Buying a car can be a grueling process. It usually goes something like this: You go to a dealership and find an automobile that suits your tastes and/or needs. You discuss it with the salesperson, take it for a test drive, and decide whether to pursue it or keep looking. If you’re still interested, you discuss the price and apply for financing. Then the salesperson goes back and forth with the sales manager until a workable price and financing plan is reached.

But sometimes it’s not that simple. Buyers often choose a vehicle that is beyond their price range, and the dealer will not finance it. Or worse, the buyer may be turned down for credit completely. But much of this hassle can be avoided by getting a preapproved car loan through a bank.

Getting preapproved for a car loan is a fairly simple process. The buyer simply goes to the bank before setting foot on a car lot and requests preapproval. The loan officer takes an application and runs the buyer’s credit report, and informs him how much money he qualifies to borrow. The buyer may then start looking at cars, and when he finds one in his price range, the bank sets up the loan.

Benefits of Preapproved Car Loans

Getting a preapproved car loan has some definite advantages. These include:

* It shows dealers that you’re serious about buying. When they know you’re definitely planning on purchasing a vehicle, they’re more likely to try to offer you a good deal to keep you from going elsewhere.

* Having a preapproved loan from the bank eliminates the need to haggle over dealer financing. Rates for dealer financing are often much higher than those offered by a bank, and rebates or discounts may be tied to the interest rate. When you already have approval from the bank, you won’t have to make concessions in these areas.

* You know your price range before you start shopping. This can help you avoid pursuing cars you can’t afford. It may also give the dealer more incentive to offer you the best deal possible.

* It’s possible that the dealer might try to beat the rate on your preapproved bank loan. Dealers receive commissions and other incentives from the banks that do their in-house financing, so they prefer for buyers to finance through them. If they can offer you a lower interest rate than your preapproved bank loan, they will usually do so.

Getting preapproved for a car loan doesn’t put you under any obligation. It simply means that the bank has agreed to finance up to a certain amount for you. There are usually certain requirements regarding the age and condition of the car, but you can generally choose any car you want and know that financing will not be a problem.

Brought To You By:
Woody Alpern
CPA/PFS
www.yourwealth.com
woody@yourwealth.com

Shopping for a car loan requires time spent researching various options. Let’s take a look at a few of these options.

Let’s assume you are purchasing a new car from a dealership. Odds are before you leave the lot with your new car, you will be escorted into the financial office where you may be asked to sign up with a specific insurance company. While this may save time and, in some instances money, you may wish to shop around and ascertain if there are more affordable rates out there.

Shopping around for the most affordable rate is a good idea. Where do you begin? Call or visit your bank. Ask about their car loans and interest rates. If you have obtained other loans from your bank, they are more inclined to offer you the best rate.

Also, check other banks in your area. They may offer slightly lower rates than your bank and perhaps you can use this lower rate as an incentive to your own bank to work with you.

Another option is to check with finance companies. Keep in mind, however, that their interest rates may be higher due to the fact that they work independently. That is, they borrow money at lower rates and then hike it up to consumers.

Credit unions are another option you can check. If you are a member, you can enjoy reduced rates on loans.

Online websites also offer a wide range of loans and interest rates. However, ensure that the company is legitimate, has a telephone number and address on its website, and is an approved licensed entity. It should be noted that if you do decide to use online websites, you may be inundated with emails and phone calls, particularly if the information you provide is given out to third parties.

Finally, you may wish to consider a home equity loan. There are two benefits using this option. One; the interest rate may be lower, and two; you can deduct the interest on your income tax. Here too, there is a risk – if the mortgage payments cannot be made, the home may be placed in jeopardy. However, with a car loan, the most you can lose is the car.

Brought To You By:
Woody Alpern
CPA/PFS
www.yourwealth.com
woody@yourwealth.com

Let’s get right to the point. Leasing a car is almost always a very poor financial decision. I’m going to focus the next few Woody’s Goodies on car buying tips. But the first tip is, DON”T LEASE A CAR! Summarized below are my views on the disadvantages of leasing a car:

