By Gwen M. Reichbach
Fall 2005
Cpl. Collins and his wife were expecting their first child and really needed a car. They went to a car dealer just off Fort Jackson, found a car they liked on their first visit and quickly signed the papers. They drove off the lot thinking they got a good deal and could handle the $441 monthly loan payment.
Two weeks later, the car broke down. But with the high car payment and no service contract, the Collinses could not afford the cost of repairs. Because the dealer refused to take back or repair the car, the Collinses only recourse was to get a loan from Army Emergency Relief.
Far too many service members suffer a similarly sour experience. The car buying and financing process is fraught with potential obstacles, and the Collinses made lots of mistakes. How can military families avoid the same problems, buy a quality vehicle with protections from a reputable dealer and finance it through a national lender?
Are you really ready to purchase and maintain a vehicle? Ask yourself:
- Am I capable of making the loan payments on time each month?
- Do I understand the financial and military consequences if I fail to make my monthly loan payments?
- Am I willing and able to pay for auto insurance?
- Am I willing to protect the value of the vehicle by having regular maintenance and repairs?
If you can truthfully answer yes to these questions, then you should be ready for the commitment of owning a car.
Select A Reliable Dealer
The Collinses first mistake was going to the first dealer they saw. Selecting the right dealership is as important as choosing a quality vehicle. Ask your Better Business Bureau if there are unresolved complaints against any area dealers. Ask financial counselors and the JAG office on base if they know about a history of customer problems at local dealers.
Franchised dealerships are required to meet manufacturer criteria, including facility, inventory and customer satisfaction standards. Many independent auto lots have established fine reputations for customer service and treatment. Whether a franchise or independent dealer, it should provide a large selection of quality vehicles in your price range and have a factory-trained or Automotive Service Excellence (ASE) certified technician on staff.
Avoid dealers where you see signs such as "Everyone Financed," "No Down Payment" or "No Credit, No Problem." These dealers often sell poor quality "clunkers," charge hidden fees and exorbitant interest rates, and may not report positive payment history to credit reporting agencies.
Should you buy a new or used vehicle? Both have benefits and potential pitfalls.
If You Choose A New Car
A new car may be a better buy if you plan to keep it at least four to six years. With a new car, the buyer may choose the exact car and features; with a used car, the consumer buys what happens to be sitting on the lot - and maybe someone else's problems.
A basic rule of purchasing a new car is to never agree to pay more than the manufacturer's suggested retail price (MSRP); usually you can pay substantially less. Many people make the mistake of thinking the "dealer invoice" price is the "dealer cost." Dealer cost - how much the dealer actually pays the manufacturer for the vehicle - may be considerably lower than dealer invoice due to advertised and unadvertised dealer holdbacks and incentives.
A dealer holdback is a percentage of the vehicle cost which is rebated by the manufacturer to the dealer. View holdback percentages for specific manufacturers at Edmunds.com.
Dealer incentives encourage dealers to sell certain models to stimulate business or reduce excess manufacturer inventory. It is the buyer's responsibility to learn about available dealer incentives; the dealer is not required to tell the buyer about them. The dealer may or may not pass part of the dealer incentive money to customers.
Manufacturers sometimes offer factory rebates, cash given back to the customer after buying a particular new car model. You can find out about current manufacturer rebates on the web. Frequently, the dealer offers to give the buyer immediate credit for the money by reducing the purchase price by the amount of the rebate or applying it as additional down payment. This often works fine, but review the paperwork carefully to make sure the rebate isn't "forgotten." You also can have the rebate check sent directly to you and keep it out of the price negotiations altogether.
Customer rebates and dealer incentives can begin and end quickly, so you need to keep abreast of developments and act when the time is right.
If You Choose A Used Car
Used cars vary widely from one- or two-year-old models with part of the manufacturer's warranty remaining to clunkers with high mileage and lots of problems. Check to see if a prospective car is a Certified Used Vehicle, which means it has passed a thorough dealer's mechanical and physical inspection. Otherwise, have the vehicle inspected by an independent mechanic. Examine it carefully because when you buy a used car, you buy all the vehicle's problems, defects, dents and scratches.
Because the average used car costs less than half the average price of a new car, it is not surprising that each year three times more used cars are purchased than new cars. Although used vehicles initially make a much smaller hole in the family budget, they generally cost more to maintain. Since wear and tear already have taken a toll, a comprehensive service contract is important to avoid financial disaster when the car needs a major repair.
Research used cars online at Consumer Reports and at auto pricing guides (Edmunds.com, KBB.com or NADAGuides.com) to know the fair retail price of the types of vehicles you are considering before you walk onto the lot. You will need to make adjustments for mileage, mechanical condition and appearance. A fair dealer price for a used vehicle should fall somewhere between the trade-in and retail value. When buying from an individual, a price close to the "private sale" value is considered fair.
