How to estimate car payment
Introduction (Feel free to skip)
I recently bought a car for the first time completely on my own. I want to share my experience with this forum because I hope it will help others find the best deal on a car and the best deal on the interest rate on a loan. Also because I've learned so much from myfico that I also want to contribute to it. I'm not an expert car buyer, so take this advice for what its worth. It will be mostly about buying a new car, and shopping for an auto loan. I will include a short section on buying used cars and trading in your current vehicle, although I have virtually no experience in this. This may turn out to be a lengthy read, but it will help if you just have no idea on where to start.
*tldr = too long, didnt read (know this acronym)
Well first step is the create your budget. If you don't have a monthly budget, a good time to create one is when you're considering the purchase of a car. Begin by making a list of all your monthly bills and their associated payments, such as utilities, credit-card payments, rent or mortgage payment and insurance. Also track how much you spend on things like food and gas for a week to determine what these items are truly costing you.
The general rule of thumb is to spend no more than 20% of your net income towards a car payment. So if you bring home $2000 after taxes multiplied by 20% is $400. So if you're budget calculations doesn't allow for 20% towards your brand new dream car, then you should reconsider buying a new car. Things you could consider are putting off the purchase of your new car until your financial situation improves, buying a cheaper car or even used.
Now you have to figure out what loan terms you have to be approved for to stay within your recommended 20% net income. You can do this by using an auto loan calculator. Play with the loan terms until you figure out the loan amount, months to finance, and interest rate you need to be approved for. Know that loan interest rates generally go up if you finance over 60 months. Don't let the loan amount you figured to dictate what you will be willing to pay for the car when you negotiate. You may very well be able to negotiate a lower price than what you figured. Here's the link to Chase's auto loan calculator. I used it and it was only off by $1.
Don't forget about your DTI:
If you are considering the purchase of a home in the foreseeable future, you might want to abide by the mortgage-industry standard for debt-to-income ratio. Mortgage lenders typically want to see that your total monthly debt expenditure, not including housing costs, does not exceed 36 percent of your gross monthly income. If purchasing a new car will push you past this threshold, consider postponing a vehicle purchase until after you've bought a home. If you already own a home, you can still use this standard as a guide when buying a new car. Yes there's a DTI explanation and calculator, here you go:
So, I decided to internet shop for my car:
I emailed 5 local Honda dealerships asking for a price quote on the same model and trim. Most of them replied within 15 minutes, some requested me call. I didn't call, and instead replied, "I'm requesting online quotes because I don't have time to call around. Please send me a quote." Some eventually sent me quote, one didn't so I simply didn't deal with them. I then replied to all the dealership except for the one that offered me the best quote. "I appreciate your quote, but this dealership offered me a better quote at $25,000. If you are able to come down, please let me know." I repeated this until it was down to 2 dealerships bidding for my business. Of couse dealerships hate it, but I'm the customer so I have every right. Finally the last dealership gave up and said, "if they want to lose that much money we cannot lose that much, they can have the deal." I found my best quote. Remember to always ask for a breakdown of the driveout quote that itemizes the TT&L (it shows everything you're paying for and makes comparing quotes easier). Why I choose to do internet shopping? I did my research and found this article:
Internet vs Traditional Car Buying:
tldr: No face to face sales pressure. No spur of the moment decisions spurred by the new car smell. Internet salesmen make less commission and focus more on selling volume. Traditional car salesmen depend on a higher commission for their living so they need to pad prices. Internet salesmen get to the bottom line price faster. Saves money and me time from visiting dealership to dealership.
Auto Loan Shopping:
As I was nearing the best quote on my car, I started shopping for a loan. I first applied to my primary bank (Chase), then my secondary bank (Capital One), and then to like 6 different credit unions. After I got a few approvals, and awaiting others, I went to visit the dealership to apply with Honda financing. The best rate I had was from a credit union at 4.89% with zero down and 650 fico score, amount financed was $25,700. I told the finance manager at Honda I was approved for "around 4.5%", cause technically I was around there lol. They offered me 3.8% and with my credit score I was very excited about that (but didnt show excitement, don't show excitement to them). BUT I didn't accept and instead replied, "I'm still waiting on a few credit
unions to give me their rate." As I waited, none of the remaining CUs could be this rate. But the original one that approved me for 4.89% was calling to follow up, I told them my offer from Honda, and they said, "let me inform my underwriter and see what we can do to beat that rate". I didn't know CUs would do rate match. They called me back and offered me 3.75% but said I could reduce this rate by another .40% by starting a relationship and autopay. A rate of 3.35% total and at only 650 FICO. Of course I gave Honda one more opportunity to beat this rate, but they couldn't. In fact they attempted to say well that was a one day offer at that rate, and gave me a worse rate. I was a little peeved, but was still okay because I simply went with the Credit Union and started a whole relationship with them: checking, savings, auto loan, and even a credit card at $2500 limit (using the same hard pull on the auto loan to give me credit card).
