There is no guarantee that you’ll get the best rate, even if you have great credit. In fact, I know you’ll never get it unless the manufacturer offers an incentivized rate, such as 0.9% for 60 months.

The best rate for non-incentivized loans of course is the “buy rate”. That’s what a lender says it wants as an APR. NO ONE gets the buy rate. Dealers can mark it up and they all do. Some states have a cap on how much over the buy rate the dealer can charge. For instance, if the state you live in has a 3% cap and the lender tells the dealer it will fund the loan at 5.5%, the dealer can then tell you that you qualify for an 8.5% APR. The difference goes to the dealer.

This 3% cap gives the dealer some negotiating leverage when it comes to your monthly payment. He can “sweeten the deal” to get you to sign. But no matter how much he knocks off the interest rate, you’ll still be paying above the buy rate.
So what can you do? Demand an “option contract”. That gives you 5 working days (or longer depending on the dealer) to find a lender on your own who can beat their deal. If you do, they shred the contract. If you don’t, the contract goes through. If any dealer refuses to give you an option contract, walk out! They may have something to hide and you’ll want no part of a shady dealership.

And remember what I said about walking out.

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The other gimmick used to work you over is the rebate. This scheme works well when we know you’ll most likely be light on the down payment. Manufacturers usually offer either a low APR or a cash back rebate. You want to the low APR. We fill out all the paper work, including the sale price of the car, your trade-in and down payment. This tells us you have only around 10% to put down and you’re either a wash or upside down on your trade (which most people are).

Then we run your credit. Maybe you could qualify for the low APR but we tell you you’re too weak in credit score and cash down. We’ll have to go with the rebate and apply that to your down payment to make it stronger and more appealing to the lender. Now here’s where we get you.

If we pushed the lender we know we could get you bought at the incentivized rate. But we don’t want to because we make just a miserably small flat fee on the deal. And if we get a buy rate on you for say 5.9%, we can legally mark it up and make much more money on the difference between what the lender wants and what we get from you. And you end up paying a lot more for the car in financing charges.

How do you avoid this? Research! Get your credit report ahead of time from any of the three main credit reporting services. They are free once a year. And there are no add-ons or other services you have to buy. Study them. Get an understanding of what all of it means. Your credit score is not the only basis on whether or not you qualify. There are many other elements that count just as much.

If you can’t figure it out, take it to your bank or credit union and have it explained to you. Then when we tell you you don’t qualify for the 0.9% APR but you know you do, get up and walk out before we can even continue on with the “rebate towards your down payment” scheme.

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There are several ways to put you together with the down payment. The first is the “I can only get your financed with $XXXX down.” gimmick. Sometimes that is true. Some lenders specify how much personal investment they want from you. But most likely, it’s just another ruse to get you to pay more for your car. Especially if we can tell you want that new car badly.

We’ll tell you we need $XXXX more from you. We’re aware you most likely don’t have that. So what to do? Hmmm … well, we could show on paper that you put the additional cash down when you haven’t. But to offset that, we have to raise the selling price of the car. And we can spread the payments over 72 months instead of 60. One hand washes the other, we tell you. But that’s not necessarily so.

First of all, that contract is fraudulent. You should not want any part of that. Secondly, you’ll end up paying much more in financing fees over the course of the loan. Think about it. You want a car that sells for $30,000 out the door. You have $5,000 to put down, financing a balance of $25,000. But we tell you the lender wants $10,000 down. And we know you don’t have the additional cash.

So we increase the selling price from $30,000 to $35,000 and show $10,000 down. Great, now you don’t need any more cash to put down. And the balanced financed is still $25,000. And now that we increased the selling price we can also increase the amount of payments to make them more affordable. Yeah, right!

If we tell you we can get you 6.90% APR at 60 months but you don’t have enough down, look out because here comes the bait-and-switch that is legal! We can get you 6.95% at 72 months. You balk about the extra payments and we tell you not to worry. You can always pay it off sooner and not have to pay all the finance charges. And besides, it’s at a lower APR. But stop and think … 6.99% at 60 months is still much less than 6.90% at 72 months. And who ever pays off their car early?