Important background information and hidden problems in a vehicle's past that may affect safety and resale value may be found through a CARFAX search. CARFAX checks for items that reduce the actual worth of a specific vehicle (by Vehicle Identification Number), such as damage in a major accident, manufacturer buyback, odometer discrepancies or whether the car was "totaled" by an insurance company. Get a clean history and a CARFAX guarantee so you don't wind up paying thousands of dollars more than the actual value of the specific car.
Low Rates And Rebates
Most consumers don't understand the finance part of buying a car. That naïveté allows unscrupulous dealers to add extra charges that buyers never see if they don't read the fine print and sift through all the paperwork. Learn about the financing process before you walk onto the car lot, and ask lots of questions. Be sure you know exactly how much you are paying for the vehicle and any additional products included, and understand all financing terms and charges.
You will have trouble obtaining a car loan from a bank or credit union if you have a poor (or no) credit history, low credit score, no co-signer, recent bankruptcy or vehicle repossession. Several firms specialize in helping people get conventional car loans despite these problems, albeit at a higher interest rate.
A low interest rate is attractive, of course, but it is only one of many factors that affect the actual cost of a vehicle and the total cost of the loan. Whenever a vehicle is financed, ask for all financing options offered, and compare the total cost of all payments - not just the interest rate.
Obtaining a low rate might not result in overall cost savings if the sales price and fees are inflated elsewhere in the deal. Some dealers use "sub-prime" or "non-bank" financing sources, where the lender charges the dealer a fee to finance a vehicle for a buyer who does not qualify for the lower quoted interest rate. The fee is passed on to the buyer in a higher sale price and raises the amount financed by thousands of dollars. The buyer is charged a "low" interest rate but actually pays a much higher purchase price and far more overall than what would result from a higher rate.
Furthermore, most sub-prime lenders do not send positive loan payment information to credit reporting agencies, so making on-time payments does not help the debtor build a strong credit record or improve a poor one.
Despite advertisements touting zero (or very low) percent financing, special annual percentage rates generally are available only to customers with very high credit scores. Yet many people are enticed into the dealership by these ads and may end up financing a vehicle at a much higher rate than they could get elsewhere. Always research loan rates and obtain a loan approval before visiting a dealer.
Also, understand and negotiate each part of the car buying process - vehicle selection, the price, add-ons, trade-in, financing and insurance - separately.
Avoid Add-ons And Extras
It's one thing to pay for required costs above the vehicle purchase price, such as taxes, registration, licenses and destination charges. But closely consider the costs and benefits of add-ons you don't have to pay for: delivery, promotion, handling, sales charges, floor charges or new-car prep fees. Avoid clear coating, etching, rust undercoat, alarm systems and cleaning fees. These are big profit items for the dealer, but you don't need them.
Consider a service contract or extended warranty that covers repair costs after the manufacturer's original warranty expires. An extended warranty is sold by the manufacturer while a service contract is sold by an independent company, but both protect buyers from suffering financial disaster due to expensive repairs. Prices of these products vary by vehicle model and age and what the market will bear, so it pays to do your homework.
Many warranties are limited to power train coverage: the engine, transmission and rear differential. Expensive repairs not covered include rack-and-pinion unit, heater and evaporator coils, air conditioner compressor, condenser, brake master cylinder, and ABS booster and sensors. To ensure adequate protection, you should buy a comprehensive service contract that covers a broad range of repairs for a minimum of 36,000 miles or 36 months.
Remember, extended warranties and service contracts require the owner to maintain and service the vehicle according to the manufacturer's maintenance schedule and to keep a written record of the maintenance.
Bottom line: Do your homework and compare all costs related to purchasing and financing your vehicle to really get the best deal.
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Gwen Reichbach, Ph.D., is president of Gwen Reichbach and Associates (859-699-8981; gwenreichbach@hotmail.com), a board member of the Institute for Financial Literacy (207-879-0389; and former director of education and community relations for Military Installment Loan and Education Services.
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Buying A Car Overseas
Exchange New Car Sales has helped servicemembers stationed overseas with vehicle purchases for more than 45 years. The New Car Sales program is located at overseas installations throughout the world and features vehicles from General Motors, Ford, Daimler Chrysler, Harley-Davidson and Buell. Delivery may occur stateside or at specific overseas locations.
To purchase a vehicle from Exchange New Car Sales, you must be a member of the U.S. military or civilian component (DoD or government contractor) on active duty; stationed overseas outside of the 50 states on PCS, TDY or other assignment orders of 30 consecutive days or more; and authorized to purchase through the Army and Air Force Exchange (AAFES) or Navy Exchange Service Command (NEXCOM).