October 2018 Newsletter

What’s A Car Got to Do With It?

About 10 years ago, my wife and I were buying our first car together. We had no idea what we were doing. We were 23 years old. We were excited. We were intimidated. And we got taken. Bad. The guy at the dealership got us into a car that was 5 years old, with higher mileage for a car that age, and a 7-year loan term. By the time we would have gotten that car paid off, it would have been 12 years old and worth next to nothing. But seriously, this happens all the time to good, smart people like you and me. Buying a vehicle is just not an easy deal to navigate. As with anything, you learn over the years how to do thing better.

Now, you might be wondering why I’m talking about buying a car when our business is helping people buy a home. Don’t worry, we’ll get there.

But first, my friend and colleague, Lyle Juillerat from 1st Source Bank has some tips on how you might be able to end up in a better situation. Then I’ll talk briefly about how this step of buying a car can impact that next step of buying a house.

There are so many things to consider before shopping for a vehicle.  Between picking out a make and model, features, options and financing, it can quickly become overwhelming.  I have put together a few simple tips and steps to take when you’re shopping for a vehicle.

  1. Make sure you have someone on your side.  This can be a friend or relative that has experience buying cars, or even your local banker. With your local banker financing this vehicle for you, they want what’s best for you. Have someone who can help make sure that you’re getting a good deal and a good vehicle.
  2. It’s best practice to get pre-approved for the car loan at your bank.  This helps to get the best deal by telling the salesman that you are “already pre-approved at your bank”.  Your banker can also look up the value of the vehicle to make sure you are not paying too much.  You can have a pretty good idea how much you can afford and what your payments would be for the vehicles that you’re looking at.  Keep in mind, usually the older the vehicle, the higher the interest rate and the shorter the term you can finance it.

3. Test drive the vehicle.  Never buy a car you have not test driven.  Today, many people are shopping (and buying) online.  It is okay to shop online for a vehicle, but it can be dangerous buying a vehicle online without a test drive or seeing the actual vehicle.

Give yourself some options.  I often see people look at one car at one dealership and buy it without shopping around.  If you can have a car picked out at a few different dealerships, you can get them into a bidding war and usually get a much lower price for the one you want.

5. Check into insurance for the vehicles you are looking at before you buy.  There are some vehicles that have higher risks for theft and costly repairs and therefore much higher premiums than others. Insurance is all part of your affordability in the end.

Here are a few other pitfalls to avoid:

 

(#1) Even if you get pre-approved and tell the salesperson, they will try to get you to finance with them or their banks that they work with.  This is called direct lending.  They will broadcast your credit application to several different banks and credit unions to try to give you the best deal. First, each one of these banks pull your credit report and all these inquiries can and usually will hurt your credit.  Also, these banks don’t know about the deal until it is done. Which means, they don’t care if you pay thousands more for the car than what it is worth.  1st Source Bank used to work with automotive dealers like this but stopped because it was happening too many times to customers.  Be persistent and tell them that you already have financing arranged.

(#2) GAP insurance.  This is something that the salesperson usually attempts to sell you with the vehicle. This is basically an insurance policy that covers the difference between the actual cash value of the car and the payoff of your loan. Most generally I tell customers to NOT get this insurance.  If you do take it, they add it to the price of the vehicle and that in turn gets financed.  A bad combination.

“I have been doing this for over 30 years and have seen way too many customers get taken by dealerships and then they come back into us to refinance it and it’s too late.”

Lyle is my auto loan banker. He helped us refinance our big mistake I talked about at the beginning of this issue. He lowered our interest rate, lowered our payment and ultimately helped us get to a place where we could turn that car into more of an asset than a burden.

Lyle has also helped many of our customers at the Pathfinder HomeOwnership Center refinance their vehicle to a lower interest rate and lower payment so that they could decrease their debt ratios and afford a better home.

Always keep in mind when you or someone you know is looking to buy a house, that car payment can often-times make or break a deal. We often see folks who buy a car without looking ahead about how that major monthly payment could impact how much of a house they can afford. Or sometimes it even impacts whether they can even buy a house. When that car payment is a few hundred per month, that could literally lower your mortgage affordability by thousands of dollars depending upon your situation. On the flip side, keeping that car payment nice and low could increase your mortgage affordability by thousands of dollars.

All financing is interrelated. How much you buy a car for can impact how much of a house you can buy. How much of a house you buy could impact how much of a car you can afford. So hopefully this issue is helpful to remind us all that it’s always best to be thinking ahead when financing anything.