How do you protect yourself? As soon as you hear the words, “The lender wants $XXXX more down”, demand to see the note on the lender’s letterhead. If you get any refusal or double-talk, walk out! And remember what I told you about walking out – never turn back!

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Let’s Be Realistic…

I’ve given you a lot of tips on how to avoid getting taken for a ride when buying a car. But this week I want to focus on something that will help you in negotiating a decent price for your next car. It has to do with being realistic in what you want to pay. If you lowball a salesmen, he’ll want to embarrass you or let the sales manager know they need to put you together. But you may not even know the price you quote is way too low. So here’s what to keep in mind.

Passenger cars have just 4% to 7% mark-up between what the dealer pays and the MSRP. The days of 10% to 15% mark up has been gone for a long time. Small cars generally are about 4% to 5%. Large cars can be as much as 7%. Crossovers hover around 6% to 8%. And trucks and SUVs range between 8% to 10%. That’s it. So remember this when you start your negotiating. Be reasonable and realistic and the sales staff won’t be so eager to bury you another way in the deal.

One other thing, dealers get a hold-back amount from the manufacturer every quarter- to half- year. That amount is not yours to negotiate. The entire amount belongs to dealer. It goes towards the cost of staying open and keeping the lights on. Every business must make some profit to stay open. A car dealer is no different.

But on the other side of the coin, they have no right to gouge you and put you together. Be realistic. And if the salesman isn’t, walk out.

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FTC – New Regulations for 2012? (Final in 5-Part FTC Series)

My hope is for the FTC to use all the information they collect to create new regulations regarding predatory dealers and financing. They are needed to protect you. More and more dealers are now becoming honest and trustworthy. However, there are still enough of them out there that give the industry a black eye and terrible reputation. It’s time to clean house.

But there is something the FTC is not going to help you with, and that’s the understanding of your credit report. The three credit agencies all dealers use shroud that information in so much code that you’ll have the hardest time trying to decipher what everything means. They say it’s necessary for the way they conduct business. But I say they do it intentionally to keep you in the dark about your history.

I’ve heard time and time again, “I have a 700 credit score. I shouldn’t have been turned down!” Well, your credit score is only one element of many that are considered when judging your credit worthiness. Here are some other things that factor into the approval or turn down.

Length of Credit History – Do you have only one or two years of history? That’s simply not deep enough to determine what kind of risk you are.

Previous Car Loan History – Have you ever financed or leased a car before? If no, you’re a high risk. If yes, did you make every payment on time? Were you 30, 60 or 90 days late? If so, how often? And what was the total of loan or lease? If your highest car loan was only for $10,000 and now you want to buy a $55,000 Audi A6, you won’t be approved. Unless you put 50% down to bring the new loan more in line with your previous loan. That’s too high a jump up to get funded without a lot of down from you.

Amount of Available Credit – How much do all your credit cards and bank lines of credit total up to? If you have too much available, you’re a high risk unless you have the verifiable income to back it up with.

Percentage of Available Credit – How much of your credit have you used? If you’re at 70% of more of your ceiling, you’re a high risk. You could max out and that could cause a downward spiral in your payments to all your creditors. Including the one that finances your car.

Amount of Monthly Debt – This takes into account your mortgage or rent, minimum total of your credit card payments, secured and unsecured loan payments, car payments, child support, alimony and all your income that’s outgoing monthly. If it all adds up to 35% or more of your monthly income, you will get turned down, or sent to a subprime lender that charges quite a lot for its money.

Derogatory Marks – This can be late pays, charge-offs (both paid and unpaid), tax liens, bankruptcy, lawsuits, skip—trace, failure to pay child support, and other potentially devastating notations on your credit history. Any of these can cause you to be turned down.

Time on the Job – Have you been at your current job less than two years? Are you a “job-jumper” with too many employers in the past five years? This can hurt your chances of being approved.

Time at Current Address – Have you been there for 5 years or more? Less than two years? How many residences have you had in the past 5 years? This can hurt you as well.

