Financing your vehicle - Introduction and Tips

Auto Finance Introduction:

     Financing a car is an integral part of a new or used car purchase for a lot of us. We usually like to think about the total cost of owner ship. In the US car dealers compete with banks to offer auto finance. Here it is so bad that, when you approach a dealer they are more keen to know "how much you can pay monthly?". That did not work well with a desi professor I used to know. It seems he went to a Cadillac dealer and liked a new Cadillac. He had a tough time to get the dealer to tell him the out of the door price with everything included. Instead he had to hear the BS on APRs, monthly payments and GAP insurance and other stuff that he would probably never need. After about 15 minutes the prof was able o get a total dollar cost of this car purchase. He simply whips out his checkbook and paid upfront the full cash payment to a gasp from the sales guy.

   Basically the dealers here assume that you need 'financing' no matter what. And along with it comes their time tested methods, scams and tricks to ensure you land the highest costs (APR, fees up sells etc) and they get the maximum money from you.     You could be a first time buyer with a couple of years of Credit History or even a seasoned buyer. So if you are shopping for finance, knowing current APRs, your own CREDIT score and a bit of due diligence can go a long way in ensuring that you get the lowest possible interest rates. Here are a few guidelines, tips and tricks to come out even:-

1.) Avoid Dealer Finacing :  It is extremely rare for a dealer to quote APRs cheaper than you can find online or at a bank or credit union. This is since; their commission will be built into your rates. The dealers eventually go through some banks or finance company, so why not apply directly. The sales guy will claim to offer you rates 'lower' than banks and other finance providers. This is usually a lie and these guys are skillful in hiding high APRs in cleverly crafted loan paperwork.

    So keep that in mind and always get pre-approved by a lender before you approach these dealers. There is only one exception to this rule and is when there is manufacturer rebates and cash incentives offered if you finance through the dealer. In that event you can obtain the incentives and after a couple of months if you can always refinance with a 3rd party with lower APR.

2.) Note on APRs - The interest rate or APR primarily depends on your CREDIT score and also varies depending on new or used car and if purchased from a private party or a dealer. To give you an idea the lowest rate is for a new car from a dealer. It may also depend on the amount of cash or down payment you put in. If this rate is x% the other rates will generally be in this order to give you an idea :-

      a.) New Car from dealer: x% 

      b.) Used Car from dealer: x+2% (or more)

      c.) Used car Private party: x+4% (or more)


3.) Obtain 3rd party Finance : Places to obtain auto finance include  Banks, Credit Union, Online Banks and finally if nothing else works go with the dealer. There are many online providers of auto finance. Capital One is a popular provider. You can even talk to your local bank where you have your savings at like BOA or Chase etc. CREDIT Union Banks are particular effective in giving you low rates and remain an attractive option for many folks to obtain loans. Find out from your employer or colleagues or social circle on  how to become a member of Credit Union type of bank. Please visit to get an idea of current rates and use their calculator to find out your monthly payments etc.


4.) Examples of finance availed :  Here are some actual example of cars financed by auto loans and how it worked:-

     a.) A recent graduate got a good job and moved to a big city. He tried every where but rates were high, he was eventually able to get good rate at his schools CREDIT union bank. He sold his used student car to a private buyer at a good price.                 

     b.) An employed engineer wanted to buy a used luxury car around 28K. He got a pre-approval for 30K from Capital One. They over-nighted(send) him a blank check with limit at $30K   He walked in to the car dealer and told he was able to pay in 'cash'. So he was able to negotiate an aggressive price of 26K with tax and all fees included. Being smart he used 5K from his savings and filled the blank check for the remaining 21K in favor of the dealer. Dealer’s paper work including the sales contract and copy of title was faxed over to the lender by the dealer.

     c.) An employed person wanted to buy a used sports car from a private seller. He got a pre-approval for 15K from an online bank. They send him a blank check with limit at $15K. The buyer already had put a deposit of $100 with the seller. He wrote the blank loan check for the balance amount to the seller, requesting him to fax over the sale letter and courier the title to the lender. The check cleared after 2-3 days and the seller called the buyer to come over and take delivery of the car.

     d.) Another employed person needed a car loan. He called a local bank branch and made appointment. He was approved of a 25K loan at a very low rate. He goes shopping to a few dealers and ensures to tell them that he is paying by cash. He makes an aggressive offer on a car and the dealer accepts. Total including tax at $22000. He pays $2000 with his credit card with instructions to the dealer to fax the copy of the sales contract and title to the banks auto loan department. The auto loan department calls the buyer and tells him to go to a bank branch the next day where they will issue the check. He picks up the check from the bank and gives it to the dealer and takes delivery of the car.

     e.) A recent immigrant with no credit history tried all means but was unable to get loan due to lack of credit history. Since he wanted to buy a used car that was around 9K, the only option he had was a dealer who agreed to give him loan but at a high APR. He also had to provide a guarantor (or co-signer) for the loan. Having no other choice he took the offer and had to settle with a high APR.       

     g.) Another employed person wanted to take advantage of the 0%APR offered by a popular Japanese car manufacturer. He was able to qualify and got lending through the dealer.  As soon as the 0% APR duration expired he was able to pay the balance due in full.  

5.) Best Approach Summary - Get Preapproved or obtain a blank check and then walk in to a dealer or private seller and negotiate.

6.) What to do at the dealer?  - Never quote a monthly figure. Always ensure to ask the out of the door final price on the Vehicle and Let them know upfront that you will be paying in 'cash'. You can use the term cash not only when you are using money from your savings, but also when you have your own finance from a 3rd party lender. (See Examples of finance availed above). So letting them know ahead that you are paying by cash , will cut a lot of bs out of the negotiation (see the prof's experience above). You drill right down to the 'out of the door' price and negotiate aggressively.

7.) Money Saving Tips -

            a.) Down Payment - Try a down payment of at least 10-40% it will help big in bringing down interest rates

        b.) Do not do a trade in: If you have a used car that you want to dispose, do not do a trade in, unless you absolutely have it. There is no way on earth they will even give you half of what it is worth. Like they say with gambling, the house always wins. The situation here is 'the car dealer always wins'. These guys have time tested methods to do the numbers/adjustments that will make it look you are getting a good value on your used car. Do not fall for it. You basically walk in his door, find a car you like, and ask out of the door price with all expenses included. That’s it Period. NO TRADE INs. There are a few limited exceptions. One was the cash for clunkers program.

        c.) Avoid Up sells - Warranty , Cleaning Package and other Upsells and gimmicks. The fun starts when you agree on a final sale price and sit down to do a sales contract. One by one all these up sells - Additional Warranty, Cleaning Package, Bumper to Bumper ,even Tire Warranty (how low they can get !!!) will be thrown at your face. Decline All. Take information brochures. You can always shop for reliable 3rd party Warranty from many providers in the comfort of your home if you so choose. Dont confuse these upsells with the Certified Pre-Owned Warranty (CPO) run by several manufacturers. CPO cars cost a bit more and are backed by Warranties above the initial Factory Warranty , by the Factory themselves.

        d.) Refinancing - Even if you were unfortunate to get a high APR loan you can always refiannce it when your credit improves.

        e.) Credit score : First is know your CREDIT score. If your score is not all good wait a few months. Improve your credit score and them try to apply for a 3rd party loan.

8.) Buying from a Private party with a used car loan : It is basically the same like you buy from a dealer. When buying from a private party you and the seller do a sales agreement and ask the seller to send (fax/mail) out paper work to the lender.  You can put a deposit with the seller. When the buyer gets paid or when the check clears you can go and pick up the car.