Whichever reason fits you best, refinancing your auto loan may be the way to go.  So what *is* refinancing, exactly?  Well, it’s exactly what it sounds like.  Let’s say you signed up for a 60 month loan on your new car, and you’re 24 months into that loan.  That means you have 36 months left, right?  When you refinance, you take the balance of your current loan, and finance it for a longer period - maybe 48 months.  That will bring down your monthly payment, hopefully to a more reasonable amount that you’re more comfortable with.

Are there any downsides to refinancing an auto loan?

Absolutely.  For one, your original 60 month loan has now turned into a 72 month loan - the 24 months that you have already paid, and the 48 months that you refinanced for.  So instead of paying off your car in 5 years, you’ll pay it off in six.  Also, unless your interest rate drops by a solid amount, you’ll end up paying more in interest over the course of the loan.

Think before you refinance

Take a few minutes to think before you refinance your auto loan.  If interest rates are dropping, it may make sense.  You can even refinance for the same number of months that were left on your original loan.  In that case, your payments drop due to the lower interest rate, you payoff the car in the same amount of time, and you save on interest charges.  But if you aren’t so luck to be in such a great situation, you really need to think about whether refinancing is right for you.  As a general rule, don’t refinance unless you plan on keeping the car through the entire length of the refinanced loan.  Smaller payments and extended term usually mean negative equity right now - something that you want to avoid.

What is GAP Insurance?

GAP Insurance covers the gap between a car’s value and your payoff, in the event of a total loss.  Let me paint you a picture to make things easy.  Let’s say you’ve just purchased a brand new Chevy Tahoe with all the goodies.  After your discounts, rebates, and tax, your total amount financed is, say, $36,000.  A few minutes down the road, an Escalade races through a red light and smacks your brand new Tahoe in the side.  Fortunately, all that sheet metal and all those airbags keep you safe and sound, just like they’re supposed to. 

Your Tahoe was not so lucky, and the insurance company declared it a total loss.  They’ll be writing a check to your bank for the value of your trade - $31,000.  But wait a minute - you owe $36,000.  And you can be sure the bank will want the full amount.  So you’ll have to get out your check book and cover the additional $5,000.  Ouch - someone wrecks your new ride and you’re out $5,000 - that hurts.

If you had purchased GAP Insurance before you drove your new Tahoe away, then you wouldn’t be in for such a rude awakening.  See, GAP Insurance covers the gap between the value of your car and the payoff.  In this case, the GAP Insurance would’ve paid the remaining $5,000.  You wouldn’t need to pay it yourself if you had GAP.

How much does GAP Insurance cost?

Ahh, you’ve asked the magic question.  The type of vehicle will affect the cost of GAP, as will the place you purchase it.  Car dealers are notorious for marking up GAP insurance - I’ve seen dealers charge as much as $800 for GAP.  You should really consider buying GAP from the bank you finance with, or a separate insurer.  You can end up saving several hundred dollars, and still get the exact same coverage.  But remember, always make sure you have GAP insurance before you drive off the lot.

Do I always need GAP?

No.  If you put down a very large down payment, or traded in a paid-off vehicle that was worth quite a bit, then you may not need GAP insurance.  Using the Tahoe example from above, let’s say you had put down $8,000 when you bought your Tahoe.  Your payoff would then be just $28,000.  Since the insurance company valued your car at $31,000, you wouldn’t have any negative equity, and thus no need for GAP.

Let’s say you’re a smart shopper. Since you’re here reading this site, I think that’s a safe thing to say, don’t you? You apply for a loan online, and get approved for 8% APR ( annual percentage rate. ) That’s not a bad rate at all, especially considering how rates have been rising lately. After you have this solid quote in hand, and you get your new car price quote from the dealer, the fun begins.

There’s a good chance the dealer will just beg and plead to finance with them - and he may avoid talking about rate at all! This is where you have to stand firm. Say that the only way you’ll finance with the dealer is if he can offer you a better rate than you are already approved for on your own. Sometimes you’ll win, and he’ll come back with 7% instead of the 8% that you had. You win, because you pay less in interest. And the dealer wins too, since he gets paid for every customer who finances with him.

There is never a time when you should accept a higher rate to finance with the dealer - it just doesn’t make sense! Going from your 8% to his 9%, on a $25,000 loan at 72 months is a difference of $886 in finance charges. I don’t know about you, but I’d rather hang on that $886 than give it to the bank, just so the dealer will be happy.

