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It is important that you arrange your financing prior to negotiating
price with a dealership--ideally, before you even visit a dealership. The financing "arm" of a new car
dealership is a prolific profit center--dealers will often take smaller profit deals when selling the car (the
"front-end" profit) if they know that they are going to make a nice profit on the financing of the car
(the "back-end" profit). The problem with this is that it is you run the risk of giving all (or more)
of your purchase savings back when it comes time to finance the car!
Don't get taken!
Don't make an expensive mistake. Check your credit and investigate all
your car finance options before
you start visiting dealerships. The dealer will work hard to get you to make all of your decisions in a single
day. Don't get caught on an emotional highway that leads to less money in your pocket (and more in the dealership's)!
- Check your credit upfront.
Many financial institutions determine interest rates on a "tier" basis. The better your credit, and the
more "in line" the price of the car is in relation to invoice (on a new car) or book value (on a used
car), the lower your financing rate will be. It is a good idea, then, to make sure your credit report does not
have mistakes or omissions before the bank sees it. Click here for a free credit report from Consumer Info.
- Make your comparisons. LendingTree
makes this extremely easy. Submit a simple application, and within
2 business days you will receive car financing offers from up to 4 different lending institutions, all competing
for your business. The power of the Internet at work!
- Check your local bank and/or credit union. After you have made your online comparisons, make your offline comparisons. The advantage
of your local bank is that there is the possibility of a personal relationship with your banker. The disadvantage
of a local (and smaller) bank may be an uncompetitive rate. If you have the availability of a credit union, the
advantage here is the convenience of having your car payments deducted from your pay. The disadvantage is that
you are tapping what may be an unsecured line of credit for a car--meaning what would normally be an easily accessible
loan from your credit union (if, for example, you ever needed for an emergency) may no longer be available to you.
- Home equity loans
have become a popular way to finance a car in recent years. The advantage is the possible tax deductibility of
the interest paid on such a loan. To get comparisons of home equity loans, visit Lending Tree's Home Equity Comparison Section Note: The IRS will only allow you to deduct interest on a loan amount that does
not exceed the value of your home, for good reason. Borrowing in excess of your home's value is not recommended.
- Dealer financing
may or may not be the best option for you. The single advantage of financing a car at the dealership is convenience--you
buy and finance the car at the same place. The main disadvantage is the variation of interest rates, since the
difference between what the dealer "sells" you the financing for and what they "buy" it from
the bank for, is their profit. This is why it is so important to do your comparisons before you enter the dealership!
- Investigate leasing to
see if it would be advantageous for you. For some car buyers it is an excellent choice. For others, it can be one
of the worst mistakes you can make.
- Don't accept the financing rate that the dealer offers as gospel! You have far too many options that may save you money to just accept what the
dealer puts on the table for you.
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