as sales tax, document fees, and perhaps service fees. Know about these beforehand so that you will have the full picture of how much you are paying. 14

15 OVERVIEW OF LEASING CARS To buy or to lease? That's one of the existential questions that drivers ponder, some more than others. Some drivers swear by it; others swear against it. Leasing isn't just a matter of plopping down some rent every month in return for the use of a nice car you also have responsibilities, which can cost you big money if you're not careful. Auto leasing has grown greatly in popularity as an alternative to owning. Price is perhaps the main factor driving the popularity of leasing. New car costs have risen greatly, and other costs such as healthcare and housing have risen greatly, putting a damper on people's ability to buy new vehicles. Enter leasing. Around one fifth of new vehicles are leased rather than bought outright. Let's look at the pros and cons of leasing so you can determine whether it's a good choice for you. 15

16 HOW LEASING A CAR WORKS Leasing simply means paying for the use of a vehicle over a specific period of time. In this respect, it is similar to renting; beyond that, there are many differences, so the comparison to renting is not an accurate one. The price of a lease is based on the depreciation of the vehicle and the interest cost. HOW IT WORKS When you sign a lease, you agree to make regular monthly payments on it, maintain it, pay taxes on it (including sales tax), pay license fees, and buy insurance for it. As part of the lease, you agree to keep the vehicle for a certain number of months (the maximum is usually 48 months) and then turn it in at lease end. With many leases, you have the option of buying the vehicle at the lease's end. When your lease ends, you must turn the vehicle back in to the leasing company with no more than expected wear and tear, and within the mileage limit specified in the contract. If you go over this limit, you must pay a fee. If there is damage, you must pay for that. YOUR OPTIONS As noted, you may have the option to buy the vehicle at this point for a price. You may also have the option to trade it in for another lease. You might even have the option to extend the lease. If you decide to turn it in once and for all, you may, at some leasing companies, need to pay a disposition fee. WHAT IS RESIDUAL VALUE? The leasing company estimates the car's residual value at the end of the lease; it bases this on the expected number of miles driven. Should the vehicle's actual market value be worth more than the residual value at the end of the lease, you might just want to buy it and either keep driving it or sell it for a profit. Generally, the longer the lease, the lower the residual value will be. But it is worth checking the value of the vehicle with a pricing site such as the Kelley Blue Book. You may find that you can recover some equity by buying it. It is important to read the lease contract carefully to determine what you are responsible for. Failing to do so can cost you a lot of money. A WORD ABOUT INSURANCE Although you are leasing rather than buying, you still must maintain auto insurance on your car. The coverage may be more or less than you would normally buy. The price varies by company, but a typical contract might require $100,000 of liability per person and $300,000 per occurrence and $50,000 for property damage, and both comprehensive and collision. As with any form of insurance, it pays to shop around before you buy and to look into all available discounts that insurance companies offer. 16