Get your Credit Report

It’s important to get your credit report and credit score before you go car shopping - I recommend that everyone do this. If you think you might have bad credit, it’s even more crucial to be prepared. If the dealer knows you have bad credit, and you don’t know the details, he can and will use this to his advantage. The most profitable car deals are to people with less than perfect credit - don’t fall into the trap!

Subprime vs Prime

So, you got your credit report and score - now what? People generally fall into two categories - prime and subprime. If your score is above 680, consider yourself lucky - you fall into the prime category. If you’re not so lucky and come in under 680, you are considered subprime. Subprime borrowers don’t always qualify for the best rates and financing terms - it’s a fact, and it’s something that you’ll have to deal with. What you don’t need to deal with is dealers taking advantage of your challenged credit, and pulling the wool over your eyes.

You don’t have to pay MSRP just because you have bad credit

Some dealers are so unscrupulous that they’ll tell a customer who has bad credit a horrible lie. The dealer will say that they have to charge full MSRP for the vehicle - that the bank requires it. This is not only wrong, it’s a bold-face lie. No bank has any stipulations on how much the dealer has to charge you for a car. They most certainly wouldn’t require you to pay full sticker price. If anything, they want you to pay less.

We can only get you approved if you buy the extended warranty

This trick is one of my Top 10 Dealer Tricks - and it’s a nasty one. Uninformed customers with bad credit make dealers like their lips with thoughts of crazy high profits. If a dealer ever tells you that the bank requires you to buy a warranty because of your credit - turn around and walk out immediately! Not only is this a lie, but you can be sure that you’ll be overcharged for the warranty. If you do want a warranty, get a quote online so you know what they’re worth. But don’t ever let yourself be forced into buying one - no bank ever requires it.

So, what do you need to know about auto loans? Let’s take a look:

Rate ( APR )

Your rate is an important factor in your monthly payment - the lower your rate, the lower your payment. Pretty easy, right? There are several factors that determine what rate you’ll receive on your loan. Your credit score is a huge factor, and something that you need to be aware of. You should always obtain a copy of your credit report and credit score before you begin car shopping. Knowing your score will help you know if you’re getting a fair rate or not.

Term ( Length of loan )

Equally important to your monthly payment is the length of the loan. In the past, loans were usually 36 or 48 months - that was as long as they got. As cars get more and more expensive, auto lenders have offered longer loans to help keep payments manageable. The average loan today is between 60 and 72 months - a big jump from 10 years ago. There are even lenders that offer 84 or 96 month car loans. Could you imagine making payments on one car for 8 years?

The reason you need this information is so a sneaky dealer doesn’t use one of the Top 10 Dealer Tricks on you. You always need to make sure you’re getting a fair rate, as determined by your credit score. Also make sure to finance your car for a reasonable period of time. There is never an instance when financing a car for 96 months is a good idea - never. If you need to finance a car for that long to afford the monthly payment, then you can’t afford that car! There are plenty of other, less expensive choices available.

A vehicle history report can’t answer all those questions for you, but it can help you make a good choice. The most common vehicle history reports come from CarFax, so we’ll focus on those. With a CarFax VHR, you get a ton of information to digest, including:

• Number of previous owners
• Length of ownership
• Accidents - minor and major
• Flood damage
• Frame damage
• Hail damage
• Odometer rollback indicator
• Manufacturer recall information

Just because a vehicle has been in an accident, doesn’t automatically make it a bad purchase. It is important to know, however, since an accident could make the vehicle worth less, and end up saving you money. The person or dealer that you want to purchase the used car from may not even know if it has been in any accidents - that’s why it’s important for you to do your homework.

A CarFax VHR costs just $24.99, and it could end up saving you thousands of dollars. If you’re looking at several cars, you could get the $29.99 on month plan, where you can pull unlimited vehicle history reports for the entire month. That way, if the first car turns out to be a lemon, you can check your next car without putting out another $24.99 every time.

You can not buy a car for the newspaper advertised price, ever.

If you try to do so, several things could happen.

• Aww, we just sold that one! - The most common excuses why a dealer can’t sell you a car for the advertised price. Usually there is a stock number way down in the fine print - and shucks, they just sold that one. If the deal is too good, you can be sure they “already sold it”.
• The ad price is for the least desirable vehicle in the world - It’s only for a stripped down, manual transmission, roll-up windows, pink vehicle. If you don’t want that exact vehicle ( and no one does ), then you’ll have to pony up some extra cash.
• It doesn’t include the fees - Dealer prep fee, doc fee, extra dealer profit fee, whatever. The price in the paper is always “plus tax, title, license, and fees.”

