Financial Preparations

Buying a Car
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Keep that chin up Fool, we're almost home free!

At this point we're just dotting the i's and crossing the t's. We simply want to make sure you're fully prepared, number-wise, before you sign your name on the bottom of a purchase contract.

Before we get down to tightening the last nut on the financial plan, we need to talk strategy for a moment. Yes, strategy. Your Foolish Car Buying Strategic Defense Initiatives (FCB-SDI) are a simple set of steps that you need to memorize and take with you into Steps 12 and 13.

Each of these steps must be kept separate and distinct in the purchasing process and they need to be acted on in order.

Foolish Car Buying Strategic Defense Initiative (FCB-SDI)

  • Step 1: Negotiate the price of the new car
  • Step 2: Value the trade-in vehicle
  • Step 3: Arrange financing/leasing

Why do we need these steps? Well, for one thing, salespeople, sales managers, and F&I managers are all lying in wait for you. These folk target customers like us for a living, perhaps a dozen or more times a day, and they are remarkably skilled at controlling the direction of the deal.

Thus we've designed the FCB-SDI to keep things simple. Settling one matter at a time will prevent confusion -- and confusion is a rather large weapon in their arsenal. They probably tested you on this when you took the test drives (Step 7). Did they throw out a low financing offer to see how you handled it? Or maybe they mentioned that the manufacturer was providing a fabulous leasing deal, darned if they weren't "giving them away." Well, forget that big special deal, Fool. Instead go back to Step 1: negotiate the price of that car.

If you take a "deal" (that special lease the salesman mentioned) without doing the three distinct parts of the FCB-SDI, then he has succeeded in confusing you. But fear not, you're already prepared! Step 9 helped complete your preparations for that FCB-SDI rule one, the New Car Purchase Price Negotiation. Step 10 showed you how to prepare for the trade-in part of the FCB-SDI. The last thing we need to do prior to buying our vehicle is to prepare ourselves financially.

If you're considering leasing, you should be able to hold your own when calculating leases against the dealer's supercomputer. Leasing has become extremely popular in the new vehicle market. More than 30% of new vehicle consumers now lease, but the mathematics of leasing can be confusing even to an engineer with a pocket protector and four years at the Jet Propulsion Lab in Pasadena.

If you plan to skip leasing and buy outright, it helps to know the terms that will be used by the bean counters. And now we're going to line up outside financing before initiating the purchase of a vehicle.

Why not just let the dealer handle that messy financing stuff for you?

That's the most simplistic approach, and it will get the financing arrangement job done in short order. However, dealer-arranged financing is probably not in your best interest. Dealerships make a great deal of their money on what is known as Back End business. A portion of back end profit comes from arranging the financing for the vehicles that customers have purchased. Dealer agreements with financing institutions are often structured so that the higher interest rate a dealer can get you to accept, the more money they make off the deal. This portion of a dealer's business is summed up in just one word: lucrative.

A Foolish car buyer is best served by lining up financing before buying the vehicle. Why spend hours test-driving, pricing and buying a new vehicle, only to turn around and hand back to the dealer all that you just saved? Go to the phone and call various lending institutions. Start with your own bank and see what kind of terms they offer. Or find a good rate using Bank Rate Monitor's Auto Loan Watch. As we stated in Step 2, use your budget as a guide. This helps determine the affordability of the down-payment and of the monthly payments. Most lending institutions have a minimum down-payment as a hedge against the rapid depreciation; 20% is a general rule for new vehicles. You might even use some of the loan calculators available on the Internet (like Bank Rate Monitor) to plug in loan terms (APR, loan term, total amount financed, and monthly payment) to try alternative payment scenarios. And remember back in Step 2 when we lead you to some Foolish financing calculators? No? Well here they are again: Finance or pay cash; What your monthly payments will be; How much you should put down; What term of loan you should consider; Home equity vs. auto loan, and Rebate vs. dealer financing.

After performing a little due diligence on the financing of your purchase, decide on one source. Negotiate the particulars down to the last detail, but don't commit. Instead, move on to Step 12, and get your vehicle. In Step 13, when the dealer takes a shot at you with a financing deal, you're well-armed to determine what's attractive and what isn't. If the dealer can't beat the best deal you've already arranged, then don't go with the dealer's "deal." It's that easy.

Another financial preparation many consumers fail to perform is the inevitable insurance question. As with loans, a great place to start is with someone you already know -- your current agent. Give him or her the exact listing of the vehicle you are planning to purchase, so that you can be given a quote on just what your insurance costs will be. You can also price this out on the Web by using services like AAA, Insurance Web and Insurance News Network. But be prepared to enter a ton of personal info if you want a quote back. And be sure to have your current insurance descriptions in front of you.

Let your agent know your trade-in plans; in that way, you're providing information on the number of vehicles you own. In addition, question the agent directly on discounts. You may be able to receive discounts based on the trade organization to which you belong, and you may be able to shave off a few dollars from your theft portion if you purchase an alarm system. If you're leasing, check on the specifics of the Gap Insurance that they may furnish at a lower rate than the finance/leasing company. (For leasing information try GE Capital and LeaseSource.)

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