This is where it all comes together. Once you’ve decided whether to buy or lease, you are prepared to delve into the last stage of the car purchase: financing. Here you will determine how much you will pay for your new car and how you are going to pay for it. This is where you hold the strongest position, yet also where you must be the most cautious, so you don’t blow the deal. When you reach financing, you must contend with a different specialist with a whole set of new sales methods. Before you stepped foot in the showroom, you hopefully had your non-dealer financing approved. You visited a bank, credit union, or your favorite relative and were pre-approved for the most favorable loan for your vehicle. You noted the dollar amount, the number of months and the APR.

Now that you sit in the financing department, collect your approval paperwork. You have already come a long way in attaining a favorable trade-in price and a price close to dealer’s cost, plus around $300, for the new car. Now it is time to finance the deal. Be wary of loosing any concessions you have fought for or of being hit with any additional costs.

There are four segments to a car transaction, and while you have just managed two of them (trade-in price and new car price), you still have the financing and the purchasing of special options to go. Before we delve into these two points, here are some things that a dealer may legitimately ask you to sign to speed up the deal:

• Power of Attorney to allow the dealership to pay off your trade in and/or register your new car for you. You may need to sign two or three forms so they can repossess your vehicle if it is ever necessary.
• State law may mandate that you sign off that certain points have been explained to you. Beware: Some dealers attempt to use this to pressure you into making a purchase.
• You may have to authorize the dealership to look at your credit report if you finance through the dealership.

OPTIONS:

In addition to signing off on the above items, you will probably be pressured by the finance employee to purchase certain extras and options. He will most likely fail to explain which of these items are worth your money and which are not. Here is a list of options – with your value in mind:

• Extended warranty. Never pay full price for the extended warranty. It may be worth your time to have this, but only if the price is right and you worry about future repairs. You may be able to get the warranty for up to 50 percent off. Keep asking for it, and watch the price drop. Dealers will typically ask for $150 and up per year of coverage. A six-year extended warranty could cost you $900. Dealerships will accept considerably less, but only if you push for it. One other important fact: This is one item you do not have to buy now; you can purchase it later if you want.
• Life insurance. Pass on this. You are at a car dealership. Buy your life insurance from a reputable insurance agent.
• Loans or financing. Accept dealership financing only if, (a) you can get it for less than your own financing from an outside source, and (b) you expect to keep the car for the full term. You should get a discount on percentage rates of one-half point in order to compensate for the "Rule of 78" financing sold at dealerships.
• Antitheft devices. Only you will know if this is a necessary expense. Before you purchase the choice offered by the dealership, check if you can buy a markedly cheaper devise elsewhere. There are numerous systems on the market. Shop around first if this is an item you would seriously consider.
• Rust proofing. Experts acknowledge that this is rarely needed and is way too expensive. It’s another clever way for the dealer to help you part with your money.
• Outside car care package. As attractive as it makes the car look, this package has a high markup. See if you can reduce the cost by 50 to 66 percent. Better yet, try to get it for free. At a cheap price, everything is an attractive purchase. An alternate to the dealer’s package is to buy the products and apply them yourself.
• Inside car care package. If you really want it, work the price down, same as the outside package.
• Radios and sound systems. Sound systems from outside sources are fine and often less expensive. In addition, these sources install and warranty their products. If you know you want a sound system, investigate before going to the dealership.

RULE OF 78:

Throughout this kit, we've mentioned the most common financing that car dealers use, the Rule of 78. Most people who have never worked in the car business have never heard of the Rule of 78. Here is a review of this type of loan and what it can offer you:

• All loans are broken into two parts: (1) principal, or the amount borrowed, and (2) interest, or what it costs you to borrow the principal.
• In the Rule of 78, the interest over the entire life of the loan is divided by 78. There are 78 equal “pieces” of the interest on your loan.
• The first monthly payment made on a Rule of 78 loan consists of twelve of these pieces of interest, with the remainder of the payment going toward principal repayment. The second monthly payment made on a Rule of 78 loan consists of eleven of these pieces of interest, with the remainder of the payment going toward principal repayment. And so on, until the twelfth monthly payment, which consists of one piece of this interest, with the rest of the payment applied toward the repayment of the principal.
• The total number of these pieces of interest when paid in twelve months, comes to 78; that is: 12+11+10+9+8+7+6+5+4+3+2+1 = 78. Thus, the Rule of 78.
• In the first year, all the interest for the life of the loan has been paid. All future payments are principal only.

