If you need a car, you need a car. The question is, should you turn to car financial services companies if you need to borrow money? And if you have no other choice, how should you deal with them?
Before we can address these issues, it’s important to understand that car financial services companies are not bad per se. They provide a service and they need to be compensated. They loan money on cars. And cars are assets that lose value over a relatively short period of time. That’s called depreciation. So if their security is losing value every day you owe them money, they take on big risks.
That’s especially true when you borrow money to buy a used car. That’s why these companies sometimes charge very high interest rates. It’s to compensate for the high risk they take. The fact that they do so doesn’t make them bad. It just means you have to take precautions so you don’t get skinned by these fellows. Here are the five main tactics to keep you safe when dealing with car financial services companies.
1. Don’t borrow money to buy a car.
This is good in theory but sometimes unavoidable in practice. If you do need to borrow money to buy a car, and you absolutely must have a car, borrow as little as possible by buying an inexpensive car. No matter what, this is an expense and not an investment. Keep that very clear and buy accordingly. By doing so, you’ll save on borrowing costs and you’ll get cheaper car insurance too.
2. Understand the true cost.
If you borrow $10,000 to buy a used car, make sure to understand the real cost of that money. The interest cost could easily exceed 25% for loans like these. Now, if you have no choice, you still might be making a smart move by taking the loan. Here’s why.
You might pay $2,500 a year for that loan, but you might only be able to keep your job if you have a car. So if you consider the cost versus the payoff, it might be worthwhile. But before you make that determination, make sure you understand the costs and the alternatives.
3. Understand the alternatives.
Every debt has alternatives. Once you understand what the financial car companies are charging, look for lower-cost alternatives. One idea is peer-to-peer lending. Here’s one way to do it: check out my Lending Club Review. In this case, you allow some other individual to loan you the money. Usually, you’ll get the loan at a much lower rate than the car financing companies offer.
4. Be prepared.
Close your eyes. Assume it’s Sunday night. You’re driving home when suddenly your car dies on you. You have no choice. If you don’t show up to work tomorrow, you’ll lose your job. If you lose your job, you’ll lose your apartment. If you lose your apartment, you’ll have to move in with your sister and your unshaven, loud-mouthed brother-in-law. A fate worse than death. There is no question about it: you simply MUST replace your car tonight.
When you approach a transaction like this, you’re going to get hosed for sure. You have no time to do any research or look for alternatives. Granted, in a case like the one I presented above, you may have no alternative. But if you pay attention and take action when your car starts getting sick, you’ll probably have more time to make arrangements than if you simply wait for the motor to die while you’re in rush-hour traffic.
5. Buy new and borrow – but don’t tell.
If you decide to buy a new car against your better judgment, don’t tell the salesperson you want to finance. Make a deal based on a cash price. Then, after everything is agreed on, tell them that you changed your mind and you’re going to need financing.
This way you can see the real cost of the loan. Sometimes, salespeople tell you that the sales price is the same regardless of whether the transaction is for cash, but that’s often not true. Bargain hard as if you’ve got wads and wads of hundreds falling out of your pockets, and then pull the old switcheroo on them. Believe me, they deserve it and they’re used to this game…it is just that they are usually the ones pulling this stunt instead of getting suckered by it. Serves them right.
Have you ever used a car financing company? What was your experience?