tldr: Apply at atleast 5+ financial institutions with most being CUs (they offer best rates). Apply at dealership financing last (they love to beat rates). Yes its a lot of Inquires on your credit report, but if you do it all within a short period it counts as 1 inquiry for scoring purposes. How do I know? Here's the link to myfico explaining:
**Please note: If you're not sure if you will be approved for a loan, shop for a loan first. It would be a waste of time for you to negotiate car prices if you are unable to get financing. Most loans are good for atleast 30 days after approval.
What to expect in the finance office:
They'll try to keep you excited about the car you just bought and in a "yes mode" as they continue to sell you lots of different warranties, GAP insurance and other packaged products. Know what you're buying and if you really need it. I declined on all products, because I felt like I didn't need any. Remember if you don't understand, dont sign it. Don't be afraid to tell the finance manager that you're not ready to sign anything. And don't take the finance manager's answer, they are so vague and wont tell you what you actually need to know. If you do want a product, remember that price is negotiable. Also remember CUs may offer same products such as GAP. Be aware of shady practices. Main thing to remember, the dealership interest rate is also negotiable and that the finance manager will get commission for setting up the loan.Here is the article on this:
tldr: 10 Things Not To Do in F&I (Don't skip this section)
Here is the Top 10 list that should get you in and out of the F&I room unscathed.
- Don't agree to be a monthly payment buyer. If you do, you'll quickly lose control of negotiations as they pack payments and hide the real cost of the car.
- Don't buy a car without first checking pricing guides such as Edmunds.com's TMV. Print out this information and take it with you to the dealership.
- Don't buy the extended warranty. The bumper-to-bumper warranty will last for at least three years/36,000 miles. The powertrain warranty will then cover all the things that make the car go down the road, often for up to 75,000 miles.
- Don't buy the extended warranty (if you really want it) for the first price they offer. Mark-up is about 100 percent, so there is plenty of room for negotiating.
- Don't enter the F&I room unless you have independent financing or you have recently checked your credit report and investigated what your bank or credit union will offer for a rate. Otherwise, how will you know what interest rate you deserve?
- Don't buy paint protection (it's just a glorified wax job) or fabric protection or VIN etching or LoJack (unless you have an irreplaceable collector's car). These are high-profit items for the dealership and can always be purchased somewhere else if you decide you really want them.
- Don't pass up gap insurance if you're leasing (unless it's already in the contract).
- Don't forget to run your monthly payment numbers using an auto loan calculator get a rough idea of what your car payment will be.
- Don't believe that the F&I guy is really your friend, even though he acts like it.
- Don't believe the F&I guy if he tells you that you have to buy the extended warranty to qualify for low or no-interest financing. I've used this line a few times before. And it's not true.
If you have a car to trade in:
I didn't trade in a car, so I couldn't post a personal experience about it. But I included a link to an article I found that may be helpful.
tldr: Find out what your car is worth, dont get ripped off on your trade. Negotiate the trade-in before talking anything about new car price. Consider selling to private party.
I didn't buy a used car either, but after reasearch here is some great information. As a rule of thumb, "every $10,000 has a $2,000 mark up included." There is also a processing fee of $300-600 depending on the dealer. The average markup rate is 26%, but can be as high as 45% on a used car. Know the real value of what your car may be worth. Expect the dealer to make a little mark up, otherwise they wouldn't be in business. But still negotiate like a mad man. Estimate the car value:
Rule #1: Don't trust used car salesmen
Rule #2: NEVER TRUST A CARFAX REPORTSource: ficoforums.myfico.com