17 GETTING A GOOD DEAL ON A LEASE To one who is new to leasing, a lease might seem like a good deal if the monthly payments are lower than they would be if the person bought the car instead. But a low monthly payment isn't necessarily the sign of a great deal. A low payment might be low because some other factor such as the lease-end residual value of the car was set in a way that is profitable to the leasing company but not to you. A good credit score works in your favor. You can negotiate the price of a vehicle you want to lease. Auto manufacturers sometimes offer lease deals through their captive finance companies. THE PRICE OF THE VEHICLE Newbies to the leasing scene don't always think about the price of the vehicle they want to lease. It may not be obvious at first, but you can negotiate the price of a vehicle you want to lease. It's not set in stone. When it comes to negotiating, leasing companies would prefer to work from the MSRP (manufacturer's suggested retail price) because it is more profitable to them. Savvy negotiators look at the invoice price instead and negotiate upward from there. THE LEASE RATE Leased vehicles have a lease rate (also called a money factor). This is a rate that is based on the interest rate that the leasing company pays to the dealer on its own loan for the vehicle. Lease rates are not required to be disclosed to consumers, so you may not even get to see what it is. Lease rates can change just as frequently as rates for new-car loans. Lease rates will also depend on your credit score; if your credit score is high, you can qualify for a low rate. The most favorable lease rates are those offered by finance companies that are associated with the major auto companies. Such finance companies are known as "captive" finance companies. Some finance companies will lower your lease rate if you put down a larger down payment at the beginning of the lease. SPECIAL LEASE DEALS Auto manufacturers sometimes offer lease deals through their captive finance companies. These are traditionally very favorable to consumers. Monthly payments can be low, and residual value can be high. Note that good deals like these may come with restrictions that you will have to agree to. SHOPPING AROUND Car pricing services work with you to find the best deals. You tell them what you are looking for and they shop your area for the best prices. CarsDirect and Edmunds are two well-known companies that offer car pricing services. TAKING OVER A LEASE Have you considered taking over an existing lease? You may get a deal with no money down and possibly low monthly payments. There is a transfer fee to acquire the lease, but once you pay it, the car is yours to drive for the remainder of the lease. OTHER FACTORS TO CONSIDER Look at all upfront payments you will need to pay, such as the acquisition fee. Look at the mileage allowed per year and the required charges for excess mileage incurred. Note the early termination fees, the option to buy, the length of the lease, the gap insurance, and of course, the monthly payment. 17

18 ASK ABOUT Finally, ask about rebates, advertised specials, factory-to-dealer incentives, or other discounts that would reduce the price of the vehicle. 18

19 ADVANTAGES AND DISADVANTAGES OF LEASING A VEHICLE Those who like to lease can point out the advantages quickly enough, and those who don't like leasing can point out the disadvantages pretty fast. Here are both the pros and the cons. THE ADVANTAGES The convenience of turning in the car at lease's end rather than having to sell it or trade it in. You can usually pay less with leasing, though this depends on several factors. Generally, you pay for the portion of the vehicle that you will actually use in time, rather than the whole thing. There is usually little or no down payment required. The sales taxes you pay on your monthly payments are tax deductible in most states. Sales taxes are spread out, since they are levied on the monthly payments, rather than being paid all at once up front. You can negotiate the value of the car. Most leases come with gap insurance included. Gap insurance pays off the difference between what you owe on the lease and what the car is worth in the event that it is totaled. THE DISADVANTAGES Before you sign on the dotted line, consider these disadvantages: You may be required to pay more for insurance on the vehicle than you would pay on a car you bought. If you are a perpetual leaser, you will be stuck with car payments that never end. You will be penalized if you exceed the yearly mileage limit. This limit is usually 10, miles and varies according to company. The penalty will be cents per mile or thereabouts. Do you drive a lot? Consider that. If you buy the car when the lease ends, you'll pay more than if you had bought the car outright. Breaking a lease early results in a big termination fee. (On the bright side, you can transfer your lease to another person: there are now Websites devoted to that service.) You will have no equity in the vehicle. The only time you could have any equity is when the market value of the car at lease's end is higher than the price you would have to pay at lease's end to buy it (the purchase option price). You would have to buy it to get this equity. If there is damage or excessive wear and tear, you will have to pay to have those repaired. Lease contracts typically define what "excessive" means. 19

