Auto Financing

When an auto loan deal goes wrong, it's often because of problems that occur when the agreement is prepared in the auto finance office. It's here that a car buyer can see much of the potential savings regarding his or her auto loan go up in smoke.

To better inform car buyers, we contacted finance experts to find out what typically goes wrong and how these problems can be avoided.

One of them said, "Most consumers have front and center the information about the cars that they want to buy. But then they go into the finance office and all the savings could go out the door."

Another auto loan expert said that most consumers "aren't aware of the importance of the finance experience. They view it as paperwork that should be completed as quickly as possible so they can drive away in their new car."

First and foremost, the deal agreed upon by the salesman needs to be put in writing in the contract, our unnamed source advised. This often involves determining monthly auto loan payments based on an interest rate. Sometimes, the interest rate a customer qualifies for is inflated so the dealership can make extra profit.

This and other finance related headaches can easily be avoided by obtaining independent auto financing before going to the dealership, Reed advised. This means the consumer can proceed as a "cash buyer" and negotiate only the price of the car. Car salesmen prefer customers to be "monthly payment" buyers because, in this way, it is easier to obscure the total cost of the vehicle.

Independent car financing can be obtained from a bank, financial institution or NBFC. By checking bank rates, shoppers can quickly review rates at a number of different lenders.

Common pitfalls — and their solutions — to ensure that things go smoothly.

PITFALL #1: Many consumers are tempted to overspend once they get to the dealership.

SOLUTION: It's a good idea to set a sensible price range for the car you want to buy and stick with it. Experts suggest that monthly car payments and related expenses should not exceed about 20 percent of your monthly net income. You can even bring a printout of your budget to the dealership as a reminder. And we always recommend bringing printouts of True Market Value prices to use as a guide when negotiating.

PITFALL #3: Most consumers arrive at the dealership without having researched the current interest rates being offered in the marketplace, so they have no idea if they're being offered a competitive rate.

SOLUTION: Use the Internet as a research tool to compare rates. Check out Web sites for national averages, and the Web site of your own financial institution.

PITFALL #4: Most consumers arrive at the dealership without approved auto financing in hand. This is either because they are not aware of all the financing options available, or they assume they will qualify for a low rate at the dealer. This approach deprives the consumer of bargaining power when it comes to negotiating the lowest possible interest rate.

SOLUTION: Become an "empowered buyer" by getting a no-obligation loan before visiting the dealership. Having your own loan could save you significant money.
PITFALL #5: Many dealers offer a choice between discounted (or zero-percent) financing or a rebate — but not both. Consumers may erroneously assume that the zero-percent loan will deliver the most savings.

SOLUTION: Sometimes it's better to take the cash rebate and apply it against the purchase price of the vehicle — and then use your own preapproved car loan to finance the vehicle. The savings chart below shows how a low-interest rate and a rebate can "beat" a zero-percent deal.

PITFALL #6: The auto finance officer may try to confuse you by "intertwining" different elements of your deal. For example, they may say "we'll give you an extra-low price on the vehicle, but this interest rate is the best we can do."

SOLUTION: Consumers should "unbundle the deal" and treat the car-buying process as three separate negotiations — vehicle price, financing and trade-in value. Avoid discussions that can take you off of this track, such as "how much can you afford to spend per month?" With financing, focus on the APR, not the monthly payment.

PITFALL #7: By the time they get to the finance department, many consumers are mentally worn out and don't review the contract thoroughly before signing. As a result, they may agree to buy things they didn't plan on (such as an extended warranty, rust-proofing, etc.).

SOLUTION: Before you sign any papers or hand over any money, check the figures in the contract and understand all the charges. The sudden appearance of extra fees should be questioned. Sometimes, dealers add extra fees — so-called "junk fees" — to retake profit they have lost by selling cars at invoice.

PITFALL #8: The consumer feels rushed, pressured and confused by the dealership's staff. In some cases these buyers have second thoughts about completing the deal — but sign the documents anyway.

SOLUTION: Consumers who feel out of their comfort zone should walk away. The buyer — not the seller — should be the one in control of the process.

If you do your homework ahead of time, and know what to expect before meeting the auto finance person, the paperwork process can go quickly and easily. But more importantly, you will receive a deal on your auto loan that you can feel good about for the life of the car.