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Shopping for a new car? Beware the extras

Here’s what to consider before you buy that new set of wheels. “Today” financial editor Jean Chatzky offers advice.

So you want to buy a car. If you're like most people, before you head to the car dealership, you spend hours researching the model you want.

What colors does it come in? Is it equipped with a sunroof? What type of sound system? Four-wheel drive?

You troll Web sites like for the intricacies on MSRP (that's manufacturer's suggested retail price) with and without all the options. And then you negotiate with the salesperson for an even better deal. After all, you don't want to spend $1 more than you have to. And yet, unknowingly, you probably do.

Because while you bothered to compare the difference between plain and metallic paints, you — if you're like more than 70 percent of consumers — didn't stop to compare financing options from dealers and credit unions and banks before heading to the showroom. So says a new survey by Americans Well-informed on Automobile Retailing Economics (AWARE). As Julia Roberts said to the saleswomen who underestimated her in "Pretty Woman": "Big mistake. Big."

"How you are going to finance something is as or more important than what you will be driving," says Eric Hoffman, spokesperson for AWARE. "You need to check banks and credit unions, and of course, with the financing manager at the dealer itself, to be able to arm yourself with the knowledge you need to negotiate." Here's what to do before you head to the showroom.

  • Review your credit report and score. Your credit score determines — pretty much to the dollar — how much you'll have to pay to finance a new car. The higher the score, the lower the interest rate. People with a score over 690 will pay roughly 7.4 percent, according to Those with a score 100 points lower will pay double that. So it makes sense to get that score well in advance of making a purchase. Then you can work (by paying your bills on time and paying down any maxed out cards) to improve the score in the time remaining before you buy. You'll also want your credit report, which is the credit history on which that score is based. You can get a free copy of your credit report so you know what creditors will see at or call 877-322-8228. Review it for inaccuracies, which may drastically increase the rate at which you can borrow. Report any errors to the credit bureaus and the creditor. With the free report, the bureau has 45 days to investigate errors, so don't wait until the last minute to review it. You can buy your credit score for $6.95 (a good deal, it costs $14.95 in other places) when you request your free report.
  • Shop around. Most consumers get their financing through the dealer, which may be able to offer a lower wholesale rate. But that's not always the case. So before you head to the dealership, find out what annual percentage rates you can get from your bank or credit union or on the Internet. You have room to negotiate with the dealer, so you need to be armed with this information when you arrive. When comparing your options, make sure the terms are the same. The length of the term, down payment, and other fine print may vary. Usually, the longer the term of the loan means the higher the rate.
  • Check for manufacturer incentives. Manufacturers sometimes offer special financing offerings on certain models — these are typically in the 2.9 to 6.9 percent range, so low that it's tough for even credit unions to beat them. They come in different forms, however. Some manufacturers offer low APRs while others focus on cash rebates. "Generally speaking, the longer you plan to keep the vehicle the more attractive the low APR is for you," says Jesse Toprak, executive director of industry analysis at, an automotive information Web site. "On the other hand, if you plan to keep the vehicle for three years or less, the cash rebate may be better. In the shorter amount of time, you simply won't be able to make up as much in interest savings as you will with the cash rebate." To decide which option is best for you, use the calculator at ().

The bottom line is, understand the extras. After finalizing your car choice and price, you will probably be hit with a deluge of extra products you can buy. Do you need an extended service contract? What about guaranteed auto protection (GAP), which pays the difference between what you owe on the vehicle and what you receive from your insurer if it is totaled or stolen? What about credit insurance? That pays for the rest of your loan if you become disabled or die. (Steer clear of this. If you need life or disability insurance, experts recommend you buy one policy that covers everything, such as your mortgage, not only your car.)

"Consumers will come into the dealership very well informed on what they should pay for the new car, negotiate on hundreds over the price of the car, then go into the financing department and automatically pay a couple thousand for an extended warranty without knowing anything," says Toprak. Web sites such as provide cost estimates for many of these products. Call a few dealerships for the brand you are interested in. Toprak recommends buying the warranty from your vehicle's manufacturer because it offers the best protection and the best price. You have the right to cancel these services at any time if you decide you do not need them or you overpaid. The company will prorate the service for the amount of time you used. So you are not stuck with what you bought.

Jean Chatzky is an editor-at-large at Money magazine and serves as AOL's official Money Coach. She is the personal finance editor for NBC's "Today Show" and is also a columnist for Life magazine. She is the author of four books, including "Pay It Down! From Debt to Wealth on $10 a Day" (Portfolio, 2004). To find out more, visit her Web site, .