1. Lesson Two: Financing a New or Used Car
© 2005 Consumer Jungle

2. Know Your Credit Score
Your credit score determines your interest rate
High Score = Low Rate
Can buy score from: --
Get pre-approved from your bank
720
Credit Score: The score that evaluates your credit-worthiness and determines the rate of interest you are eligible to receive. It is also called a FICO or Beacon score, and less frequently an Empirica score.
As of December 2005, it costs $44.85 to buy all three of your credit scores at This is a small amount compared to how much it could cost you if someone told you that your credit score was worse than it truly was, and consequently charged you a higher interest rate. The higher interest rate will cost you hundreds, if not thousands more, over the life of the car.
A car dealership will most likely refer to a Beacon score. Remember that there are different names for the same report all of which evaluate your credit worthiness.
Empirica Score =Transunion
Beacon Score = Equifax
FICO Score = Experian
A bank will be conservative in their recommendation of how much you can borrow. They may suggest that you take a car loan for no more than 25% of your income. The car dealer will inch that up to say 40%. We recommend that you borrow no more than 20% of your monthly net income.
By knowing your credit score, you will know that you are approved to get a loan. When you are financing a car at a dealership, make sure that your car loan is approved before you leave with the vehicle. It is common that many dealers will send you out with an unapproved contract then call you back several days later wanting more down payment or wanting the cars back.
© 2005 Consumer Jungle

3. Number of Years to Finance?
Recommend 31/ years.
Average loan is 5 years
Interest rate increases after 5 years because risk is greater
More years will increase the cost of the loan and the amount of interest you pay.
Upside down-when you owe more on the car than it is worth. Usually happens with longer loans.
Interest: The fee charged by lenders for the use of their money.
Some people are taking out six- or seven-year loans. In addition, the people who are buying these cars are often upside down in their current loans. So, you’ll end up owing money on the old car even after you’ve traded it in. It’s a recipe for disaster. If you learn your car is worth less than you owe, keep it.
When you take out loans longer than 5 years, the lender must charge a higher interest rate because the risk is greater. People usually start to dislike their car and want to sell it before five years have passed. So then they try to sell it and end up “upside down” in their loan.
Source: Aug 18, Resist car loans of longer than 4 years
Some people are applying for 8-year loans because they want more car than they can afford, according to the Wall Street Journal. It’s a car loan that outlasts your car. Car loans should be 42 months or less - period. Even if you do four full years (or 48 months) you’re okay, but Clark doesn’t recommend it. Eight years is too dangerous. If you’re two years into a car and you realize you hate the car, you are in bad shape financially and mentally. And, worse yet, the average price people are paying for a car these days is $27,000. If you can’t afford that much car, the answer is not to take out a longer loan. It’s to buy a less expensive car.
Source: wwww.clarkhoward.com, Sep 30, Eight-year car loans are a No-No!
Upside-down: When you owe more on your car than it is worth.
Cost of a loan: Amount of money you will have to pay back in addition to the money you borrowed.
© 2005 Consumer Jungle

4. Low APRs vs. Rebates
Usually only have the option on new cars to receive a rebate or low APR
Get a $4,000 rebate or 0% APR
If you take the 0% APR, you give up the $4,000 rebate
APR: APR is the annual percentage rate for a loan. Also known as the interest rate.
© 2005 Consumer Jungle

5. Compare Multiple Finance Quotes
Get quotes from:
your bank or credit union
online lenders
dealerships
Compare the APR and the length of the loan.
Think beyond the monthly payment.
Remember the total cost of the car is the base amount plus interest that you pay over the life of the loan.
© 2005 Consumer Jungle

6. All of the Finance “Extras”
Be prepared to hear about the extras:
Credit Insurance
GAP Coverage
Extended Warranty
Extended Service Contract
Exterior & Interior Finish Protection
Undercoating or Rustproofing
VIN Etching
Dealer Prep Fees
The salesman may sell you some of these “extras” before you meet with the dealership’s finance representative. Either way, you should be prepared to hear about and respond to another round of salesmanship.
© 2005 Consumer Jungle

7. Credit Life Insurance
If you die or are disabled and unable to work, the insurance will pay the balance of your loan.
Averages $30 per month
Does your life insurance policy already cover this?
Not required by federal law.
Carefully consider the cost of credit insurance and double-check that your current life insurance policy doesn’t already provide the same coverage (paying off your car loan in case you die or are disabled.)
Remember that credit insurance is not required by Federal Law.
Check with your state Attorney General’s office to see if it is required in your state—most likely not!
If the dealer requires you to buy credit insurance, it has to be disclosed in your APR.
Credit Life Insurance : If you die or are disabled and unable to work, the insurance will pay the balance of your loan.
Credit Life Insurance is offered when you buy a car or other big purchase. These are sold as protection for you, but really they provide protection for the bank.
It is an old practice to make you have extra insurances on your loan to get approved or to get a lower rate. This is ILLEGAL.
© 2005 Consumer Jungle

8. GAP Coverage
New cars quickly depreciate within the first 1-2 years of ownership.
You can owe more on your car than it is worth (upside down) as soon as you drive off the lot.
If your car is totaled or stolen, your collision/comprehensive insurance will only cover the market value of the car.
Gap insurance covers the “gap” between the loan value and the market value.
Gap insurance is usually inexpensive. GAP stands for guaranteed auto protection. You will also want to get a quote from your insurance agent for GAP coverage. They will sell you the insurance, and you won’t have to pay interest on it like you would at a dealership where the cost is rolled into the loan.
Gap Insurance: If you car is totaled or stolen, the insurance covers the loan value of your car instead of the car's current market value.
Upside-down: When you owe more on your vehicle than it is worth.
© 2005 Consumer Jungle