A car dealer’s newspaper ad is designed to do exactly one thing - get more customers in the door. If a dealer doesn’t put ridiculous prices in the paper, and all his competitors do, he won’t get any customers. So much for being honest. So every single dealer prints an absurd ad, full of prices they can’t sell a car for.

The best way to avoid having to deal with this issue, and the confrontation that it can cause, is to get a quote online. A quote online, in writing ( your printed email ) is as good as gold. It’s for a specific unit, which you confirmed was in stock, and the price is good for internet customers ( you ). This way, you avoid the hassle, and never have to look at the newspaper ad.

1. High Demand - Some cars are in higher demand than others - that’s a fact. But, some dealers will act as though every one of their cars is the hottest vehicle on the market, and if you don’t pay what they want, someone else will. They’ll also pull the “if you don’t buy it now, it’ll be gone when you come back” trick. Yes, this could happen - but you shouldn’t let that force your hand.
2. Come back and sign, your signature didn’t match. - If you financed with the dealer and you get this phone call, watch out! The dealer could be changing things on the contract so that you end up paying more money than you agreed to. Whether it’s the price of the car, value of your trade, interest rate, or # of payments, you need to match every number to your copy of the contract.
3. Straw purchase. - If you have shaky credit and need a cosigner, you need to watch out for a straw purchase.  Generally, if you have a cosigner on your loan, both you and your cosigner will get “credit” for your on-time payments.  However, some dealers will end up taking you off the note altogether - which means the car is only in your cosigner’s name.  The worst part is that in most states it’s illegal to purchase car insurance for a car that isn’t in your name!
4. Required Warranty - Some dealers will say that you must buy a warranty to get financed - the lender requires it. I’ve worked in the car business for many years, and I’ve worked with a ton of different lenders. No lender will ever require that you purchase an extended warranty to be approved for financing. Not a single one. Whether you get a warranty or not should be up to you - it is not required.
5. We’ll pay off your loan no matter how much you owe - This message is all over the radio, TV, and even that funny black and white paper that my parents used to read. Yes, any dealer will pay off your loan, even if you’re upside down. But the amount that you were upside down doesn’t go away - it gets added to the price of the car you’re buying. The dealer isn’t doing you any favors by paying off your negative equity.
6. Lie about your credit - This one is particularly devious. Some dealers will lie to less-informed consumers, and indicate that their credit is worse than it really is. Since the customer thinks their credit isn’t as good, they’re more willing to pay a higher interest rate. This just adds up to more dealer profit.
7. Switch to a lease - This isn’t as common today as it once was, but it still happens. At the last minute, the dealer will switch from a purchase to a lease. Since you agreed to the higher purchase payments, you’ll end up paying those same payments on a lease. And, of course, the vehicle goes back after the lease is up. You end up with high payments and no vehicle at the end - ouch.
8. Extend the term - You may think you agreed to a 60 month purchase, but the dealer got sneaky at the end and changed it to 72 months. Or even worse - 84 or 96 months. Imagine paying on a car for 8 years - that’s insane! And it’s insanely profitable for the dealer.
9. Mistake on Contract - Happens all the time. The $21,000 that you thought you were paying for your car magically turns into $22,000 on the final contract. If you’re not careful, then you’ll sign up at an additional thousand dollars - pure profit for the dealer, and painful for you.

