Senate Cents: A Financial Wellness Blog

Most car dealers aren’t out to give you an unfair deal, but as an amateur negotiating with professionals, it can feel like you’re at a disadvantage. That doesn’t have to be the case. A little preparation and knowing some of the common car dealer tricks used by salespeople, can help you close on a car with confidence.

1. Undervaluing your credit score

Some dealers may try to convince you that your credit is worse than you think. Missing out on the most competitive rates that you qualify for could cost you hundreds of dollars over the life of your auto loan.

How to avoid

Check your credit score against the average auto loan rates before hitting the dealership. Or, arrive with preapproval from USSFCU in hand to strengthen your negotiations.

2. Only negotiating the car price

Many people view buying a car as one transaction. It’s not, and dealers know this. It’s really three transactions rolled into one: the new car price, the trade-in value and the financing. All three are ways for the dealer to make money — meaning all three are places you can save. Negotiate each of these transactions separately to get the absolute best offer but know that you’ll have to take the initiative and open negotiations yourself.

How to avoid

Treat each transaction the same way the dealer does: separately. In fact, you can shop your trade-in at multiple dealers to get the best price. Coming in with common sale prices for the car you’re interested in — and preapproval from a trusted lender like USSFCU — will help you keep the salesperson honest.

3. Downplaying the total price

Dealerships frequently offer an attractive, low monthly payment to lure you in, but you need to pay attention to the total price as well. A low payment could mislead you into believing you can afford a more expensive car than your budget can handle.

Plus, low payments can lead to terms of 60 months or more. Such long terms cost more in interest and put you at risk of an upside down car loan.

How to avoid

Focus on the total amount you pay rather than the monthly payment. Never answer the question, “How much can you pay each month?” Stick to saying, “I can afford to pay X dollars for the car.” You should also make sure that any price negotiated is the full cost of the vehicle before your trade-in or down payment is applied.

4. Emphasizing MSRP

Dealers promote the manufacturer’s suggested retail price, or MSRP, and its often what people consider the sticker price. It’s good to know but ask for the invoice price instead. The invoice price is what the dealer paid for the vehicle, and knowing the invoice price helps you understand the dealer’s markup. It can also inform your negotiations as you settle on your out-the-door (OTD) price, which includes taxes and fees.

How to avoid

Use websites like Kelley Blue Book and Edmunds to research what different models are selling for. Don’t feel embarrassed to ask for the numbers you need to make an informed decision. If the selling price is high, consider timing your purchase around a holiday or other beneficial time to buy. You can also use USSFCU’s Car Buying Service powered by TrueCar® to see what others paid and get upfront pricing.

5. Employing yo-yo financing

Spot delivery, also known as spot financing, allows you to sign a contract and drive your car home before the financing is finalized. While it is often legitimate, it can sometimes be used to back you into a loan with higher rates than what you might otherwise qualify for.

Yo-yo loan scams operate by “qualifying” you to borrow at a specific, appealing rate. Then, the dealer will notify you at a later (and often inconvenient) date that you’re not qualified to borrow under those terms. Then, surprise! The only way to stay in your new vehicle is to agree to a far more expensive loan.

In the event your financing really does fall through, the dealer should be willing to call off the sale of the vehicle per a clause in your financing agreement known as the owner’s right to cancel.

How to avoid

Know in advance what kind of interest rate you qualify for by prequalifying with other lenders. Confirm that you have been approved for the financing your dealer offers and only leave the showroom with contracts in hand that include all of your loan details, including the exact repayment terms.

6. Pushing unnecessary insurance

Dealers may try to sell you high-priced GAP insurance or credit life insurance as part of your loan. These can dramatically increase the total amount you repay.

If you decide you need these products, you’ll likely save by shopping around and going through a third party. Not only are rates often lower through a regular insurance company, but you may have more options. Plus, you won’t be financing an expensive add-on that will cost you hundreds extra in interest.

How to avoid

Compare options. USSFCU offers GAP Plus for a flat $499, and it includes Auto Deductible Reimbursement and a $1,000 replacement vehicle credit. This is most likely significantly less than what the dealer charges—mechanical repair coverage is also available.

7. Promoting expensive 0% interest offers

A 0 percent interest financing offer sounds incredible, but it may not be the right choice for you. Incentives like these are usually for shorter terms, such as 24 or 36 months, and require large payments even for an inexpensive model. You’ll also need excellent credit to qualify.

