Buying a car is a very expensive proposition. Besides buying a home – buying a car or truck is typically the second largest asset people purchase. And those car payments can really add up to a budget buster if you are not careful.
There is no need to wind up paying more than you have to.
When going to buy a car there are some key financial potholes to avoid along the way. Dealers have all sorts of clever ways to add extras to the purchase that will cost you money you don’t need to pay.
The Temporary “Permanent” Sale – A large number of people are not aware the sales contract they sign to buy a vehicle may not actually lock them into the rate and payment specified on paper.
What you want is a final sales agreement and not a conditional sales agreement. In the conditional sales agreement the dealer has the right to change the terms or cancel the sale even after you drive the car off the lot.
One easy way to get a clue if you are being targeted for a conditional sales agreement is if the dealer lets you take possession of the car right there on the spot and drive off with it, without much checking.
Then low and behold the dealer will call you with bad news in a week or so and “LieNance” the car. They will tell you the financing fell through because you don’t have the best credit and so the rate must change and your payment will go up.
People with bad credit tend to fall for the “LieNance” approach trick because it is believable with their bad credit.
Sometimes this approach is called the Yo-Yo Sale because the dealer let’s you take the vehicle home and then yanks you back in once you’ve fallen in love with the car.
To avoid this from happening you should apply for your financing someplace other than at the dealer. You can try your bank or credit union for a loan to purchase the vehicle.
If you walk in pre-qualified at the dealer you are also in a better position to negotiate for a better deal as well.
According to the Center for Responsible Lending a person caught in a Yo-Yo or Spot Delivery scam will pay an extra 5% APR on top of what they were originally told.
While there is some limited federal law protection from this practice, it is really the state law which more restrictive.
But dealer agreements also contain mandatory arbitration clauses which limit many of these situation from ever reaching court.
Dealer Financing Markup – This is less of a deceptive pothole than it is a unfortunate trap set for the consumer because they are unaware.
By following the advice above and getting pre-qualified and arranging financing outside the dealership you will already know what the current rates are and what is a good deal.
In the dealer kickback situation the dealer will originate a finance agreement at X% but will sell it to a finance company for a lower interest rate and keep the markup as additional profit.
But don’t despair, now that you are armed with this practice you might even find your low pre-qualified offer can help you negotiate an even lower interest rate through car manufacturer dealer financing.
That’s what I did once. I walked into the dealer with a pre-qialified check in hand to buy a car and the dealer was able to beat that rate by 1%. They wanted the business and had access to lower wholesale funds.
Tack It On and Pack It In Loans – Have you ever financed a vehicle and had the dealer want to add on all sorts of extras like Guaranteed Auto Protection (GAP) Insurance, or Vehicle Service Contracts (VSCs), and Extended Warranties?
GAP Insurance sounds like a great deal. It will pay off in case the vehicle is totaled and there is a difference between the current value of the vehicle and the outstanding loan amount. Your car insurance policy might only cover up to the current market value of the vehicle.
The problem with rolling GAP insurance into the financing is there comes a time when the car will be worth more than the loan but you will continue to pay financing on a product that now has no benefit for you.
Then there is also all the other services the dealers try to sell at the end. The bottom line is they all increase expense for the consumer and profit for the dealer.
If you avoid these traps, you’ll be way ahead to saving money and cutting your costs.
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My beef with percentages is that they are nearly impossible to follow depending on your situation. Take the 25-35% housing requirement. Many people in my state would have to go half on one room or a studio apartment to make that percentage. For families that is just not feasible.
Hi Steve, I am wondering what is a good percentage of my total income to allocate for a future car payment? I have heard before that you should not pay more than 30% of your income for your housing payments or something like that. Is there a similar percentage for car payments?
I believe all those percentage estimates are a load of crap. The bottom line is your life needs to fit within your income, including savings and retirement saving. How you elect to use your money is up to you.
If you have a higher car payment but elect to cutback in other areas, that’s fine in my opinion.