BuyingaCarFotolia 69373808 Subscription XXL

When it comes to buying a car, are you financially literate?

Buying a car is as appealing to me as getting a root canal. Turns out, I am not alone. Here is a story that my colleague Gordon shared with me about his recent car buying experience and what he wants everyone to know before they set foot in a dealership.  Thank you, Gordon.

Like most people who are considering buying a new car, I try to do my homework. With my last purchase I studied the Consumer Reports car guide, assessed my needs and after a lot of discussion with my wife settled on the model I wanted and what it should cost me. When I visited the dealership I felt I was well prepared. That quickly changed.

What I was entirely unprepared for was a very hard sell on financing. I’d spoken to my credit union before visiting the dealership and knew the financing terms they would offer, but thought it wouldn’t hurt to see what the dealership offered. At this point I lost control of the process.

The initial offer took several thousand off the purchase price, but with a higher interest rate. A back of the envelope calculation indicated this wouldn’t be to my advantage. The dealership counter offered with a different rate, but my wife and I were surprised to see the term of the loan was extended a year. What followed was another hour of offers and counter-offers, and in retrospect what we finally settled on was no improvement over what my credit union had offered, at the price of considerable anxiety and confusion.

What I didn’t realize was that financing is sold at least as hard as the car itself, and that negotiating financing at the dealership puts the consumer at a considerable disadvantage.

The onslaught of offers is more than most people (myself included) can assess on the spot, and the dealership can counter with a nearly infinite set of loan variations. The supposedly great price breaks and deals come at the expense of higher loan rates and longer terms, and I have to conclude the confusion that results on the consumer’s part is a feature of the process, not a bug. It can be very easy to sign up for a supposedly good deal that, through higher interest rates or longer terms, will cost you considerably more over the life of the loan. Let’s take a look at how.

Keep in  mind rates will vary based on your credit score and the amount of your down payment.

Sample rates for a local credit union for a $15,000 car loan

Term in Months APR Monthly payment Total amount paid
24 1.95% $637.77 $15,306.48
48 2.45% $328.38 $15,762.24
72 3.45% $230.94 $16,627.68

Hypothetical rates from a dealer for a $15,000 car loan

Term in Months APR Monthly payment Total amount paid
24 6.9% $668.12 $16,034.88
48 5.9% $351.59 $16,876.32
72 3.9% $235.00 $16,920.00

While having a shorter-term loan with the credit union example saves you money, typically dealerships offer shorter-term loans at a higher percentage rate, so you end up paying more for the vehicle than with a longer-term loan with the dealership.

My advice to anyone considering a car purchase is to get a pre-commitment from a trusted lender before setting foot in the dealership, and to make sure you understand the terms of the pre-commitment. The dealership might offer you an advantageous deal, but these offers should be treated with appropriate skepticism. If you’re told you’re getting a limited time offer that must be accepted within a day or two, that should serve as a signal that you’re being pressured to sign quickly on a loan agreement, one you probably don’t fully understand. The great virtue of coming in with a pre-approval from a trusted lender is that this gives you an alternative to the dealership offers, which may be designed to confuse. It is very likely the trusted lender’s terms will be a better deal than anything the dealership will offer.

Gordon is currently enjoying his new vehicle and vouches to never stray from his credit union.