20 TO BUY OR LEASE? For most people, the answer to this question will come down to dollars and cents. To those for whom money isn't as much of an issue, there are other things to ponder. A list of advantages and disadvantages can help you determine whether to buy or lease. For those who are still on the fence, here are some more things to think about: HOW DO YOU TREAT YOUR CARS? Want to repaint, customize, or add racing stripes? Then expect to have them undone, and then expect a bill in the mail. The car doesn't belong to you while you lease it, so you can't make changes to it. Are you tough on your cars? Or irresponsible? You will be responsible for any damages and any wear and tear that is deemed excessive. Leasing does not let you off the hook for these. ARE YOUR FINANCES STABLE? Your financial situation should be stable if you want to lease, because you will be committed to your auto. Ending your lease early will cost you extra, and you may also have to pay all the remaining payments. Ask yourself whether you might be hit soon with high healthcare costs, mortgage costs, or other expenses that could jeopardize your ability to make your lease payments. HOW MUCH DO YOU DRIVE IN A YEAR? Estimate how much you drive in a year. Is it more than the amount specified in a lease, meaning between 10,000 and 15,000 miles? If it is, you'll be hit with excess mileage charges when the lease ends. Can you reduce your mileage in other ways, such as by biking, walking, or bussing? If not, consider those excess mileage costs and whether they would be a hassle for you. HOW IS YOUR CREDIT? You need a very good credit rating in order to lease. One reason for this is that the leasing company bears a lot of risk when it offers you the lower monthly payments. If your credit is poor, you may pay a higher lease rate (which is factored into your monthly payments). Do you know your credit score? HOW DO YOU REALLY FEEL ABOUT LEASING AND BUYING? Some people just like to own, so buying appeals more to them. They can build up some equity, which owning allows them. Leasing doesn't build you equity at least not until you decide to buy at the lease end, if you do at all. Another plus for buyers is that eventually, they can stop making payments and own the car outright. On the other hand, some people would rather not have any ownership. It is the convenience factor that they like and are willing to pay for. That convenience includes a lower chance of needing repairs and a high likelihood of having warranty coverage for the duration of the lease Financial Fitness Group All Rights Reserved 20

21 SUMMARY OF OVERVIEW OF LEASING CARS Leasing a car can be a good choice for those looking to save on costs. It can work for you if you can stay within the limits of the leasing agreement. If you lead a stable life and take good care of your cars, you may find leasing an advantage. If you are more unpredictable with your car needs, it may not be the best option for you. The Federal Trade Commission has additional information for would-be leasers at and Interested in a lease? Try these practical ideas to help you on your way. PRACTICAL IDEAS I CAN START WITH TODAY Decide on a realistic price range for a vehicle and stick to it. Learn the pros and cons of auto leasing, and decide if that's a good option for me. Use a car pricing service to help me find the best deals in my area. Discuss auto leasing options and prices with a leasing company. 21

22 FINANCING A VEHICLE PURCHASE For most consumers, picking out the make and model car they want to buy is the easy part, while the financing is the more complicated question. Your options include borrowing from the dealership, a financial institution, your home equity line of credit, or a relative or friend. When taking out a loan, the terms will depend on several factors, including your credit score, the length of the loan, and whether the car is new or used. You should also consider any financing options in light of special discounts and incentives. It's important to compare the cost of various financing options before settling on one, so you're aware of all the options. 22