As you can see, there is so much more than a credit score that determines if you’re approved or turned down. And if approved, are you prime or subprime? You need to understand exactly what’s on your credit history and how it will work in your favor. Or against you. Everyone is entitled to a free report from the three agencies once a year. You should definitely take a look at yours before you start car shopping. Get to know it and understand it. It can save you a lot of embarrassment and grief. Or give you confidence, as the case may be.

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THE FTC – Dealer Practices – Part 4

The FTC is looking into dealer practices when it comes to the contract. In particular, dealer add-ons and how they’re hidden in the price of the car, or in the payment. Full disclosure is the only way a dealer with integrity operates. Before you sign or initial anything, be sure you know what you’re signing. If the total price of the car is different from what you agreed on, or if the payment is different from what you were told, be very suspicious.

Sometimes it’s a matter of the lender. The sales manager says you should qualify for a 6.9% APR. But once the finance manager sends your application out to the lenders it works with, your actual approval rate may be more. Then again, it could also be less. However, ask questions. Have the finance manager show you exactly where the difference is. Ask him to explain why it is different than what you were told.

The same applies to the selling price of the car. If there is a discrepancy, ask questions. Where exactly is the difference and what makes it changed from what you were told?

Some blue suede shoes dealerships will “pack” your selling price or payment with an extended warranty, undercoating, paint sealer, or other aftermarket products that you may not want. Be sure you get a full disclosure on everything you’re being sold. Ask for an item by item breakdown of the selling price, including accessories. And do not sign if you don’t want any of the items. Demand a new contract be written up.

New cars and late model used cars all have rust-proofing, paint sealer and fabric protector put on right at the assembly line. You don’t need any additional protection. None. So don’t let a blue suede shoes salesman or finance manager talk you into it. And an extended warranty is not necessary unless you plan to keep the car much longer than the factory warranty. Then it’s good insurance to have it, just in case. But be sure it comes from the manufacturer, not a third party!

The FTC can help you to an extent. But you can help yourself even more by staying aware and alert. And asking questions.

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How does the FTC protect you when buying a used car?

What if you’re in the market for a used car? Not a new one. How can the FTC protect you? By drawing up the same guidelines as mentioned in Part 2 for new cars and enforcing them. It’s very rare when a manufacturer will have incentivized rates on used cars. Some do from time to time but only on Certified Used Cars. You really should research the manufacturer’s website to find out if they’re offered. Chances are that only standard rates are available.

Since dealers do not offer you proof of your buy rate, how will you know if you’re being hammered? By asking for it and holding firm. No proof, no signing. It’s as simple as that. And if you find they’re charging over 1% mark-up, demand that they trim it back to 1% or you’ll walk. And then do it if they refuse. And always remember … once you start walking DO NOT turn around for any reason! If you do, they’ve got you in their clutches.

I mentioned stipulations in Part 1. These are demands made by the lender before approving your loan. For instance, the lender may want 6 personal references complete with full addresses and phone numbers, proof of income and/or a utility bill in your name to your current address. They will call all your references to verify them before they commit to funding your loan. And they’ll call your employer to be sure the check stub you submitted is current and accurate. Once everything checks out, you’re approved.

Stipulations are usually demanded by sub-prime lenders. If your credit is really bad, they’re taking quite a chance with you and they need to protect themselves. However, a prime lender may also ask for them as well. If you’re close to Tier A or Tier B credit, but just a shade shy, they may ask for ‘”stips” . If they’re satisfied that you’re a good risk, they may upgrade you and save you on the finance charge.

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Truth in lending … it’s what we all want. (Part II – FTC Series)

Truth in lending … it’s what we all want. Especially when it comes to car loans. If you were turned down for an incentivzed loan, you may qualify for a B or C tier loan with the lender. Or you may be paper shuffled to a bank or sub-prime lender. With any of these, there is the risk of over paying for your loan.

You must understand that all these lenders have a “buy rate”. This is the APR they want to fund to loan. Dealers can then mark-up the buy rate and get the additional money back from them. Some dealers are rather honest and only charge a ½% to 1% mark-up. But other blue suede shoes dealers will mark it up as high as 10% or more. Dealers need to make a profit. They’re a business and cannot work for free. But they shouldn’t gouge you either.

