How to Use Car Financial Services Companies Safely

When you need a car you can’t really putz around.  You’ve got to get those wheels pronto or your entire world can fall apart.  The question is, should you turn to car financial services companies if you don’t have the money to pay for the auto? And if you have to go that route, how should you deal with them?

While auto finance companies have a bad rap, it’s important to understand that they 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. Since the security for their money losses value every day, and since that collateral is really easy to move and hide, they take on big risks.  That’s part of the reason they sometimes charge sky-high rates.  (The other reason is because people turn to them who are desperate and when that happens, the company takes them to the cleaners.)

The high rates are even more a problem when you finance a used car. But the fact that they charge exorbitant interest rates doesn’t make these companies 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.

When at all possible, don’t borrow for a car.  Instead buy something you can afford without taking a loan. This is probably the very best way to save huge on buying a car.

This is good in theory but sometimes unavoidable in practice. But 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, a car 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.   That’s crazy – but you may have no choice.  Here’s why:

Let’s say you $2,500 a year for that loan.  But because you have a car, you get to keep your job.  And without a car, you won’t be able to do so. So if you consider the cost versus the payoff, it might be worthwhile. But before you make that determination, make sure you understand what you are really paying for that loan.

3. Understand the 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.  Another option is to borrow from family or friends.  With the right approach, this could be the most inexpensive option possible.

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.

How do you prepare?  Set up an “auto replacement fund” now and put money into that account ever month.  This is one of the best techniques to avoid ever having a car payment.

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?