9. Extended Warranty Takes effect after the factory warranty expires.
You don’t have to buy an extended warranty on the same day you buy a new car.
No if vehicle has above-average reliability rating.
Yes if car has below-average reliability rating, and you plan on keeping it well past the factory warranty period. Used cars beyond warranty.
Factory Warranty: Original warranty on a new car and usually lasts for three years or 36,000 miles.
Extended Warranty: Covers bumper-to-bumper damages after the original factory warranty expires.
Don’t have to buy an extended warranty on the same day you buy a new car. You can buy the extended warranty anytime before the original factory warranty expires.
Consumer Reports publishes their predicted reliability ratings for cars annually in April. Their reliability ratings will let you know if a vehicle has and above-average or a below-average record.
© 2005 Consumer Jungle

10. Extended Service Contract
May duplicate warranty.
Doesn’t cover common repairs like brakes or clutches.
Requires routine maintenance.
Look out for exclusions that deny coverage.
Extended Service Contract: Optional protection on specified mechanical and electrical components of the vehicle available for purchase to supplement the warranty coverage provided with the new or used vehicle.
You do not have to buy a service contract the day that you buy the car, so the best option is to go home and think about it.
Auto Service Contracts
Service contracts are usually high-profit add-ons, costing hundreds to more than $1,000.
May duplicate warranty coverage.
Common repairs for parts like brakes and clutches generally are not included in service contracts.
Watch out for exclusions that deny coverage for any reason.
If you don’t keep up with the manufacturer’s recommended routine maintenance, they can void the service contract.
Ask these questions:
Does the dealer, the manufacturer, or an independent company back the contract?
What happens if the provider goes out of business?
How are claims handled?
Can you choose among several dealers or repair centers?
Is the car covered if it breaks down on a trip or if you move out of town?
Do you need prior authorization for repair work?
© 2005 Consumer Jungle

11. Exterior & Interior Finish Protection
Not worth the extra $$$.
It is a paint sealant for the exterior.
Sometimes called Polyshield.
Fabric protection protects cloth seats from stains & fading.
Cost example: 6-years protection for $498
According to Consumer Reports, paint sealant is little more than a vastly overpriced wax. You can easily purchase a good protectant from any auto-parts store and apply it yourself.
Fabric protection. If you buy a vehicle with cloth seats, you may want to spend a few dollars for a can of fabric protector and apply it yourself.
© 2005 Consumer Jungle

12. Undercoating or Rustproofing
Not worth the extra $$$.
Undercoating protects the parts below your car.
May also be sold as rustproofing.
Rust is extremely rare in modern vehicles.
© 2005 Consumer Jungle

13. VIN Etching Not worth the extra $$$.
Places the VIN number on the vehicle's window to deter theft.
VIN Etching: According to Consumer Reports, this is a service in which the vehicle identification number is etched into the vehicle’s windows to deter theft. Some states require that a dealer offer it to you, but non require that you buy it. It’s not unusual to find a charge for VIN etching already printed on the purchase agreement, as if it’s assumed that you will pay for this service. We recommend that you refuse this charge. Even if you decide you want VIN etching, you can have it done less expensively elsewhere, or even do it yourself for a kit that costs about $25.
© 2005 Consumer Jungle

14. Dealer Prep Fees Not worth the extra $$$.
Charge from the dealership to you to prepare the vehicle.
Cross out on bill of sale.
Manufacturer pays dealership to prepare car.
© 2005 Consumer Jungle

15. The Benefits of Financing
You establish credit
Once 18, take out at least a 2-year loan and make on-time, in-full payments.
Before the age of 18, you will have to finance the vehicle in another person’s name.
Remember to review every document carefully before signing.
© 2005 Consumer Jungle

16. Leasing
© 2005 Consumer Jungle

17. Pros & Cons of Leasing Pros Cons Annual mileage limits
Lower Payments usually lower
Pay for depreciation + rental fee
Option to Buy
Cons
You are renting-not buying-and you have to return the car
Annual mileage limits
Usually 12,000 – 15,000
Must pay 10 to 25 cents for each additional mile above the annual agreement
Must return all items in car
Negotiate the purchase price of the vehicle as if you were going to buy. Once you have a firm price, then bring up your desire to lease.
Buy extra miles up front if there's a risk of running over the standard allotment. Excessive mileage at the lease's end is typically charged at a higher rate.
© 2005 Consumer Jungle

18. Tips for Leasing Ask for an itemization of the capitalized cost.
Get all terms in writing.
Ask about standards for wear and use.
Ask for examples of early termination charges.
Understand your end-of-lease options, such as:
turning in the vehicle and walking away
purchasing the car
rolling into another lease
Avoid lease terms that extend past the vehicle's basic warranty.
© 2005 Consumer Jungle

19. Tips for Leasing
Get every item of equipment listed on the lease so you aren’t charged for “missing” equipment.
Take the contract home and review it carefully away from any dealer pressure.
Understand the conveyance, disposition, and preparation fees.
Get GAP Insurance
Remember that “lease rates” or “money factors” do not have the standardized definitions and are not equivalent to an APR
Protect yourself with gap insurance, which is generally available through the leasing company. In case you have an accident that totals the car, this covers the difference between an insurance settlement and the actual payoff for the car.
The four-digit "money factor" is roughly equivalent to a loan's annual percentage rate. To translate this into a percentage rate, multiply the money factor by 2400.
© 2005 Consumer Jungle