Some lenders have put a 3% cap on the mark-up allowed. But even this can mean $100s, or even $1000s more added to the cost of the loan. I’d prefer to see a 1% cap, with proof of the buy rate disclosed. I hope the FTC will take notice of this.

If you were to ask a finance manager for proof of the buy rate that you were approved at, you’d be verbally abused or thrown out of his office. Dealers have always felt this is their private information that should never be shared with the public. Yet a dealer with integrity shouldn’t have any problem showing you your approval paper and their mark-up, with an explanation that it’s the cost of doing business, which it truly is. You, the consumer, should not accept any mark-up over 1%.

Not all lenders will allow a mark-up. They give a flat rate back to the dealer for each loan they fund. This usually applies to sub-prime lenders since their APR is so high to begin with. They don’t want to risk losing the deal by a dealer tacking on another 5% to an already 25.9% APR loan. Flat rates commonly range from $150 to $300 per loan.

I truly hope the FTC will set guidelines that all dealers must abide by. And that full disclosure of the buy rate and mark-up, as well as a cap on the mark-up, will be enforced.

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Car Buyers and THE FTC — Part 1

Last year Congress created the Consumer Financial Protection Agency. It gave the FTC authority over consumer financing fraud. In April they started holding round table discussions with car buyers. Topics included interest rate mark-ups, upfront payments, and payments “packed” to include unwanted dealer add-ons. What the FTC plans to do with this information, they haven’t said yet. But we can hope they’ll use to it pass new regulations to protect you when you negotiate the purchase of your next car.

Dealers have, for decades, used captive lenders, such as GMAC and Ford Motor Credit. As well as third parties such as Chase, Nuvell and Household Finance. Nuvell and Household are primarily  used for sub-prime borrowers. There are many other lenders in addition to these that fund car loans. But rather than jumble your mind with all of them, I’ll just mention these.

If you’re buying a new or used vehicle from a Ford dealer, they’ll run your credit and immediately decide if they should send you to Ford Motor Credit. Being a captive lender, Ford dealers send all their best customers to them. And they reap the rewards through rebates from Ford Motor Credit and easier approval of their loans. The same applies to GM and GMAC, as well as all manufacturers and their captives. (Although GMAC was taken over by Ally Bank, the same holds true with them.)

What happens when your credit application in submitted? A lot. But that’s for another discussion. The bottom line is you’re approved or turned down. Or approved providing you meet certain stipulations. If the manufacturer offers incentivized rates, such as s1.9% or 2.9%, etc, you either get it or you’re turned down. If you’re approved, you can rest assured that there will be no mark-up in the APR.

If not, you may qualify for another non-incentivized loan from the captive lender, or you’re sent to an outside bank, or any one of the many sub-prime lenders. And that’s where you need to be on your toes. Because these rates can greatly vary, depending on the honesty and the mood of the dealer’s finance manager. You need to know the truth about lending. You need to strengthen your position before you sign anything. And this is where the FTC can protect you. And I hope they do.

Check back every Monday for the next few weeks for a continuation of this blog series on Car Buyers and the FTC .

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Buying a Car this Christmas? Credit Tips to Make a Gift Keep Giving

Credit … which way to go to finance your car? Do you try the dealer, your bank, or your credit union? If it’s a new car and your credit is strong enough, always go through the dealer using the manufacturer’s incentivized rate. 0.0% to 2.9% is usually offered on many models. No other lender can match that.

Sometimes “Certified” used cars will get a preferred rate through the manufacturer but you need to ask about it up front. If it’s not, try your credit union. Credit unions have great rates that most times are lower than your bank. If you don’t belong to one, it could pay to join one.

What if your credit is not “gold nugget”? Again, shop for a rate at your bank or credit union. Then have the dealer try the lenders it works with. Once you get their APR you can then make a solid judgment on which one to go with.

But what happens if you forget to check with your bank or credit union first before you shop? Simple. Tell the dealer you want an Option Contract. The dealer then will work out all the numbers for you and you’ll have up to 7 days to shop other lenders for a better rate. If you don’t find it, the dealer then sends your contract in to the lender it deals with.

Keep in mind that an Option Contract does not get sent in until the specified day agreed upon. Or it’s shredded if you come back with a check from your lender.

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