Debt Free

As the price of cars, both new and used, continues to climb like a deranged Edmund Hillary after being locked inside a Starbucks, chances are you’re going to have to get a loan to buy your next car. Unlike homes, which tend to appreciate over the long term, cars are a depreciating asset, so you probably won’t be able to use the equity in your existing car to pay for your new one. It’s pretty typical for your car to be worth just about nothing by the time you’re finished paying for it. You’ll be confronted by a dizzying array of choices when it comes time to finance your next vehicular pride and joy.

So, what are you to do? Where are you going to get the money it will take to put yourself behind the wheel? First you’ll have to wrestle with the lease vs. buy decision. That’s a subject for another post, I’m going to assume that you’ve already made the decision to buy your car, and leave the leasing to someone else.

Car loans are available from a number of sources. Most traditional lenders, such as banks and credit unions, offer car loan products. In addition, you can finance through the dealer, if you’re buying your car there. You can also get a loan from one of the many on line vehicle loan providers. All have their advantages and disadvantages. Rest assured, you can get a good loan, and with the average price of a new car for 2008 hovering at around $28,000 according to Edmunds.com, you’re probably going to need one.

First of all, negotiate the price of the car down as low as possible. One way to pay less in interest payments is to just finance less. Pretty basic, but it bears repeating.

Car Loans Through the Dealer –
Rule number one; secure your financing before you ever go near the dealer’s lot. Even if you don’t use it, and for some reason you do finance through the dealer, having your loan secured from an outside source gives you a hefty advantage at the negotiating table. Dealer financing has its advantages for you as a customer, however most of the advantages lie with the dealer. Many car dealers make a large percentage of their profit through the financing they provide. Many car dealers are on the up and up, but there are those that aren’t, and even those that are reputable are out to make as much profit as possible. For more info, here's a post I did some months back on car dealer scams. 

One possible advantage by getting a loan from the dealer is one of the low interest incentive programs offered by many auto manufacturers. You have to run the numbers however, as many of these low, or zero interest loan programs are offered in lieu of a substantial cash rebate. Look at how much you stand to save by foregoing the discount and financing at the low interest rate, versus taking the discount and getting a good loan somewhere else.

Here’s an example:
GM is trying to rid itself of some excess inventory that burns a bit more fuel than some would consider desirable, so they’re offering 0%, 60 month financing on Silverado pickups. You can also choose a $2,000 rebate, if you’d rather have that. Now this is a nice truck if there ever was one, and if you can afford to feed it, more power (and it has up to to367hp) to you.

0% Car Loan
Where do you end up after you analyze this loan? A Silverado extended cab 4x4 with the 5.3l V8 fetches about $33,000. If you financed at zero percent it would cost you $33,000, but it would effectively cost you less, due to the time value of money. Your real cost is closer to $30,000 after the effects of 3.5% inflation is calculated on your payment stream.
 

Cash Rebate in lieu of 0% loan
If you took the $2,000 discount and financed $31,000 at 6.75% for 60 months, your payment would be $610 per month for 60 months, vs. the $550 you’d pay for the 0% loan on the $33,000 loan. Your total of payments would be $36,600. The present value of the payment stream is roughly $31,165. That $610 you pay for your last payment in 5 years is only worth about $512 in today’s dollars.

So, in real terms you spend about $1,165 more for the cash rebate plus the third part loan. If, however, you invested the $2,000 at 10% for the 5 years, you’d end up with about $3,300. That’s enough math for one Friday, I think. Just remember to bring your financial calculator to the F&I office with you and don’t take the F&I manager’s word for everything. Remember, they are all about getting you to say “yes”. So when they say, “If I could, would you”, just say no! (At least until you’ve run the numbers yourself)

You can get a good car loan. They key is to look at all the alternatives. Weather you finance through the dealer, get a loan at your bank or credit union, or get a loan from a on-line car loan website, just make sure you compare all the offers, and make the best choice. Don’t just grab the first loan to come your way.

Have a great, Debt Free, weekend!