1. Price of the new car - This is the number one place where dealers make their money. Any amount over invoice that the dealer can get is profit.
2. Your Trade-in - If your trade is worth 15,000, but the dealer gives you 14,000, then he just made an extra thousand dollars in profit - not too shabby. For him, that is. It’s not so good for you.
3. Financing - Dealers are paid a flat fee from the banks for each contract they send over. That’s why they try very hard to earn your financing, even if they can’t offer you a better rate. Also, they make money doing something called “point spread”. Say their bank approves you for 6.5%, but the dealer signs you up at 8.5%. They just made a 2 point spread on you. On a $20,000 car this can be huge - almost $1500 in added profit for the dealer.
4. Unnecessary Add-ons - Paint and fabric protection, sealant, rustproofing, VIN etching.. I can hear you nodding your head - you’ve seen these things before. Not only do you not need them, they are almost pure profit for the dealer. I’ve seen dealers charge as much as $1,000 for paint and fabric protection. The paint sealant is nothing more than wax, and the fabric protection is a can of Scotchguard. You’re better off handling these items on your own.
5. Extended Warranties - All dealers offer extended warranties on the cars they sell, but the prices vary wildly. Extended warranties are not a bad idea at all - in fact, they are often a very good investment. However, you must be careful not to pay too much. For the exact same warranty that you could purchase online for $700, you could pay as much as $2000 at the dealer - or $1,300 too much.
6. Dealer Prep - A bogus fee that many dealers tack onto the contract. Some dealers charge as much as $600 for a dealer prep fee - they say it covers their costs in detailing the vehicle, inspecting it, and filling it with gas. Wrong! Nearly all manufacturers cover the costs of inspecting and gassing the new vehicle. This fee is bogus. If it’s $600, ask them to reduce the price of the vehicle by $600 ( They can’t just remove it from some contracts, without removing it from all of them. ) Don’t pay this fee, ever.
7. Doc Fee - Some states of regulations in place governing the amount that a dealer can charge for a Document (Doc) fee. This is supposedly to cover all the paperwork involved with the vehicle purchase, such as registration, titling, and payoff. $50 should be plenty for this fee - any more, and ask for an additional discount on the vehicle. I’ve seen doc fees well into the hundreds - don’t pay that much!
8. Holdback - Nearly all manufacturers send dealers a quarterly payment, based on the vehicles that they sold. Each vehicle has a “holdback” amount, which is a percentage of either invoice or MSRP, depending on the dealer. On some cars, this can be well over a thousand dollars - all profit. So when a dealer agrees to sell you a car at invoice, and pretends like he’s losing his shirt, you’ll know better.
9. Floorplan Assistance - Some automakers go above the holdback, and offer something called Floorplan Assistance. This is designed to help offset the costs of the dealer carrying inventory. At the end of the day, it’s yet another profit avenue for dealers. A few hundred dollars per vehicle can add up very quickly when you’re talking about a large volume dealer and hundreds of vehicles.
10. Adjusted Market Value - Sometimes you’ll find a dealer who has the nerve to add an Adjusted Market Value sticker to some or all of the new vehicles on the lot. Let’s say MSRP is $26,000 - the dealer sticker price may be $28,000. That’s a $2,000 AMV, and it’s 100% pure profit. Don’t ever pay more than MSRP - you should rarely pay as much as MSRP.

Get a quote before you go to the dealer

You can spend hours haggling in a salesman’s office, or minutes getting price quotes online - it’s your choice. Remember, you want to work smarter, not harder. With the age of the internet and online price quotes, there’s no reason to go to a dealership unarmed. Some of the best places to get quotes are Edmunds, Dealix, Cars Direct, and AutoUSA. Several price quotes allows you to see what a particular car is selling for, and helps keep you from paying too much for your new car.

Know what your trade is worth

One of the biggest money-makers for a dealership is the trade-in. Most people have no idea at all what their trade is worth. They do their research on the new car, but always forget about the trade-in! This mistake can cost you thousands of dollars, so don’t make it. There are online resources such as KBB, NADA, and Edmunds that can give you a rough idea of what your trade is worth. Only a hands-on appraisal with a written cash offer is certain though - this is where CarMax comes in handy. If you can spare about 45 minutes, drop by your local CarMax, and they’ll inspect and appraise your car, and give you a written cash offer to buy it. Now, you know exactly what your car is worth, with no questions.

Get financing before you shop

Many dealers advertise great financing offers, that seem too good to be true. Often they are too good to be true, and require absolutely perfect credit to get the advertised rate. And to top it off, they may only offer attractive rates on a very short term note, that would put your payment out of range. What should you do? Get a “blank check” loan approval before you ever visit the dealer. Simply fill out the application online, and once it’s approved, the bank will overnight you a blank check, that is good for up to your approved amount. So you know how much you can spend, the interest rate, and your payment, before you even start car shopping.

Don’t be a payment buyer

The salesman will always ask you this question, or one that sounds just like it - “What would you like your payments to be?” This is a trap - Don’t fall into it! When you resign yourself to a set payment, it becomes all too easy for the salesman to build profit into the deal. You won’t know how much you’re paying for the car, how much they’re offering for your trade, what the interest rate is, or even how many months you’ll be paying. Payments are important, but don’t ever become a payment buyer. If you got your financing up front like you should have, this is easy to avoid. As far as the dealer is concerned, it’s like you’re paying cash.