Purchasing a car is a big deal for anyone. It makes the heart thump in excitement to have that dream vehicle on the driveway. Before stepping on the pedals there are several things a car buyer must know to get the best car loan deal.
First Things First
When buying a car you must know what you can afford. It is better to sit down and review your budget to see how your monthly payment for the auto loan will affect your household.
The rule of thumb is not to go beyond fifteen to twenty percent of the household budget for transportation expenses.
It will also be wise to check on your credit standing since this will be the basis of the interest rates and ultimately your monthly payments. If you have to deal with some financial mistakes then deal with it head on so you can pull up your credit score. It will be beneficial for the auto loan and also for all other financial transactions.
Shopping early for the car that you want is also good since you will have an idea of the price and you can confidently walk your way into the show room. Knowing what to expect is best when buying an old car or the latest model if you have done your homework.
Mistakes to avoid
Car dealers need to earn their living. They will sell at the highest price possible. If you show something that they can capitalize on, then say goodbye to your dollars.
Here are some mistakes that a car buyer can avoid:
- buying the vehicle not for you -You don’t need to buy a truck if you only drive less than a mile to the grocery. No sports car if you are a family man of four kids. This is a simple rule for the car loan game.
- Be realistic - if you are about to go gaga on a car try to hold back your emotions. If you have a budget of $25,000 and the car of your dreams is at $35,000, maybe you can still haggle for a lower price. Just don’t expect that you can get it at $25,000.
- Deals by location- dealers have price differences in every car and in every model. You have to check the Customer Satisfaction index of a dealer or check their complaints records before negotiating with them. Positive records show how you can trust them with the car deal.
- Broker Assistance- if the tough gets going do not call a broker immediately to help you out. Brokers have special price arrangements with dealers where you will not be on the winning side.
- Do not celebrate too early - if the dealer gave in to the haggling wait until you enter the business office. Watch out for price add-ons like the insurance and other services.
To meet the dealer head on you must have done your home work before walking in to the showroom. You don’t have to be a hostage but take control of the bargaining. Remember that the first offer is not the best and you can always wait for price split for the better.
If they can’t give what you think is best and feasible, then walk away and see what they do. If they don’t go after you to give you other options then go to the next car dealer and shop for the best deal again.
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NEW YORK -(Dow Jones)- The financing arms of U.S. auto makers are likely to shift to longer-term car loans as they eliminate or scale back their participation in the leasing business.
A longer maturity on loans translates into a slower repayment of principal, increasing the potential magnitude of losses resulting from defaults. It also means that these companies should set aside more reserves to account for possible losses from these loans - on top of the funds they have squirreled away to support the souring credit quality of their portfolios.
But these longer-term loans - which can now stretch out as long as 84 months, or 7 years - are one way that General Motors Corp. (GM), Ford Motor Co. (F) and Chrysler LLC can seek to clear bloated inventories and avoid further market- share losses. With fuel prices above $4 a gallon and consumer confidence on the decline, Detroit’s auto makers have been stung by steep declines in sales of the pickup trucks and sport-utility vehicles that have long sustained their businesses.
As the financing arms of these auto makers eliminate or cut back on unprofitable lease agreements - a trend that has picked up momentum in recent days - longer-term loans for car buyers can bring down monthly payments for borrowers to the same level as payments made under leasing agreements.
“What you’ll probably see is that captive financing arms focus a bit more on longer-term loans, such as 72-month loans to help reduce monthly payments,” says Chris Wolfe, an analyst at Fitch Ratings.
Wolfe warned, however, that longer-term loans increase the ultimate loss severity in the event of default, noting that the amount of unpaid principal is larger than it would have been on a shorter-term loan.
“From our perspective, longer loans mean loss-incurred-in-case-of-default becomes higher,” says Wolfe. “Are companies factoring that into the price they charge the customer? Are they factoring that into the loss reserves?”
Chrysler To Extend Loan Terms
Fitch on Tuesday downgraded its issuer default rating on Chrysler to CCC, just two notches above a default rating. The move followed Chrysler’s announcement Friday that it would no longer offer leases through its Chrysler Financial lending arm.
Fitch said that the downgrade reflected Chrysler’s restricted access to economic retail financing for its vehicles, which is expected to further cut into sales volume. It added that “the lack of competitive financing is expected to result in more costly subvention payments and other forms of sales incentives.”
Chrysler Financial, which typically extends 36-month loans to car buyers, will do more 60-month loans, according to Bill Porter, a spokesman.
The question of longer-term loans comes “into play when we had to make the decision to move away from leasing. It’s shifting the risk,” says Porter.
“You still have the risk of consumer finance; people can still default on their loans. What added to the lease was the risk of declining residual values,” he said. “We believe we can effectively manage our risk through disciplined credit policies on the loan side.”
Leasing comprises an estimated 20% of U.S. auto sales, and has been a key tool used by auto makers to offer lower monthly payments on vehicles customers couldn’t otherwise afford. In recent months, however, leases have become a liability amid tanking resale values, especially of used pickup trucks and SUVs.
In most cases, when a lease is up, the customer returns the vehicle to the auto finance arm, which then resells the car or truck. The lower worth of the vehicle has spelled losses at these companies at the time of resale, and, a fall in the value of their existing portfolio of lease agreements.
Longer Loans Are Key Incentive
Ford announced last week that it wrote down $2.1 billion to cover unprofitable auto leases at its Ford Motor Credit arm in the second quarter. GM affiliate GMAC LLC could announce big lease-related losses when it releases its second- quarter financial report on Thursday.
This week, Ford informed its dealers that it will raise the prices on leases on its most-profitable trucks and SUVs due to the “extreme losses” Ford Motor Credit is taking on these vehicles. GMAC, in which Cerberus Capital Management has a 51% stake and GM has the remainder, said it will no longer extend auto lease deals to consumers with the lowest credit ratings.
“This isn’t the first time auto makers have taken losses on residual values,” said Robert Schulz, an analyst at Standard & Poor’s. “What makes it a little unique now is that they are stopping and ending leasing completely,” he added, referring to Chrysler.
Schulz said that S&P is worried about the potential for the auto makers to implement more broad-based and aggressive incentives.
Cut-rate financing for longer terms has become a key incentive in the arsenal of auto makers.
“Longer-term contracts may be one way to essentially keep” payments on a car loan in line with lease payments, says Curt Beaudouin at Moody’s Investors Service.
“That’s the rock and the hard place that the manufacturer and finance companies are in between at the moment,” says Beaudouin. “The risk is if you loosen standards now to drive sales in the absence of leasing, you’re inviting more credit losses.”
-By Aparajita Saha-Bubna, Dow Jones Newswires; 201-938-2137; aparajita.saha- bubna@dowjones.com
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