Financing a Car – 5 Tips For Buying Smart

    Most people can not plop down the cash to buy a new car outright. That means most of us finance new vehicles. Fortunately, financing a car is not hard…if you know what you’re doing. Here are five simple tips that can make the process much less painful and reduce your risk.

    First, do not assume the dealer has to finance your car for you. That’s one option, but only one. Other options include getting loan online, or getting a loan from your bank. That last option is worth a serious look.

    Most dealers will finance your car for you, but the person working up the financing deal usually works on commission. Who’s side do you think he’s on? You might end up paying more for your car than you want to. And speaking of paying more, you can use a bank loan to your advantage. If you get a car loan from a bank, that typically means you get cash to use to buy your car. If you walk into a dealer with cash equal to the amount you’re willing to pay for a car, many dealers will take your price, even if it’s less than they might be able to negotiate for. It’s a bird in hand for them.

    Not only that, but getting a loan elsewhere can save you from price creep. For example, some dealers will charge a $300-600 fee for VIN etching (to etch the vehicle VIN number in the windshield) and say the bank required it in order to authorize a loan. Nonsense. And if you’ve got your loan already, you can nix that fee.

    Second, shop around for your rate. The Annual Percentage Rate for loans is not set in stone. Finance companies are often willing to compete for your business. That competition works in your favor. Get the lowest rate you can.

    Third, protect yourself against scams. The VIN number etching fee is one example, but it’s not directly related to financing. The FICO score scam is. That’s where the finance guys at a dealer claim they have an “official” report that grossly undercuts your credit score. Because you’re a greater risk (they say), they jack up your interest rate. If you get your credit scores before you go car shopping, you can pull out your own reports and cut this scam off at the knees.

    Fourth, avoid using your home equity to buy a car. This definitely looks convenient, because the money’s there and available, usually at a nice interest rate. But when you use home equity to buy a car, you’re tying your car to your house. That can be a risky scheme. The subprime collapse demonstrated that in spades-if you lose your house, your car could go right along with it, or you could be forced to damage your credit so you can still get to work.

    Fifth, never finance a car for more than 48 months. This is about your financial health. The monthly payment for a 72-month loan will be lower, but you’re signing yourself up for six years of debt. If you can’t afford to put at least 20 percent down on your car, and you can’t afford a 48-month loan, you really can’t afford the car at all.

    These five tips should make financing a car easy and painless. It takes some due diligence and self control, but those can pay off very nicely in the end.

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