Buying a car questions

[Leo]

I was going to buy a brand new car. Dealership listed it for $15,000 if you finance through their bank. KBB fair purchase price around $18,500. I was going to put 20% down payment and finance it for 3 years.

I have 750 credit score based on Credit Karma (TransUnion and Equifax) and Credit Sesame (Experian).

Dealership did not want me to put down payment because their bank require loan of more than $15,000. Dealer also insisted me to do 60-month loan with 4.39% APR but explained that there will be no pre-pay penalty in the contract and I can pay off the loan early. 60-month will be around $326 per month. Dealer said If I decided to go with 36 months, bank might increase the APR to 6-7%.

Questions:
What APR is acceptable with someone who has good credit score (750)? I feel like more than 4.39 is a little higher.

Why dealership or their bank refused the down payment and require a certain amount of loan?

Why dealership or their bank increases APR if I go with shorter term?

Dealer also said it does not matter if I go with 36 months or 60 months (assuming same APR). As long as I pay the loan within 36 months, cost will be the same. Is this correct?

I really like the car but I walked away. If you were in my shoes, what would you do?

[JustBill]

I really like the car but I walked away. If you were in your shoes, what would you do?

Well, I am in my shoes . And I would have walked away as well.

[frugalfarmwife]

I agree, walk away.

Dealerships always have that one car to draw you in. I'd go find my own financing, go dicker/deal the best price and then tell them it's on your terms.

Or, many dealerships are offering 0% on 14 models, look into those.

Just watch, make sure you can get a loan you can pay off early and cut the interest at the same time.

We recently bought a used truck, a 2013, paid 1/2 down, got a loan at a low rate and are paying it off early, every additional payment cuts the interest. We got a longer loan but have paid 1/2 off in 10 months.

ff

[disneysteve]

Wow. I consider new car dealers among the sleaziest businesses out there but this story really takes it to another level of sleaze. This guy should be reported to every agency you can think of for dishonest business practices.

Yes, you were absolutely right to walk away. Running away would have been even better.

About the only thing he told you that is true is that the APR on shorter loans tends to be higher than on longer loans. Other than that, everything else was a lie.

It is amazing that dealers are able to get away with this crap and that it doesn't violate any laws.

[Jluke]

Questions:
What APR is acceptable with someone who has good credit score (750)? I feel like more than 4.39 is a little higher.

Why dealership or their bank refused the down payment and require a certain amount of loan?

Why dealership or their bank increases APR if I go with shorter term?

Dealer also said it does not matter if I go with 36 months or 60 months (assuming same APR). As long as I pay the loan within 36 months, cost will be the same. Is this correct?

I really like the car but I walked away. If you were in my shoes, what would you do?

You should easily be able to find 2.49% or lower on a brand new car - whether it is through a dealer financing or credit union. I'm not sure about big banks like Wells Fargo, etc.

The dealer was trying to make the most money off of you. Shorter term loans typically have a lower APR (i.e. honda offers 0.9% for 0-36 months or 1.9% for 48-60 months).

They threatened a higher rate on a shorter term to maximize their profit.

You obviously need to find a new dealer - hopefully one that offers the same make/model of the car you wanted. Check online for the financing details - you can even apply online in most cases.

Good luck

[Leo]

Thanks for the reply guys. After thinking about it last night, I think their strategy is to list the car so low and when buyer comes, talk them out to a longer term loan without down payment. I kinda understand that they need to make some money. Actually they listed it for $17,500 - $2500 rebate if you financed with their bank and other dealerships have similar cars for more than $18,500. They also offered me an option of 0% APR for 60 months but in lieu of the rebate and I think this is still a good deal. Although I almost took the deal because I understand that they need to make money, I just don't like how they the do their business.

[disneysteve]

The price of the car should not be dependent on how you plan to pay. As soon as a dealer pulls that nonsense it's time to get up and walk out.

[avil_saver36]

I was going to buy a brand new car. Dealership listed it for $15,000 if you finance through their bank. KBB fair purchase price around $18,500. I was going to put 20% down payment and finance it for 3 years.

I have 750 credit score based on Credit Karma (TransUnion and Equifax) and Credit Sesame (Experian).

Dealership did not want me to put down payment because their bank require loan of more than $15,000. Dealer also insisted me to do 60-month loan with 4.39% APR but explained that there will be no pre-pay penalty in the contract and I can pay off the loan early. 60-month will be around $326 per month. Dealer said If I decided to go with 36 months, bank might increase the APR to 6-7%.

Questions:
What APR is acceptable with someone who has good credit score (750)? I feel like more than 4.39 is a little higher.