In some cases, you may even save by passing on a 0 percent offer. For instance, say you’re looking at a $20,000 car and will get $4,000 for your trade-in. You can choose between 0 percent financing or 3.49 percent with a $2,000 rebate. The term of the loan is 36 months. At the loan’s end, you’ll come out ahead by more than $1,200 if you take the rebate and the 3.49 percent financing.

However, in today’s rate environment, even those with excellent credit typically see rates of 5 percent or higher.

How to avoid

Use a rebate vs. low-interest calculator to compare the total cost of the loan financed both ways. Depending on the specific terms and your budget, there are times that the low APR is the better option.

8. Encouraging a roll-over

It can be tempting to trade for a more expensive car before you have finished paying off the car you’re currently driving. Some car buyers do this by rolling over the remaining payments on their current car into a new car loan or lease.

This is a risky move. You could owe more on your new loan than the vehicle is worth. In the lingo of automobile loans, you’ll be “upside down” on the vehicle. Then, if it is totaled in an accident or if you decide to trade it in, you will write a big check to cover the remaining loan amount.

How to avoid

You don’t want to roll over an old car loan into a new one. Instead, try to get a good price for it as a trade-in or through a private sale. And if you can’t, stick with it. Unless you desperately need a new car, there is no reason to buy a vehicle before you have paid off your old one.

9. Offering long terms

Loan terms of 72 or 84 months are increasingly common, but they come with higher overall interest and a longer path to positive equity.

How to avoid

Keep your loan term at 60 months or less, if possible. It may cost a bit more per month, but you’ll save more over time—and own your vehicle outright sooner. If you can’t pay off your loan in that timeframe, consider trimming add-ons or switching to a more affordable model.

10. Encouraging a balloon payment

While balloon payments have largely fallen out of favor, some dealers still use them as a way to offer extremely low payments upfront. While convenient at the outset, the problem is the much larger payment that comes at the end of the loan. While early payments are often manageable, many borrowers struggle to meet the last, lump sum payment at the very end. This can mean paying on your loan for years, only to have to roll over the last payment into a new loan to pay it off.

How to avoid

For most borrowers, it’s much safer to choose an installment loan with equal payments. You can’t predict what your financial situation will be like when the balloon payment comes due, so choosing this option introduces more risk to your loan.

11. Pushing certain vehicles

The bait and switch happens when you go in looking for one car and the dealer manages to get you behind the wheel of a different one. Dealers may use deceptive strategies to get you on the lot, only to tell you the car you want isn’t available and then try to sell you on something else, often at a higher price.

How to avoid

Be firm about the vehicle you want. While some salespeople may offer helpful insights, it’s important to weigh their suggestions against your own knowledge and not be misled. You can always visit another dealership if necessary or return later when you’ve had time to research new information.

12. Hiding details in the fine print

You know that you should review your final amount paid, APR and term before signing on the dotted line, but it’s important to check the fine print for any add-ons or extra services you didn’t agree to. Sneaky extras could cost you hundreds of dollars more than you intended to pay.

Reputable lenders will be upfront about what’s in your contract. If you see something that looks incorrect, the issue should be fixed without complaint or pushback. If not, walk away and find a dealer that will.

How to avoid

Read over the contract carefully. Ask about all charges and make sure the terms are clear to both you and the dealer. Keep a copy of the contract in case you need to ask questions or dispute an error.

Bottom line

Buying a car can be stressful, but don’t let the fine print of a contract make you sweat. Take your time to read everything over and ensure you understand. Knowing what to watch out for and understanding what kind of auto loan rate you’ll qualify for can help you remain in control of the situation.

If you feel pressured or uncomfortable at any point during the transaction, remember you hold the power as a consumer. Walking away from a sketchy contract is likely to save you from a headache down the road.

We’re Here When You’re Ready

Ready to get started? Just visit ussfcu.org/auto to check our current rates, explore your options, and apply online—or give us a call at 800-374-2758 if you’d like to talk it through.

All loans subject to credit approval. Rates and/or credit limits are based on creditworthiness, income and debts. Rates subject to change without notice. Not all applicants will qualify for the lowest rate.

Article content is provided for information purposes only. Original article by Bankrate.com.