23 SOURCES OF FINANCING FOR A VEHICLE You have many sources at your disposal. Options for financing a vehicle purchase are numerous and include banks, savings and loans, finance companies, credit unions, online financial institutions, home equity lines of credit, and relatives and friends. Many car buyers finance their purchases through their car dealer, who has access to loans offered by a number of finance companies, banks, and savings and loans. Generally, when you buy a car, the salesperson will ask you if you plan to finance your purchase, how much you plan to provide as a down payment, and what type of monthly payment you can afford. Your salesperson will likely involve the sales manager and the finance manager in the negotiations over the car, as the financing package is a part of that negotiations process. The major benefit of going through the dealer is convenience, as you can buy a car and finance it in one stop. The major disadvantage is that the terms of the loan may not be as favorable as you can get elsewhere. THE BRICK-AND-MORTAR APPROACH Borrowing from a brick-and-mortar or online financial institution is another option. Before you fill out a loan application, check and compare rates for loans with varying lengths. Once you find the financial institution with the best terms for the type of loan you want, you can apply for the loan either before or after you've found the car you want to buy. By applying before you find a car, you can get pre-approved for a loan, leaving you in a strong position when negotiating a price on the car you want to buy at a car dealership. This is one advantage of getting financing in advance, as you won't get the issues of the price of the car and the financing mixed up and can focus on negotiating a good price for the car. Actually applying for the loan works similarly for both brick-and-mortar and online financial institutions: you fill out an application, either in person (for a local bank) or online (for a local or online financial institution). The application will ask you a number of questions, including your income, your savings, how much you want to borrow, and what other loans you have; and will also ask you to give permission for the financial institution to check your credit history and credit score. Many financial institutions can get you approval within several hours of filling out the application. TAP THE EQUITY IN YOUR HOME If you are thinking of tapping your home equity line of credit to pay for a car purchase, check that you have enough funds remaining in your line of credit to cover the purchase. Also, make sure that the interest rate on your home equity loan is competitive with current car loan rates available from financial institutions or your car dealer. If the rates are similar and you are comfortable borrowing on your home, tapping your home equity line of credit may be more economical, as you can deduct the interest you pay on your tax return if you itemize. Typically, you access money from your home equity line of credit by writing a check for the account provided by the financial institution that granted you the line of credit. KEEPING IT IN THE FAMILY Borrowing from a friend or family is another option. If you are short of money, don't have good credit, and have a good relationship with family members or friends, this may be a workable option. If you can work out such an arrangement with a family member or friend, it is best to keep the repayment on a businesslike basis by crafting an agreement that covers the amount borrowed, the interest rate on the loan, and the repayment provisions Financial Fitness Group All Rights Reserved 23

24 WHAT DETERMINES AN AUTO LOAN INTEREST RATE? A number of factors determine the rate you'll be offered on a car loan, including your credit score, the length of the loan, the condition and age of the car, and where you live. The largest factor of those is your credit score. Your credit score is a numerical representation of your credit history. If you've handled credit well in the past by paying your bills on time, especially installment loans and credit card bills, your credit score will be higher. If your credit history is damaged or spotty, meaning that you haven't paid your bills on time and/or don't have much credit history, your credit score will be lower. Generally, borrowers with credit scores of 650 and above get the most favorable rates, while those with scores of 550 and below get the worst rates. Before buying a car, obtain a copy of your credit score from a credit bureau or credit scoring company such as Fair Isaac, creator of the FICO score, at The length of the loan is another factor in determining the interest rates. Loans with shorter terms 24 or 36 months get the best rates, while longer-term loans of 48, 60, or 72 months receive less-favorable terms. This is because the value of a car depreciates fairly rapidly; and the longer the loan, the less the car is worth. With lengthy loans of 60 or 72 months, there is a good chance that during the last one or two years of the loan, you will owe more on the car than it is worth. The newer the car, the better the rate. Interest rates for new car loans are always lower than for used car loans. Again, this is because a new car holds its value better than a used car, which is more likely to experience mechanical problems than a new car. In some cases, your geographical location can also affect the interest rate you receive. 24

25 STRATEGIC CONSIDERATIONS OF FINANCING A VEHICLE In an effort to move cars off the lot, many car manufacturers offer special discounts and incentives, mostly on new cars. Incentives vary, but usually include cash back in any amount from $1,000 to $5,000; an amount that you can use as is or add to your down payment. Special discounts can include premium packages of options offered at a discount and special financing offers. A popular financing special deal is 0 percent financing. While this offer may lure buyers into a car showroom, it is generally only available to borrowers with excellent credit. If your credit score is less than 700, or in some cases less than 750, you won't get that rate. If you do qualify, zero percent financing means that your entire monthly payment will go toward paying the principal on your loan and that you won't incur any interest charges throughout the life of the loan. When negotiating your purchase, it is advisable to do some research about the make and model of car you want to buy before visiting the dealership. By doing research on the Internet and consulting consumer sites with information on car prices, you can know how the manufacturer has priced the car and what types of dealer markups have been added, so you can negotiate those down as low as possible. Generally, the dealer markup is called ADP (additional dealer profit) or ADM (additional dealer markup) on the price sticker on the side of the car. The Internet is useful for loan rate and length comparisons. Many consumer finance Websites offer loan rates from numerous sources and allow you to search by your location so you can compare what types of loans are available in your area to those available from online sources. 25