Why dealership or their bank refused the down payment and require a certain amount of loan?

Why dealership or their bank increases APR if I go with shorter term?

Dealer also said it does not matter if I go with 36 months or 60 months (assuming same APR). As long as I pay the loan within 36 months, cost will be the same. Is this correct?

I really like the car but I walked away. If you were in my shoes, what would you do?

1. $15000 borrowed at 4.39% for 60 months comes at at most $280 a month. $326 a month at the same APR is a loan for approximately a $17500 purchase. So at that monthly payment, you are either not buying a product for $15000 of you are not getting the APR of 4.39%.

2. Assuming you truly bought a $15000 car at an APR of 4.39%, your monthly payment is $280 as stated above and your total interest over the lifetime of this loan is under $1750. If the fair market value of this car is indeed $18.5K, then you actually have a deal here, because you pay at most $1750 on the interest and save $3500 on the sticker.

3. You could minimize the interest further by putting the whole 20% downpayment along with the first payment assuming there is really no prepayment penalty.

4. Interest rate is meaningless. 0% interest rate means nothing if the sticker price is high.

5. It still looks like the dealer is trying to scam you given the limited numbers available here. I think the "out the door" cost of the car is higher than $15K, and the dealer is not really explaining the process of paying the loan off. It seems like there is some kind of prepayment penalty hidden under terms and conditions, because theoretically, you could buy the car and pay it off the next month.

[disneysteve]

3. You could minimize the interest further by putting the whole 20% downpayment along with the first payment assuming there is really no prepayment penalty.

That's only true if you can make extra principal payments. Sometimes that isn't the case and extra money paid in just puts you ahead on the payment schedule.

So, for example, if the monthly payment is $280 and you send in $560, they just count that as you having made 2 payments so you're one month ahead. It doesn't save you a penny in interest. You will still make the same total number of payments for the same total amount. It's just a question of how long it will take you.

So while there is no prepayment penalty, there may not be any prepayment benefit either.

[disneysteve]

4. Interest rate is meaningless. 0% interest rate means nothing if the sticker price is high.

I've made this point many times. 0% probably doesn't really exist. The dealer makes it up somewhere else.

Negotiate the price of the car FIRST.
THEN talk about how you plan to pay.

[avil_saver36]

That's only true if you can make extra principal payments. Sometimes that isn't the case and extra money paid in just puts you ahead on the payment schedule.

So, for example, if the monthly payment is $280 and you send in $560, they just count that as you having made 2 payments so you're one month ahead. It doesn't save you a penny in interest. You will still make the same total number of payments for the same total amount. It's just a question of how long it will take you.

So while there is no prepayment penalty, there may not be any prepayment benefit either.

I am surprised that this is allowed. It violates the basic "time value of money" tenet completely.

This looks to me like just another form of prepayment penalty and should be worded as such.

[safari]

About the only thing he told you that is true is that the APR on shorter loans tends to be higher than on longer loans. Other than that, everything else was a lie.

Actually, it's the opposite. Shorter loans have lower APR than longer loans. The same is true for mortgages. Logically it makes sense because the lender has a greater risk of the default the longer the loan term is, so they are charging higher interest to account for the higher risk.

Going back to the original poster's question, if $15,000 is a lot cheaper than you can buy the same car from another dealer and their only condition is that you have to finance it with their bank, and they can show you in writing that there is no pre-payment penalty, go ahead and do it and then refinance it right away with another bank or credit union. You should be able to get the APR below 2% on a 36 month loan.

[Leo]

Thanks guys for the reply. I tried applying on my bank (Chase) and they were able to give me 2% for 36 months. I decided not to buy the car though. I changed my mind and we'll just buy a used car.

[goldenfinancialservices]

Use your local bank, or at least give them a shot!

I just bought a new car for my wife a few days ago. I have an 860 credit score, but was still given an interest rate at around what yours is. Car dealers may use loan companies that offer easy approvals, but high rates, so be careful. Always see if your bank can do better.

After purchasing the car for my wife, the next day I went to my local bank, Bank of America, and gave them my temporary car loan paperwork where they attempted to beat the interest rate that the dealer gave me, and my bank saved me 1.25% just like that. You have the option to go to your local bank immediately after buying a car and see if they can give you a better rate.

[Tabs]

I've read elsewhere that car dealerships can haggle on the price of the car, but will usually cave in somewhat to make the customer feel like they've won and gotten a great deal, when in fact, closing the deal is more important for them.

Then they make it up by hard-selling on the financing and extra insurance coverage afterward.