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How To Buy A Car

November 26th, 2006 · No Comments

Another article in the How To Get A Raise In 15 Minutes series, this will explain what to do and what not to do when buying a car. I have a close friend who recently bought a new truck. He went to the dealer and told him what he could afford to spend on it. Next he told the salesman exactly how much he could afford to spend per month on it. The salesman then proceeded to show my friend trucks with options in his price range. For convenience, he used the dealer’s financing and rates. My friend then bought a truck and was done with it.

Nothing wrong that, right?

{cover your ears while I scream at the top of my lungs}

I do not even know where to begin on this one. Let’s just say that the salesman on this deal felt like King For A Day. He probably thought to himself, “man, this guy was born yesterday.” Well, let’s break it down piece by piece. First, do NOT and I mean NOT tell them how much you want to spend. Well, duh! Isn’t the salesman going to mark up every model he shows you to meet that price maximum of yours? Second, do NOT NOT NOT mention your maximum monthly payments. Again, the salesman can easily, legally and even morally (or so he thinks) inflate the monthly payment to cover a high-priced, high-commission-for-him warranty, high interest rate on the financing and other high charges built into that monthly payment. You have no clue what the interest rate, length or terms of the loan are. I won’t even get into nickel-and-diming you to death with the warranty, rust inhibitor, dealer charges or options for the car.

To further illustrate this point here is an example.

What Should Happen

Car cost = $15,000
Terms of the loan = 5 year = 60 months
Interest rate = 6% (which can easily be beat in today’s market)

Using any of the plethora of free loan calculators on the Internet we can see that the monthly payments for this loan would be $289.99. Now, suppose you told the car salesman you could afford $290 per month. I am in no way insinuating that car salesman are dishonest, but the salesman is trying to make the best commission for himself, not you. Below is what might happen.

What Will Happen If You Trust The Salesman

He’ll sell you a $15,000 car for $17,500
Give you a 6-year loan = 72 months
Give you an interest rate of 6%
Monthly payment is $290.03

Hmmmm, let’s run through this now. He kept his promise of keeping the payments at $290 per month. You were able to afford that $15,000 car you wanted. Everybody is happy, right?

WRONG!

He raised the price of that car up $2500 but disguised the increase in the loan payments. You are now stuck with

  • A ridiculously long car loan (6 years??? Like you’ll still want the car then!)
  • A not-so-competitive interest rate
  • And worst of all – $2500 more in the salesman’s pocket – not yours!

Dave Ramsey’s book Financial Peace Revisited taught me this about buying a car. On average, a dealer makes $1200 profit from customers who lease the car, $700 profit from those who finance the car and $72 from those who pay cash for the car. Need I stress the importance of paying cash for a car if possible or at least using a low-interest home equity loan to pay for it?

Lessons learned when buying a car:

  1. Use your local bank on the corner BEFORE going to the dealer. You will often get a more competitive rate and not be tempted to “impulse buy” using the dealer’s pathetic financing.
  2. Don’t ever mention your maximum price, monthly payments or any other cost. What salesman in his right mind would not charge you the maximum you can afford….or more!

Bottom Line:

Using this advice could easily lower your car payments by $50 – $100 per month

Saving On Car Costs After The Purchase

My brother Mike, my dad and I all called our car lender on the same day (one influenced the other two) and received a lower interest rate just by asking. This is a true story and was pretty funny. Mike called me and told me what he did. I did it. I then called our dad and he did it. Mike lower his payments by $23 per month. I shortened my loan length. Our dad shortened his loan length as well. Pretty amazing, huh? Do you think any bank on the planet is going to call you up and say “we’d like to start making less money from you” – HECK NO! It never ceases to amaze me what you can get just by asking.

Tags: Money

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