What's the financial transaction Americans complain about more than any other? Buying a car. And it's not just the negotiating process for the vehicle that drives consumers to distraction -- it's the financing process. “Today” contributor and Money magazine editor-at-large Jean Sherman Chatzky gives tips on how to get the best deal for your next set of wheels.
Dealers aren't making money on cars anymore -- consumers who come into the showroom knowing the precise spread between the invoice price and the sticker have become savvy negotiators. But car salesmen have to earn their keep somewhere. So they're working hard to make up the difference on servicing, on trade-ins, and on financing, especially on financing.
A report out from the Consumer Federation of America say that Americans are being charged "at least hundreds of millions of dollars and possibly as much as a billion annually" in undisclosed finance "mark-up" charges when they finance their new car purchases at dealerships.
What are mark-up charges?
Essentially, they're the difference between what you might have to pay for a car loan if you got the best rate possible based on your credit rating, and the rating the dealer says they can "get you." Dealers have the ability to take bank rates and rates from financing companies (rates based upon your credit score) and mark them up. They don't impose a mark-up all the time, but they do often. According to the report, approximately 1 in 4 customers of GMAC and FMCC -- the financing arms of GM and Ford -- are marked up and as many as 50 percent of Nissan financing customers.
Who gets marked up?
There's not necessarily a formula for how much they mark them up. Often, it's a measure of how high a rate they believe they can get you to take. According to the report, African American and Hispanic car buyers with similar credit histories to non-minorities are marked up - depending on the lender - as much as twice as often as white buyers.
How much is this costing buyers?
The average mark-up is 3 percentage points a consumer - over $1,000.
Is this legal?
It is, though lawmakers are starting to make noises that consumers should be told how much they're being marked up. Right now, the industry maintains that dealers should be compensating for their efforts in arranging loans.
So what should you do?
First, understand the process. You need to understand that just as buying a house is a completely separate process from finding a mortgage, getting the best rate on a car loan has absolutely nothing to do with getting the best price on a car. That knowledge - and the ability to stick to your guns in a negotiation - puts you right back in the drivers seat. What else do you need to do?
Tips on financing a car
Know your credit score
To know what you'd pay for auto financing you need to know your credit score. You can buy it - or get an approximation for free - at myfico.com. Only people will scores of 720 or more qualify for the best rates. But at that website, you can also get a sense of what that score will get you on a new car. On a 48-month new car
Credit Score = Auto Financing
720-850 = 4.9%690-719 = 5.6%660-689 = 7.7%625-659 = 10.8%590-620 = 15.1%500-589 = 18.5%
Find a loan
You should secure a loan before you go into a dealership. Understand, it's very tough to beat an interest rate with a manufacturer's incentive driving it - like a 2.9 percent rate - but you can have a loan in your pocket and you don't have to use it if the dealer offers you a better one. You'll likely find the best rate from an online lender that specializes in auto financing. Capital One Auto Financing (capitalone.com) is currently offering a 48-month new car loan at 4.29 percent. Credit Unions are also hugely competitive in this market. You can get a list of the best rates in the country from bankrate.com. Then apply before you start shopping to know -- for certain -- what your credit score will buy you.
Talk price
Only now is it time to head to the dealer. Keep the fact that you've secured financing -- as well as all other information about your situation -- to yourself as you negotiate. Don't answer questions about whether you've got a trade-in, how much money you're putting down, how much you want to pay a month or how you plan to finance the car. Just say: Let's talk about price. Only once you settle on a number, do you say: I'd like to talk about financing. The salesman will tell you what rates are available. Then use the rate in your back pocket to see if you can finagle a better deal. If there are manufacturer's incentives at play, you may be offered a choice of a sweet rate or a rebate.
Figure out the best deal
If you're offered a rebate vs. a good rate, you may need to leave the showroom and use the web to help you figure out which is the better deal. But on average, if you've already got a low-rate locked up, the rebate may be the smarter move.
Let's say you're looking to finance a $20,000 car and you've got a $4,000 trade-in which brings the price down to $16,000. You've been offered zero percent financing, or a $2,000 rebate. But you've also got 3.99 percent financing from another source. If you finance the $16,000 at zero percent, your three years of monthly $444 payments add up to just that: $16,000. But if you use the $2,000 to reduce the size of your loan to $14,000, your monthly payment (even at 3.99) falls to $413. Your total out-of-pocket is $14,878 and you've saved $1,122.