Dealerships often make money from their finance office. You may spend your time haggling $300 off the price of the car just to end up purchasing an overpriced extended warranty for an additional $1500 that may not be necessary.
By knowing what to expect ahead of time, you can be money smart about purchasing a vehicle. Here are a few hidden financing traps to avoid when you purchase a car.
1. Arrange your own financing ahead of time
Without arranging your own auto financing before you visit the dealership, you’ll be at the mercy of a dealer’s inflated interest rate. A finance manager may review your credit history and if they find any issue such as a late payment from several years back, they may use this to mark up their interest rate by 2-3 percentage points. This can cost hundreds of extra dollars over the life of the loan.
How can you bypass this issue? Get a pre-approval for a car loan from your banking institution or an online lender. You can use the loan to help you get a better rate from the dealer.
2. Only negotiate the price of the vehicle
Dealers will often ask what type of monthly payment you’re willing to make. With an inflated monthly payment, dealers can make it seem like you’re getting more value with add-ons they claim as discounted or free. These additions can include anti-theft devices, paint protection, and extended warranties. To avoid this issue, let the dealer know that you are a cash buyer and that you only need to negotiate the price of the vehicle. Be sure to check standard pricing guides such as the Kelley Blue Book to get a better understanding of the current market value of the car you wish to take home.
3. Avoid overpriced extras
Pitching overpriced extras are the norm for dealerships. A prepaid maintenance plan can bring in a lot of cash for a dealership and it often isn’t fully used by their customers. For example, a plan offering prepaid maintenance may say it will help you save money on oil changes but many customers will end up overpaying for services they won’t fully use. Be wary of expensive extended warranties as the chances of something going seriously wrong with your ride are slim. If you’re not interested in buying extended warranties from the dealer, tell them that you won’t be keeping the car for very long and won’t be needing an extended warranty. The dealer won’t be able to say much to convince you otherwise.
4. Avoid paying additional fees
The unfortunate reality is that many dealers use additional fees to bring them more profits. Ideally, you should only be paying for the price of the car, sales tax, documentation fee, and registration costs. Find out about any fees before you agree to purchase a vehicle, ask for a fee breakdown and question any fees in the list that look excessive.
5. Don’t agree to an extended loan term
It may seem like a good idea to have a longer loan term with a lower monthly payment. Keep in mind that you would be paying a higher amount of interest over the span of the loan. As you’ll be repaying less of the loan each month, you will end up owing more than what the vehicle is worth over a long period of time. Only consider this extension of the loan term if you are sure you will keep the car over the entire loan duration.