Friday, December 6, 2013

How to Buy a Car: Part 5 - The Finance Office

Once you've agreed to the deal, you're only half done.  After negotiating with the car salesperson, the next step is the finance office, where the next battle begins.  Hard won concessions on the sales price or trade in value of your car can be easily lost in the finance office.  This is not to say the Finance office is shady, just an acknowledgement that it is a profit center for the dealership.     

When I was in the car business, the dealer I worked for made about $150 on every new car sold.  But if a customer financed a car with the dealer, bought an extended warranty or car care package, the dealer could make ten times that amount.  This is why it's important to do your homework on financing and your credit score. 

Most dealers work with a number of lenders, including local banks.  These lenders will give the dealer a "buy rate" or a base interest rate the dealer can use to finance auto loans for its customers.  The buy rate is based on tiers of credit scores--a good credit score might have a buy rate of 3% while an excellent score might be 2.5%.  The dealer then marks up the rate and makes a profit on that mark up. 

For example, if a dealer's buy rate is 3%, they might offer you a loan for 3.25% and will make money off the .25% markup.  If you are prequalified for a loan at or over the 3.25% rate, it makes sense to use the dealer financing.  If you can get a loan for less than 3.25% then you're better off financing the car from your own source. 

You can also use your prequalified rate to negotiate with the dealer.  If the dealer offers you a 3.25% rate, but you have access to financing with a 3% rate, the dealer might try to match the rate or get close to the rate to earn your finance business.  Most of the time I will go with the dealer's financing because they can either match or beat the rate I'm prequalified for.  But I always go in prequalified so I have options.    

Another place car dealers make money is on extended warranties and care packages.  The finance office will show you how adding an extended warranty or a rust prevention package will only cost you a few dollars a month but add years of peace of mind.  As a rule, I generally avoid every protection package except for the extended warranty, which I might consider based on the following criteria:

  1. If the car I'm buying is out of factory warranty or has less than a year of factory warranty remaining. 
  1. If the warranty cost less than $1,000 but provides at least 3-5 years of comprehensive coverage. 
  2. If the make and model of the car I'm buying has a reputation for costly repairs. 
  1. I plan to keep the car for more than 3-5 years. 

I passed on the extended warranty with the Chevy Traverse my wife and I bought, because it had two years of bumper to bumper coverage left on the factory/certified warranty.  I also passed on an extended warranty when I bought my new Ford Fusion, because it's covered for three years or 36,000 miles.  Had I bought a used high end luxury car, like a Jaguar or Porsche, or something like an Infiniti with over 70,000 I would have strongly considered one.  

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