1. The selling price is usually MSRP. Many dealers hide this value from you, diverting you to low monthly payments. Many car sales people will simply tell you its cheaper to lease, where you can’t figure out that the price charged was MSRP, and stole your trade in because they are not required to disclose a trade on a lease form;
2. Confusing finance charges. Some dealers try to confuse you and lie about something called the “money factor” and often won’t even tell you the money factor. Well, let me tell you about the money factor. It’s usually a very high interest rate as compared to the interest rate you can obtain if you purchased a car. To convert the money factor into an interest rate, simply multiply it by 24;
3. Long-term cost of leasing is more than the cost of buying no matter what the dealer tells you. Dealers don’t compare apples with apples when telling you that a lease is cheaper than buying. Let me illustrate what happens. Most people lease for 36 months, or borrow (if purchasing) for 60 months. However, dealers like to compare a 36-month lease payment to a 24-month loan payment (even though it’s rare for people to borrow for 24 months). Therefore, they can convince people that buying a car is much higher than leasing a car because of the appearance that the monthly payment on the lease is much less. They don’t tell you that they packed the lease payment with hidden extended warranty, credit life insurance, $500 dealer acquisition fee, $300 disposition fee, etc.;
4. Depreciation in any auto lease is RIDICULOUS. With leasing, every 3 year you pay approximately 50% depreciation in car value, so after 2 leases in 9 years, you have paid 150% depreciation. If instead, you purchased the car, and drove it for the same 9 years, you still have not used up 90% depreciation. Obviously, buying is cheaper, end of story;
5. Possible double tax when leasing a car. Most states tax your monthly payment. But some states like Illinois and Texas tax the full amount of the car even though you are only using up to 50% of the value then returning it. Even worse, if you buy the car at the end of the lease, you again pay sales tax on that residual amount! Don’t even consider leasing if you live in Illinois or Texas.
6. High Insurance Cost. Lessors require you have minimum insurance policies of $300,000;
7. If you lease the car, you may not get a manufacturers rebate. This can increase the cost by $500 to $1500, so make sure you get the rebate! Some dealers try to get out of it, and they may keep it for themselves;
8. Lemon laws don’t cover leases in some states. For example, the Illinois attorney general’s office stated that the three day right to cancel law does not apply to an auto purchase, and Illinois Lemon Law only applies to new cars, not used car sales of leases;
9. Misleading dealer lease ads. Many ads state very low monthly payments, like $275 per month for a BMW. However, there’s usually only a tiny stock number of the only car there at that price. To get low monthly payments, you need huge down payments (which are sunk cost lost forever since you don’t own the car). The fine print also may state that taxes are extra;
10. Calculate your own lease payment. Dealers love to volunteer to do a lease versus purchase analysis for you. Tell them, sure go ahead. Then tell them you want a print out of the analysis so you can take it home and check it. You ten MUST be able to figure out the lease payment on your own, and lookup residual values (available on various web sites (i.e. Edmunds.com)). For your convenience, I have attached a spreadsheet which will help you in calculating you lease payment (LEASE PAYMENT CALCULATOR ATTCHED);
11. Mileage limits. Most leases limit you to 12000 miles/year. Some are 10,000 miles. Many of my friends have paid thousands of dollars at the end of their lease for excess mileage.
12. You are responsible for program maintenance. Better keep damn good records of every oil changes tune up, etc. and do them on schedule too. Don’t give them any chance to claim excess wear and tear; and
13. All 4 tires must match! This is in every lease contract. Leasing companies charge you for mismatched tires, and they charge MSRP, which you can get cheaper in a tire shop;
14. Accidents may trigger early termination. Some leases actually may terminate upon an accident, and you’re still obligated to pay off the lease. Car insurance covers the damages, but not the cost of paying off the lease. You’ll need “gap insurance” for that (another additional cost of leasing). You should definitely buy gap insurance when you lease, but shop it, because if you buy it from the dealer, you’ll b e getting a raw deal;
15. Dealers love to offer you and early out on your lease. Dealers will often volunteer to pay your early lease termination penalties, and buy you out of your current lease. But they do this so they can roll you into another lease (thereby selling another car), and in essence they have just financed all that debt into the new lease. Now you’re paying off 2 leases. Thanks for nothing!
16. Tax law changes have reduced the tax considerations of leasing versus buying, and focused the decision on the real economics as mentioned above. Since 1998, taxpayers have the option of using the standard mileage rate on either leased or purchased autos. Prior to 1998, standard mileage rate was only available if the taxpayer owned the auto. This removed the advantage that purchased autos had over leased autos regarding required record keeping.

Do yourself a favor, don’t lease a vehicle. As a matter of fact, buying a 1 or two-year-old vehicle is by far the best way to go. Today, you can even get those used vehicles with 5 and 10-year warranties still in tact. If for some crazy reason you decide to lease, please use my lease calculator (file attached) and make sure the dealer isn’t ripping you off.