Education - Auto Buying

Buying a car is a big decision! It can be a fun and exciting process or it can be very stressful. We are going to provide you with some tips on making the auto buying process a little easier.

Buy or Lease

Your first decision is choosing if you want to buy or lease a car. Personal Financial Experts agree buying is the better financial decision! Leasing may make sense in certain tax situations such as owning a business.

What are the Costs?

There are several factors to look at when figuring the price of the car. You can not just look at the sticker price of the vehicle; you need to look at all of these costs when deciding on a vehicle:

  • Purchase Price
  • Depreciation
  • Finance Charges
  • Insurance
  • Taxes

Check Your Credit Score

Why is credit score so important? Your credit score is very important when you are trying to obtain financing. It determines if you qualify for the loan as well as how much you will pay in finance charges. The lower the credit score, the higher the rate, and the more you pay in finance charges. If you have a high credit score, you will get a lower loan rate and pay less money in finance charges.

Credit Score Starting Loan Rate
730 + 5.70%*
680-729 6.20%*
640-679 7.20%*
600-639 8.70%*
550-599 12.20%*
<550 16.20%*

In the next chart you will see what a payment per $1,000 with three different rates can be. This will help you see how much money you can save by having a higher credit score.

Rate Payment Per $1,000
5.70% $19.19
7.20% $19.90
16.20% $24.42

Financial Strategy #1

If you are forced to pay a high rate because of your past credit history, then purchase basic transportation. Purchase the car of your dreams after you re-establish your credit and can get a reasonable rate!

Financial Strategy #2

If your credit score is below 730, meet with an ICCU Financial Service Officer to discuss strategies to improve your credit score and therefore lower your loan rate. We want to teach you how your can improve your credit so you pay LESS on future loans!

Financial Strategy #3

Buy the car of your dreams, but only after it is 2 or 3 years old. USA Today reports that depreciation is one of the biggest expenses in owning a car!

  • WATCH OUT FOR THE CLIFF!!!
  • In 3 years, your new car is worth 27% to 62% of the original purchase price. (A $20,000 purchase is worth between $5,400 to $12,400.)
  • In 5 years, your new car is worth 18% to 52% of the original purchase price. (A $20,000 purchase is worth between $3,600 to $10,800.)
  • Here is a chart showing the monthly depreciation costs on a $20,000 vehicle bought brand new:
Years Owned Monthly Depreciation
1 $300-$616
2 $258-$491
3 $211-$405
4 $179-$325
5 $160-$273

Financial Strategy #4

Check out the book value of a vehicle that is 3 to 5 years older than the vehicle you are considering. This will give you an idea of how this model holds value.

Financial Strategy # 5

Get pre-approved for financing at your Credit Union. Having your financing already set, gives you more buying power. You will be aware of how much you are willing to spend and an approximate of what you can afford.

Negotiate the Deal

The dealer is looking to make the most money, and that doesn't always mean they are giving you a great deal. You need to be willing to walk away at any time! You also want to look at similar vehicles at different dealers. This will give you some leverage when negotiating the deal. Follow these steps to help you get the best deal possible:

  • Contact 5 dealers.
  • Tell them you are working with other dealers.
  • Tell them you are paying cash (since you have already been pre-approved at your Credit Union, all the dealer needs to know is that it is a cash deal).
  • Tell them you have no trade-in.
    We have seen situations where the dealer inflates how much they are giving you for your trade-in and what they are really doing is adding in the extra amount (since they are probably not paying off your current trade-in in full) on the base price of the vehicle. So it looks like the dealer is doing a good thing for you, but they are really not giving you a good deal at all!
  • Ask for the "Out the Door" price (the final price including tax, title, and licensing).
  • After round 1, submit the best offer to the other 4 and ask them to beat the deal. After round 2, submit the NEW best offer to the other 4 and ask them to beat the deal. Keep repeating these steps until all of the dealers say "this is my best offer." Then you know you have a fair price. Now you can ask them what they will give you for your trade in. Since you have your out-the-door price, the dealer will not be able to add on to your purchase price. Remember, if you are not sure you are getting a good deal, ask the dealer for a bill of sale and bring it to a Financial Service Officer. We will be happy to look up the value of the vehicle to make sure the dealer is giving you the best price. Do not sign anything until you a positive on the purchase.
  • Do NOT allow the dealer to pull your Credit Report
    • They will run it with several financial institutions which can lower your credit score.
  • Do NOT discuss financing or add-ons with the dealer.
    • They will try to sell you overpriced add-ons.
  • Always be prepared to Walk Away
    • The dealers want to sell you a car more than you probably want their vehicle. So make sure you are getting the best deal on the vehicle you want!

