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Making sense of common car finance misconceptions

by Guest on April 29, 2014
Business

If you’re currently looking to buy a new car, you are probably also looking at car finance. And of course the best finance option is the one with the lowest interest rate – right? It’s true the super low interest rates that dealers advertise are tempting, especially considering the large price tag on a new car. However, a low interest rate alone may not equal cost savings over the life of a car loan.

So, why then, are dealerships always advertising ‘0% finance’ or low interest rates if that’s not the best deal? And if the lowest finance isn’t the best factor for saving money over the life of a car loan, what is?

Fortunately, you can figure out your best finance option by understanding more about the dealership finance.

Dealer finance demystified

Headline interest rates are often shockingly low for a very simple reason: To grab your attention. After all dealers want to make selling you a car look as appealing as possible.

Manufacturers and dealers typically subsidise the lower interest rates in lieu of purchase price reductions. Which means in order to get that unbelievably low rate, you often can’t negotiate on the price. In other words you trade a lower interest rate for a higher purchase price.

And if you are focused on the low interest rate, you are less likely to read the fine print, and the fine print may not be as attractive as the low interest rate!

The low-interest rate dealer finance often comes with a particular set of loan conditions and if you would like to change anything, such as the loan length or residual, it may revert to normal interest rates.

by negotiating a lower purchase price and obtaining separate financing at a higher rate, you could end up paying less over the life of the car loan than if you had used low-interest dealer finance

As with everything in life, if it sounds too good to be true it probably is. Before you take up low-interest dealer finance, have a good look at the total cost of buying the car.

It may sound counter-intuitive but it is possible that by negotiating a lower purchase price and obtaining separate financing at a higher rate, you could end up paying less over the life of the car loan than if you had used low-interest dealer finance and paid an extra $5,000 for the car.

Use one of the many car finance calculators available online, to test out some scenarios for yourself.

You will quickly see the price you pay for your new car, and thus the amount you finance is a more important factor in saving money on a new car, than the finance interest rate.

For example*: If you accepted a drive away price of $42,000 with dealer finance at 1.95% interest with no residual, over a 5 year term, you would pay back $44,115 over the life of the loan.

However, if you were able to negotiate a further $5,000 off the purchase price and organised your finance separately at 5.49%, you would pay only $42,395. Saving you a massive $1,720!

So, how do you do it?

1. Organise your finance first.

Start by securing pre-approved financing. If you have pre-approved financing before you walk onto the car yard, you are in a better bargaining position than if you use dealer financing to purchase your vehicle.

Pre-approved finance also reduces the risk that you will be tempted by a dealer’s amazing headline interest rates.

2. Get a lower grand total.

The ‘drive away’ price is the total amount you pay (in order to drive away in your new car. It includes the purchase price of the car, taxes and fees (e.g. registration, applicable insurances and duties), and the dealer delivery fee.

The dealer delivery fee is a separate source of profit for the dealer and can include everything from basic administrative paperwork to interstate delivery and rebooting the car’s computer. Find out exactly what your dealer’s delivery fee includes and negotiate accordingly.

In addition to the dealer delivery fee, you can also negotiate on other items such as insurance, warranties, and aftermarket products. You may find more competitive pricing for these items outside the dealership so be sure to shop around.

3. Remember you’re in control.

A final thing to remember is that you are in charge of your purchase. When shopping for a car, it can be easy to feel overwhelmed or outmatched, but by keeping these tips in mind, you are in a much better position to secure the best deal.

Image credit: Supplied by stratton

Rob Chaloner

Rob ChalonerRob is the Founder and Managing Director of stratton, and is passionate about smarter ways to buy and finance cars. With stratton, he’s working to help Australian buyers disrupt the traditional car buying, financing and insurance markets through smarter products and online services.

*Example used for illustration purposes only. Assumes monthly repayment over 60 months with no residual or deposit.

Guest
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