The Rule of 78 is a financing gimmick devised to extract all the interest in a loan early within the loan payment period. You pay off all the interest and very little of the principal. If you keep your loan until its expiration date and nothing else happens, it doesn’t matter if your loan package is the Rule of 78 or simple interest.

But what happens if you get in an accident and the insurance company pays off the car? You will have paid off all the interest, and the insurance will cover only a percentage of the remaining principal value of the car. You will be stuck with the difference.

The Rule of 78 works out well for the dealerships. They are paid their interest early in the financing contracts. More importantly, if you decide to refinance later to take advantage of a drop in interest rates, most of the interest has already been paid off, but you will still need to refinance a large principal balance. This type of financing is will obviously not work in your best interest.

THE BUSINESS OF FINANCING:

Now that you understand a type of financing, you might wonder what actually transpires in the finance office. The first item on the agenda is to confirm that the finance person acknowledges with the prices you and the salesperson agreed on earlier. This must be done before you begin discussing the details such as length of financing, interest rate, lease versus buy, etc. Below is a list of items you should discuss with the finance person:

• Reaffirm the cost of the new car. Verify that you both agree on the items that will be included with the vehicle. Do not negotiate. If he balks at the price, show him the figures you have written down, and call in the sales manager if necessary. There should be no surprises at that this stage.
• Reaffirm the price given you on your trade in. Go back to your notes, and have the financing associate confirm that this price is fixed, and that there will not be a sudden change in pricing.
• Reaffirm the amount of down payment required. Dealers love cash. Make sure the amount of down payment doesn’t suddenly rise.
• Verify the amount of rebates, such as first-time buyer discounts. This is all "free" cash, as far as the dealer is concerned, but it should go directly to the customer. If there is a factory-to-consumer cash rebate, it will be presented here. Make sure the price for the new car reflects this discount. It is important to clarify that your rebates were not negotiated into the low price you received for the new car. Factory-to-dealer cash discounts, on the other hand, are discussed in the sales room when determining the pricing for your new vehicle. American car manufacturers typically give factory-to-consumer cash rebates, and Japanese car companies give more factory–to-dealer incentives.
• Reaffirm the amount of package discounts. Check for mistakes in this figure. If the dealer promised you power steering at no extra charge because you bought the air-conditioning system, make sure the finance associate honors that commitment.
• Ask about extra options, such as an alarm system, an extra pinstripe, an extended warranty. Make a firm decision on each one, then negotiate the price. Remember the high markup, and try to cut the cost by at least half . If you can't do that, most options are not worth considering.
• Ask how much time you have before your option to buy an extended warranty expires. Also ask if there is any other organization that will offer you an extended warranty on the car at a later date.
• Ask about the dealer’s best financing package before you reveal that you already have financing from an outside source. Once you have the information, compare it to the financing you have. Check for the Rule of 78 financing. When you mention your outside financing, ask the dealer to beat your package. Tell him you would rather the finance money go to the dealership than to the bank. Make sure these figures make sense and are correct for the loan amount you are borrowing.

The dealer may offer you financing, but some of the terms of this financing will differ from that offered by your bank or credit union. Most dealers offer interest rates that are based on the Rule of 78. Most outside lending institutions use a method with interest on the declining balance of the loan. Everything else being equal, take a declining balance loan over a Rule of 78 loan so that if you change your mind and get rid of your car early, you pay less interest. One-half percent is a good rule of thumb to take Rule of 78.