Financing

We have seen over the years how the dealers will give you a better rate and it ends up costing you more!

  • Dealers charge much more for add-ons to loans such as Mechanical Repair Coverage (warranty), GAP Insurance, and Payment Protection Plans. ICCU offers all of these products and our prices are lower than most prices offered by the dealers.
  • We can process an Auto/Home Loan in which the interest may be tax deductible. It is as easy as a regular car loan and by placing a courtesy lien against your home, you can save even more money! For example, a 7.5% APR turns into 5.4% APR after taxes (assumes 28% tax bracket and the member itemizes deductions on the US 1040 Schedule A).
  • GAP Insurance (Guaranteed Asset Protection)
    • If your vehicle is totaled or stolen, you are still liable for the remaining balance left (after the insurance company pays what they think the vehicle was worth), also known as the GAP. The GAP Insurance covers that remaining balance.
    • Since most new cars depreciate by thousands of dollars as soon as they are purchased, GAP is important to have if you are not putting a significant amount of money down towards the purchase.
    • Often, negative equity is carried over to your new vehicle purchase. That puts you "upside down" immediately, meaning you owe much more than the vehicle is really worth.
    • ICCU GAP is priced at $240 vs. dealers who have charged $500 or higher!!!!
    • ICCU offers a full refund if you cancel within the first 90 days.
  • MRC (Mechanical Repair Coverage; Auto Warranty)
    • MRC helps you pay for covered repairs on your car when an unexpected breakdown occurs. For a few dollars a month, you can protect your vehicle and your finances from expenses that could total hundreds or even thousands of dollars!
    • You can use the MRC policy at ANY authorized automobile dealer or licensed repair facilities in the U.S. and Canada.
    • You can transfer your MRC policy if you sell your vehicle to a private party or you can cancel the MRC at any time on a pro rata basis.
    • The MRC is convenient, with toll free customer service and communication. It is hassle free because the repair facility is paid directly by the plan; you only pay the deductible amount that you select - $0, $50, $100, or $250.
    • There are 3 different plans to choose from: Silver, Gold, or Platinum. Speak to a Financial Service Officer to help decide which plan is right for you.
    • There are many other benefits that come with the purchase of MRC. A few are car rental reimbursement (certain restrictions apply), 24 hour toll free road side assistance covering towing, flat tire changing, oil and other fluid delivery, jump starts, fuel, and entry when keys are locked in car, and emergency travel expense up to $500 for lodging, meals, and transportation if a covered breakdown occurs more than 100 miles from home.

More Helpful Information

  • Trade-In or Sell Outright
    • When you are looking for a new car, you need to decide if you want to trade-in or sell your current car.
    • You will most likely get more money if you sell the car yourself. While looking for your new car, drive around with a "For Sale" sign in the window to see if there is any interest in the vehicle. If so, you may have a good chance of selling the car yourself.
    • There are tax-advantages if you trade-in a vehicle.
    • You can also choose to donate your car to charity, which may be a tax advantage.
      1-800-CHARITY CARS, Phone Number (800) 242-7489, Web site, www.800charitycars.org
  • Insurance
    • Contact your insurance agent to get a quote for insurance before you purchase the vehicle.
  • Taxes
    • Vehicles purchased at dealers pay sales tax of 6.25% (may vary based on the county you live in) on the purchase price less the trade in.
    • Vehicles purchased from private parties:
    <$15,000 $390 or less based on the year
    >$15,000 $750
    >$20,000 $1,000
    >$25,000 $1,250
    >$30,000 $1,500

Additional Resources

There are many places where you can get additional information about the vehicle that you are looking at. The more knowledge you have, the better off you are! Here are a few links to some web sites that can help you get more information:

  • Consumer Reports-
    www.ConsumerReports.org
  • Insurance Institute for Highway Safety-see how the car you are looking at ranks in front and side impact crashes
    www.iihs.org
  • NADA-look up the retail value of the vehicle
    www.nada.com
  • There are many Internet auto dealers. Checking out prices on those sites can tell you what to expect when looking for a vehicle.

Contact an ICCU Financial Service Officer if you would like more assistance in your auto buying experience. Our goal is to help you get the best deal possible! We also want to help you improve your credit so you pay less finance charges!

*Loan Rates are based on a 60-month term. Your final rate depends on your credit history and your relationship with ICCU.

 

 

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