26 SUMMARY OF FINANCING A VEHICLE PURCHASE The automobile market is favorable to buyers in many ways. As an educated vehicle buyer, you should know the important sources of financing for your vehicle. You will also benefit from knowing how to gain the advantage in bargaining for the best loan terms. Doing plenty of research beforehand even before you're thinking of buying a car or truck will come in handy and can save you a lot of time and money. 26

27 AUTOMOBILE WARRANTIES Automobile manufacturers make promises that they will repair or replace defects in their products. These are called warranties; these warranties are included in the prices of the vehicles and last for a certain length of time. Warranties are not always in writing, nor are they only for new automobiles. While reading a warranty can make your eyes glaze over quickly, they can also save you a lot of money, a lot of time, and a lot of frustration. Learn exactly what is covered and for how long, and what is expected of you as a warranty holder. Some glazing of the eyes is a small price to pay for peace of mind. 27

28 ABOUT AUTOMOBILE WARRANTIES It is an industry standard for a new vehicle to come with a manufacturer's warranty. The warranty may be bumper-tobumper or just a powertrain warranty engine, transmission, drive axles, and sometimes additional important parts. The length of a bumper-to-bumper warranty varies according to the manufacturer, from 2 years/24,000 to as high as 5 years/60,000 miles. Powertrain warranties can be as high as 10 years/100,000 miles for some makers, and even "lifetime limited" for others. A variety of warranties exist for automobiles, just as they do for other consumer products. Here is a rundown of forms: EXPRESS WARRANTIES An express warranty is a warranty that is explicitly stated, unlike an implied warranty. It is a specific promise that your car will be fixed in the event of malfunction. Express warranties can be communicated to you in oral or written form, including in advertisements. IMPLIED WARRANTIES Implied warranties are just that implied. There are not written or spoken, but rather assumed. They exist regardless of any intention by the seller to create them. Any auto you buy is covered by an implied warranty unless it is sold "as is." There are two types of them: the warranty of merchantability and the warranty of fitness for a particular purpose. The warranty of merchantability is a seller's assurance that the auto will do what it is normally expected to do, given its status as a new or used auto and its condition. The warranty of fitness for a particular purpose refers to buying a vehicle for a particular, nonordinary purpose. This warranty assures that it will perform for that purpose. The seller must be made aware of this purpose in order for the implied warranty to be effective. The length of coverage time by implied warranties varies by state. Interpretation of "ordinary" use has sometimes been a matter for courts to decide. A word about "as is" sales: if you buy an auto as is, you are out of luck if it breaks down. However, if you buy a service contract for it, you will then be covered by it to the extent of its provisions. EXTENDED WARRANTIES An extended warranty is simply a prolonged coverage that extends past the life of an original warranty that you had on the auto. It is not a true warranty because it is not included in the price of the vehicle. It costs extra and offers a certain amount of coverage (repairs, labor, parts); details of coverage will vary greatly according to contract. Extended warranties go by alternative names: service agreement, service contract, maintenance agreement, etc. An extended warranty is offered by the manufacturer, the retailer, or by various warranty sellers. Extended warranties may have exclusions in them and should be understood thoroughly before buying. SECRET WARRANTIES Some warranties are not advertised; such is the case with secret warranties, also called warranty adjustments, policy adjustments, or various other terms. These are goodwill programs that manufacturers set up in the event that a major defect becomes known in a particular model. Only rarely are these programs communicated directly to consumers; typically, consumers must complain in order to get their defect covered. Only a few states require manufacturers to disclose these warranties to consumers. 28