FINANCING CHECKLIST:

This list is designed to help you gather facts to determine what your final cost will be after your purchase. Make rough guesses for numbers 1-19 as a practice run before visiting the dealership, so you have a rough idea of what your costs will be. Then complete the entire list during the financing segment of your purchase. Finish numbers 1-2 before going to the showroom.

• Lender________________________________________________________

Interest rate__________% (APR) amount of loan______________________

Type of loan___________________________________________________

• Lender________________________________________________________

Interest rate__________% (APR) amount of loan______________________

Type of loan___________________________________________________

• Dealership_____________________________________________________

Interest rate__________% (APR) amount of loan______________________

Type of loan____________________________________________________

• Cost of new car (from your negotiations)_____________________________
• Trade-in value (from your negotiations)______________________________
• Down payment (not including trade-in)_______________________________
• Amount of dealer rebate___________________________________________
• Amount of package discounts (luxury package, etc.)_____________________
• Amount of other discounts and rebates (first-time buyer, promotional, etc.)___________________________________________________________
• Sales tax______________% X _________________(price) =____________
• Registration and licensing fees______________________________________
• Document fee___________________________________________________
• Insurance______________________________________________________
• Other items (extended warranty, etc.)________________________________
• Transportation (freight)___________________________________________
• Dealer’s prep (usually included at no cost)____________________________
• Initial gas and oil (should be included in the price)______________________
• Dealer’s advertising (negotiate for zero)______________________________
• The amount to be financed (4 less 5,6,7,8 and 9, plus 10, 11, 12, 13, 14, 15 and 16)____________________________________________________________
• Monthly payments for___________months at____________APR=_________

LEASING FINANCING CHECKLIST:

Remember to negotiate the vehicle price first, and then discuss leasing. After you decide you are going to lease, you can negotiate such items as interest rate and residual value of the vehicle. Base your lease amount on those figures. If you are considering leasing, here are some other important questions to ask in financing:

• What is the interest rate (APR)?
• What is the length of the lease?
• Is the lease figured with simple interest?
• What is the interest rate for the purchase of the car at the end of the lease?
• What is the price guarantee of the car at the end of the lease?
• Is there a difference between the leasing and buying interest rate?
• Is there a difference between the leasing and buying prices or financing?
• What condition must the car be in when you return it to avoid a penalty?
• What is the maximum mileage per year? Are there penalties for exceeding this?
• How much is the return fee?
• Are there any other fees upon the return of the car?

ITEMS TO DOUBLE-CHECK:

• Have you been charged only for items you specifically wanted (no extras)?
• Did you get all the discounts you were entitled to?
• Was there anything else the dealer promised but conveniently forgot or reduced?
• Ask what else the dealership can do for you, or give you to make the high cost of the car more palatable. Perhaps the dealer will throw in an upgrade or a free oil change on your first service visit.
• Insist that the finance associate explain the contract in detail and note the figures in writing.
• Ask the finance associate if anything was added to the car's cost that you did not clearly request, but that he thought you might need or want.
• Remember the "lemon" law. In some states consumers are allowed to return a new car to the dealership if the car has a high number of mechanical problems.
• Is the car a "flood" car? A flood car is a new car that has been water damaged, rebuilt and offered for sale as a new car.
• Is the car damaged? Was it stolen or in an accident, repaired and advertised as a new vehicle? This sort of damage must be disclosed to the customer.
• Is there anything else about the car you should know about in order to make a decision?
• Have there been any recalls on this car model?
• What is the length of guarantee on this car?
• Does the dealership provide loaner cars or transportation if the car needs repairs covered under warranty?
• Is the car truly new? Has it ever been registered before?
• Did you get everything you asked for? Has anything been left out or held back?
• Double check all the numbers used to price your car in case of substitution or error.
• If there are reparations for substitutions promised to you, hold back part of money until they are completed, or refuse to sign until they are completed.
• Check to make sure no fees were tacked on after the final figure was decided, such as dealer’s preparation fee, which usually is included in the price of the car.