Trans World Assurance Blog

Car Financing Strategies, Part 3 (Jeff Burch, Money Book)

Posted on Sat, Jun 18, 2011

TRICKS USED TO FOOL THE UNINFORMED

“We have credit unions that lend money for cars”:  That is a true statement; however, if you finance your car through their credit union you will pay the commission that they give to the dealer for bringing in your business, which will cost you 1% to 2% or more. 

“Our loan rate is 6%, which is lower than your credit union’s loan rate of 8.75%”: That may be true; however, the dealer might have conveniently forgotten to factor your rebate into that equation.

Example: $14,000 car financed by a dealer at 6% for 48-months, payment would be $328.72 a month. However, by applying a rebate of $1,500 toward down payment, and loan financed through credit union at 8.75%, monthly payment would be $309.50. That would be a nice tidy savings of $922.56 over a 48-month loan.

Important: Make sure car manufacturer sends rebate check directly to your residence.

Buying credit disability insurance or credit life:  These insurance polices pay car payment obligations off in case of death, or if one should become disabled. Typically, they are over-priced policies that you do not need. Consider the policies as optional coverage, no matter what the dealer insists. Besides, even if you decline the policy and die later, your estate is liable for all car payments.

Other solution: Purchase cheap term insurance policy.

Before signing any contract: Make sure that the dealer or lender has not added an insurance policy to the contract without your knowledge. Adding a policy will leave you with a higher payment than expected.   Calculate monthly car payment by using loan table (on right); then make doubly sure this is the correct figure, before signing your name on the contract.

Important:  Several credit unions do not charge anything extra for such insurance policies. 

Bonus: Several credit unions believe that a death cancels loan obligations. 

Getting a loan for the loooooooongest period:  Typically, consumers finance long-term loans, for lower monthly car payments, or when financing a costlier car than they can readily afford. 

Problem: The longer the loan, the more interest you will pay, and on top of it, be charged a higher interest rate. However, when purchasing a used car, the interest rate is generally the same for two or four year loans.

Danger: By borrowing money too long, you may end up paying far more than the car is truly worth, which would be costly if you try selling it.

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Example: Financing $14,000 car

 Length          Interest         Monthly          Total
of Loan             Rate          Payments      Interest

 3-year                6%             $425.88       $1,331.68

 4-year                7%             $335.16       $2,087.68

 5-year                8%             $283.92       $3,035.20

 6-year                9%            $252.36       $4,169.92

 7-year              10%             $232.42       $5,523.28


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Strategy #3: Lower payments will make it easier on your budget each month, but payments will seem like an eternity. Look for more “reasonably priced” cars that come with affordable payments and shorter pay-off plan. 

Note: To lower and shorten payments take out a loan for no more than 80% of loan value of the car, and then pay difference with down payment.

Calculate payments: The table below will help you to figure monthly payments with a mixture of interest rates and for any dollar amount.

Example: Car costs $14,000, with 48-month loan at 10% interest rate. Divide amount of the loan $14,000 into $1,000: $14,500 ÷ $1,000 = 14. Locate 10% rate on table; then on right, under 48-months you will find the factor of 25.36. Multiply 14 by 25.36 and you will have an exact monthly payment of $355.04.

Interest    36-months      48-months    60-months
  Rate        per $1,000      per $1,000     per $1,000

  11.00           32.73               25.84             21.74

  10.75           32.62               25.72             21.61

  10.50           32.50               25.60             21.49

  10.25           32.38               25.48             21.37

  10.00           32.26               25.36             21.24

    9.75           32.14               25.24             21.12

    9.50           32.03               25.12             21.00

    9.25           31.91               25.00             20.87

    9.00           31.79               24.88             20.75

    8.75           31.68               24.76             20.63

    8.50           31.56               24.64             20.51

    8.25           31.45               24.53             20.39

    8.00           31.34               24.42             20.28

    7.75           31.22               24.29             20.15

    7.50           31.10               24.17             20.03

    7.25           30.99               24.06             19.91

    7.00           30.87               23.94             19.80

    6.75           30.76               23.83             19.68

    6.50           30.64               23.71             19.56

    6.25           30.53               23.59             19.44

    6.00           30.42               23.48             19.33

 

Lease payments: To familiarize yourself with the complexity of car leases, see: www.LeaseGuide.com

Tags: Money Book, Jeff Burch, car financing, auto loans