Over 90 percent of new vehicles are purchased via a finance arrangement of some kind. Auto finance deals might make a new vehicle affordable, but you might find yourself dealing with massive interest rates, inflexible conditions, and extra costs if you aren’t careful.
Consumers, often daunted by the terminology and cowed by the aggressive sales tactics, accept the first finance deal offered to them by the dealership. Dealers earn a significant percentage of their profit on the commissions on such deals, which means that they have an incentive to oversell. However, it also means that they have a lot of room to move on such deals if you negotiate.
The following is a brief guide on how to negotiate the best car finance deal to make sure that you aren’t ripped off.
Why You Need to Negotiate Your Auto Finance Deal
You have probably done hours of research and shopped around before selecting your vehicle. You have probably also negotiated with the dealer about the price. If you accept the first finance arrangement the dealership offers you, however, all your hard work will be undone.
It is estimated that almost 20 percent of car dealers make more than 50 percent of their margin from commission on auto finance deals. It therefore means that they have an interest in encouraging you to take on the most expensive financing option available. They will likely subject you to a lengthy sales pitch, in which they will try selling you everything with the finance deal from rustproofing to extended warranties.
Fortunately, it also means that they have much more room to move if you are ready to negotiate with them. Here is how you can fight your corner and make sure that you get the most inexpensive and favorable financing arrangement for your new vehicle.
Never Lose Sight of the Vehicle’s Actual Cost
It might seem easier to negotiate the price of your monthly payments for your vehicle. After all, it will be the amount of money that will be coming out of your bank account each month. However, it is always important never to lose sight of the vehicle’s total cost along with the total cost of the finance deal.
In fact, discussing the monthly payments as opposed to the vehicle’s price, is a strategy often used by dealers for the purpose of obfuscating costs and convincing you to max out your budget. For instance, they might ask: “How much would you like to spend each month?”
First, ensure that you have established and negotiated the price of the actual vehicle before arranging the finance deal. It is also important to do some math to find out how much you can expect to spend throughout the finance deal. It will include fees, interest rates, and add-ons and will help you not to overcommit or to be sold either a finance deal or vehicle that’s too expensive.
Keep Your Interest Low
You will also have to pay interest on the loan when paying for a vehicle on finance. You want to find the deal with the lowest possible interest rate. The rate offered by your finance provider will depend on your credit score, but don’t be afraid to ask them to adjust since they probably have some discretion regarding the rates that they can offer.
You can even limit the total interest payments, and by extension the overall costs, if you put down more money as the deposit and opting for a shorter-term finance arrangement. It is possible to find low APR car finance to keep repayments down.
If you have poor credit and the finance provider does not want to budge, don’t just settle for an auto finance deal with exorbitant interest rates. Don’t be afraid to walk away and seek out other finance providers, dealers, or other ways to finance your auto purchase, which includes guarantor loans.
Keep the Loan Term Short
You might be tempted to sign up for a finance product with a lengthy term to keep your monthly payments low and help you pass affordability costs, but it is always important to remember that long-term loans come with their own unique risks and costs. Borrowing money for a longer term means paying more in interest.
Furthermore, a longer loan term increases the length of time that you will be in negative equity on the finance product. Negative equity means that you owe more on the vehicle than it is actually worth and it occurs because vehicles are depreciating assets, particularly in the first months of their life.
If you are in negative equity, it will be impossible for you to either sell or trade-in the vehicle in case your circumstances change and you need a new vehicle or you are no longer able to afford the repayments, without first paying hundreds if not thousands of dollars out of your own pocket.
Avoid any auto finance deal with a term greater than 5 years, no matter how hard the dealer or finance manager pushes it. The sweet spot is 3 or 4 years.
Avoid the Extras
Finance providers and dealers will always try to get you to bundle everything from GAP insurance and servicing packs to PPI with the auto finance deal. Some dealers will actually attempt to sell you unnecessary extras such as home insurance when auto finance is all you need.
In general, you need to be wary of the extras and not agree to any additional provision that you have not researched thoroughly and run comparisons on. Tacking on all the extras being pushed by the dealer carelessly will only inflate your monthly payments and total vehicle costs, while increasing the dealer’s profit.
Don’t Be Afraid to Walk Away
The right vehicle at the right price is ultimately not right for you if you find yourself locked into expensive and unfavorable finance deals to purchase it. If the finance provider doesn’t want to budge on a lengthy term or high interest rate and aggressively keeps pushing extras, don’t be afraid to walk away and seek out another vehicle, and another financing product elsewhere.
In fact, if you show a willingness to walk away, some of the non-negotiable prices and rates might start moving.