29 SHOULD YOU GET AN EXTENDED WARRANTY? An extended warranty (also called a service contract) is a prolonged coverage that extends past the life of an original warranty that you had on the auto. It costs extra and offers a certain amount of coverage (repairs, labor, parts); details of coverage vary greatly according to contract. An extended warranty is offered by the manufacturer, the retailer, or by various warranty sellers. Extended warranties may have exclusions in them and should be understood thoroughly before buying. But should you get one? On the positive side, an extended warranty can buy you some needed peace of mind, and it can save you a lot of money in repair costs. On the other hand, it can cost a good chunk of money, and you may end up never needing it. They are a big source of profit to those who sell them. Ultimately, you must consider the likelihood of your vehicle needing repairs and whether the repair costs would justify the cost of an extended warranty. The only way you will know for sure that you need one is to see it in hindsight. Consider the following questions to determine whether to get an extended warranty: YOUR VEHICLE AND YOU Is the vehicle new or used? Used vehicles are more likely to benefit from extended warranties. What is the condition of your vehicle? Is it likely to need repairs? What is the potential cost of repairs that you anticipate the vehicle might need? Do you use the vehicle enough to need a warranty? Do you plan to sell or trade the vehicle soon? If not, you must consider the costs of repairs, not only now but years down the road. If you invested the money you would otherwise spend on a warranty, could you build up an adequate fund for repairs? THE WARRANTY Is there any overlap between the original warranty and the extended warranty? How long does the extended warranty last? What is the cancellation policy? What is the reputation of the company offering the extended warranty? Does the dealer, the manufacturer, or some independent company back the warranty? What exclusions are in the extended warranty? Are they anything you anticipate spending money on? Is the new warranty contingent on you doing the manufacturer's recommended routine maintenance? Many are. USING THE WARRANTY Can you choose service dealers or repair centers or must you use only one dealer? What happens to your coverage if the dealer or the administrator goes out of business? How do they handle claims? Is your car covered if it breaks down on a trip? Do you need prior authorization for repair work to be done? Warranty providers must be licensed or registered. They are regulated by many state insurance commissioners, meaning that you can research a prospective provider if you need to. 29

30 GETTING THE BEST SERVICE FROM AN AUTOMOBILE WARRANTY To get the most out of your warranty, you must be proactive. That means, for example, that you must notify the seller early on if there is a problem with your car. If you don't, you could lose coverage for the problem. Keep a log of every time you contact the seller; this could protect you if you had to defend yourself in a dispute. Also, it is always advised to read the warranty carefully before you buy the vehicle. Learn what is required of you so that you can stay in good standing with it. A warranty doesn't necessarily mean that you will get a refund if the product is defective; the company is allowed to fix it first. Print the warranty out if it is online and keep it with your records. After you buy it, save your receipt; you may need it to prove the date of your purchase. It is important to use and care for the vehicle in the manner intended by the manufacturer. If you do not, you may lose the warranty coverage. That means you must keep up the maintenance on it, and keep all records. They will come in handy if your maintenance habits should be disputed. If you can't resolve the issue with the retailer, try the manufacturer. A well-written complaint letter can open doors for you. If that fails, you can try your state's consumer protection office; it may be able to help you. IF NONE OF THESE APPROACHES WORK If these avenues don't work, you do have other options. There are dispute resolution programs available, which might even be required by your warranty before you go to court. Your consumer protection office can help you find these programs in your area. If dispute resolution does not work, you can try small claims court or file a lawsuit. Small claims court is simpler and less expensive and may be most effective for disputes that involve small amounts of money. FINDING SECRET WARRANTIES Secret warranties are warranties that are not advertised or made known otherwise. The way to find a secret warranty is to do some research on your own. Consult the technical service bulletins that come out periodically for your vehicle. You can find them at the National Highway Traffic Safety Administration and other locations online. Print out the bulletin and take it along with your vehicle to the dealership or other repair location. The bulletin will help your case that you deserve the repair. If the dealer refuses you, try the manufacturer instead. If you succeed with your claim, you may get the repair for free, but in certain cases you will split the bill with the manufacturer and/or the dealer. One note: if the defect is safety related, the manufacturer will have to repair it for free, even after the warranty is up. 30