- 1 4. Going To the Dealership Unprepared
- 2 Do Your Homework First
- 3 5. Extra Interest With Longer Loans
- 4 Squeeze Into a 60-Month Loan
- 5 6. Higher Interest Rates When Car Price and Financing Negotiations Are Combined
- 6 Don’t Tip Your Hand
- 7 7. Fees You Don’t Actually Need To Pay
- 8 Contest All Nonessential Charges
- 9 8. Yo-Yo Financing Scams
- 10 Avoid Spot Delivery
- 11 9. GAP Insurance Markups
- 12 Buy GAP Insurance From Your Insurance Company
- 13 10. Extended Warranties That Aren’t Worth It
- 14 Buy a Reliable Car Instead
4. Going To the Dealership Unprepared
Buyers who don’t know what they want are a car dealer’s best friend. Walking into the dealership blind is an invitation for a salesperson to, well, sell. When you enter a dealership knowing only that you want something bigger than your last car, for example, salespeople can steer you toward the cars they want to offload. If you’re uninformed about models and features, salespeople can tell you all about the pros while leaving out the cons.
Do Your Homework First
When it comes to buying a car, knowing what you want can go a long way. Narrow your options ahead of time by determining your budget, the vehicle class you want and brands you like or don’t like. Use sites like Edmunds, Kelley Blue Book (KBB) and J.D. Power for insight into value, ratings, awards and consumer reviews. You can also use other sites, such as RepairPal to learn about the average cost of ownership when it comes to repairs and maintenance and Motor Trend to see the results from actual road tests. By the time you walk into the dealership, you should have specific makes, models and trim packages picked out so you’re not susceptible to falling for an impulse buy from a talented salesperson.
5. Extra Interest With Longer Loans
When it’s time to talk dollars and cents, the dealer will likely ask you what you can afford per month. That’s a trick question. With a long enough loan term, virtually anyone can afford any car. If you say you can cover $500 a month, for example, the finance office can string payments out into a longer loan term to make the payments fit your budget — even though you can’t actually afford the car. They want to sell you a more expensive car and have you on the hook for interest payments for a longer period. Good for them, but bad for you if you’ll still be making payments when the car is out of warranty and prone to mechanical breakdown.
Squeeze Into a 60-Month Loan
According to Edmunds, 60-month loans were the most common financing framework 10 years ago, but today, 72 months is the most common term, with 84-month loans serving as a close second. When you budget for 60 payments, you’re budgeting for a car you can actually afford. You’ll own your car free and clear just as your powertrain warranty expires, will have saved real money in interest payments never paid and enjoy a payment-free car for a year or two longer than you would have.
6. Higher Interest Rates When Car Price and Financing Negotiations Are Combined
If dealers know that you’ll be financing the car through their dealership, they can factor that into their negotiation strategy. That strategy often involves convincing you that you’re getting a great deal on the car by slashing the MSRP from $22,000 to $19,000, for example, and then making up for the price decrease by raising the interest rate on the loan.
Don’t Tip Your Hand
To avoid this trap, keep financing negotiations and car price negotiations separate. In fact, don’t reveal how you plan to pay at all.
Ideally, you would get preapproved before heading into the dealer so you have more options. If you’re looking for competitive rates, PenFed might be one spot worth checking out as rates come as low as 2.24% APR for used cars through TrueCar. You can easily apply for financing with PenFed online, making the stressful car-buying process easier. And if you’re able to get preapproved, you’ll have a locked-in rate to work with.
7. Fees You Don’t Actually Need To Pay
There are hundreds of dollars dealers often try to add on for things such as documentation processing or conveyance fees and advertising fees. They also might try to tack on dealer prep or predelivery inspection fees, loan payment fees and market adjustment fees.
Contest All Nonessential Charges
You should contest every previously mentioned fee or charge that isn’t mandatory. If the dealership won’t waive them, you can ask for a reduction or for something of value in return, such as accessories or extras you otherwise wouldn’t buy.
8. Yo-Yo Financing Scams
A common and often illegal scam is for a dealer to sell a car, let the buyer drive it home and fall in love with it, and then call a day or two later to report that there’s been a “problem” with the loan, lender or the buyer’s credit. Then comes the money grab. The dealer reports that the buyer needs to pay a larger down payment, refinance at a higher rate or bring back the car. It’s called the yo-yo scam, and it tends to target buyers with iffy credit who believe — perhaps correctly — that they don’t have good options.
Avoid Spot Delivery
The yo-yo financing scam is also called the spot delivery scam because it only works if you take delivery on the spot. Sometimes, perfectly honest dealers will offer spot delivery to their customers as a courtesy. That occurs when the dealership couldn’t complete the financing process — maybe you bought the car in the evening after banking hours — but gives you possession of the car right away while things are being finalized. No matter the circumstances, how trustworthy you believe the dealer is or how much you want the car right away, be patient and politely refuse spot delivery. Once the financing clears, the paperwork is signed and the car is registered in your name, the yo-yo scam simply can’t work.
9. GAP Insurance Markups
Guaranteed asset protection — known as GAP — insurance bridges the gap between what it costs for your insurer to replace your car should you total it and what you still owe on your loan. It’s not a bad thing to consider, but be prepared for the dealer to try to sell you their own GAP coverage — at a huge markup.
Buy GAP Insurance From Your Insurance Company
Your dealer likely will paint a nightmare scenario in which you total the car as you drive it off the lot and owe $28,000 on a loan, only to receive a $20,000 check from your insurance company. Although that’s the worst-case scenario, the concept is real and it’s worth considering taking out a GAP policy. Since dealers routinely charge four times the going rate, however, it’s best to buy it directly from your insurer. You might even save money by bundling GAP coverage into your current policy.
10. Extended Warranties That Aren’t Worth It
Extended warranties offer peace of mind by extending bumper-to-bumper warranties for a longer period of time. They make dealers tons of money in commissions and come with a lot of fine print. According to Consumer Reports, people who buy extended warranties typically pay more for the coverage than they receive in benefits.
Buy a Reliable Car Instead
The average extended warranty costs $1,500, although the price can be negotiated just like the price of the car. The average repair, on the other hand, costs $180. That, combined with the fact that extended warranties often come with high deductibles and other catches, means it’s usually better to put that $1,500 toward a car that’s known for reliability. RepairPal reliability ratings are a great place to start.