During a recent Q&A session for my Financial Freedom University students I was asked about car financing, the best way to buy a car with finance, what factors to consider and what not to do to ensure the whole transaction has the best impact on your finances.
Taking on contraction debt has massive implications for your financial wellbeing and is one of the aspects of personal finance that many, many people get wrong.
Because most people aren’t prepared upfront and have not been taught what to do and not do, they end up costing themselves massive amounts of money which could so easily be saved and directed to their freedom instead, so I thought I’d share my answer with you too.
Here are my 5 Top Tips to save massively on your car financing
TIP #1: Buy What You Can Afford and Never New
Your car is not an asset! Quite the contrary: cars depreciate like… well like new cars!
For this reason alone, it’s not smart personal finance to pay interest on a car loan. As soon as you drive off the lot, your cars value plummets and very soon you still own more on the car than it is worth.
The smart option is always to buy a car second hand and for cash. This way some other sucker paid for the first big depreciation drop. This doesn’t mean you must settle for some unsafe falling apart jalopy. You can get fantastic nearly new or demonstrator models with very little mileage but never new! (I have never bought a new car and never intend to either)
You can absolutely control whether you buy a second-hand car or not (that all about ego) but you may not have the cash yet to buy the car outright and so the next smart option is a second hand car with the lowest amount of finance possible. There’s a difference between using a car loan wisely and using it to buy a lot of car (and depreciating metal) you can’t afford. Just because some bank or car loan company say’s you can afford a certain car doesn’t mean it’s a wise thing to do that. Determine what you need from this vehicle – separate out wants and needs – and find the lowest cost option.
NEVER make a buy decision based on the monthly repayment and how it will affect your expenses now
ALWAYS look at the total cost of the financing option with all the interest and the financing charges included.
Tip #2: Put Down a Minimum of 20% and Preferably More
If you can’t come up with a minimum deposit of 20% of the cost of the car, go back to Tip #1 and find another car.
Your aim is to come up with the biggest deposit / down payment that you possible can with a minimum threshold of 20%. Get creative, eat tinned fish for a month, sell stuff, get another job, make stuff… do whatever it takes.
Only once you have the “right” car identified and the biggest deposit you can come up with do you determine the amount of financing you need and move onto getting the best financing deal.
TIP #3: Know Your Credit Score in Advance
Believe it or not, there is a “certificate” out there in the world which tells other people whether you are a financial risk or whether you are a great Wealth Chef! And this certificate is exactly why there’s some truth to the old adage that the rich get the best deals (meaning, actually, that the people who understand money get the best deals).
This certificate is your credit score and a key ingredient in getting good financing is to have a great credit score. Here’s the gist…
…unlike mortgages or a credit card, you can usually get a car loan even if you have a pretty dodgy credit record and hence a low score BUT you’ll just pay a lot more!
Why will the bank do this even if you are a risk? It’s relatively easy for the banks to repossess a car if you don’t keep up with your payments and since they have had you paying at a more expensive rate in the meantime, they will have made relatively more money off you than the person with the good score and solid payment record.
But if you have a poor credit score you may feel lucky to even get ANY loan offers, meaning you are less likely to negotiate and car dealers know this making them very happy to offer you high cost deals so they make more money.
Once you know your credit score, you can figure out if you can qualify for the best car loan rates.
The bottom line – the better your score is the more you can negotiate down the interest rate you get offered and the better the deal you’ll get.
By knowing what your score is in advance you are armed with powerful information. Even if your score isn’t too great you can take actions to improve it (knowledge is power) and you can shop around BEFORE you go to the dealership to make sure you’re getting the best rate a bank can offer you. You may have to pay more than someone with good credit score but you don’t have to accept the first offer you get and end up paying thousands more just because of ignorance.
If you don’t know what your score is or how to get it, go and read this article How To Get and Improve Your Must Have Wealth Health Certificate.
Tip #4: Make the Loan Term Short
Shorter loan terms come with lower interest rates and higher monthly payments. And that’s what you want.
When you walk into a dealership and say you want to finance your car, any savvy car salesperson will try to negotiate with you and constantly refer to the cost of monthly repayment, not the overall price of the car with all the interest and fees. They will show you lower and lower payments by extending the length of your loan, not by reducing the price of the car.
This is the oldest and still most effective game in the book to hook people into an endless cycle of debt and to get people to spend more than they had planned.
It’s tempting to stretch out a car loan over five or even six years to get to a lower monthly repayment or a more expensive “fancier” car – but understand the cost of this choice – the cost is your financial freedom.
Tip #5: Pay for extras, fees, finance charges and taxes in cash
One of the biggest mistakes people make when buying a new car is forgetting to include the cost of the financing, registrations fees and taxes in the total price. That mistake is then compounded when they add these costs to the financed amount!!
When you’re negotiating on the price of the car, also negotiate on the financing costs and fees and once you have everything locked in pay for all fees, extras and finance charges in cash.
So there you are…5 tips to be smart with car finance.
In the comments below I would love to know…
What other smart money tips do you have that you can share with your fellow The Wealth Chef to help others reduce their debt, get more from their money and achieve their freedom faster?
Remember, each baby step matters and each Dollar, Pound, Euro, or Rand saved and directed towards your freedom makes a massive difference.