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Financing for used car

Question: I was lucky enough to get a fabulous job offer just as the recession hit. I've been saving money to buy a car, preferably used. This will be my first car purchase on my own, so I wondered if I should tell them up front about the down payment amount or wait until later in the negotiations if it might bias other factors of financing. What's your advice? Kelly, Cincinnati, OH

Answer: It's always nice to hear from someone who not only got a good job despite tough times, but really likes their work. I'm glad you've been saving up for your used car purchase, too.

Now, to your specific question: I think it's always a good idea to separate the negotiation over the car's price from its financing.

First, figure out the financing and if you're going to borrow get preapproved for the loan. You should be able to get a good rate on the loan these days. The gap between used car loans and new car loans used to be much wider than it is now. The assumption in the past was that only risky credits would buy a used car. Otherwise, you'd be buying new, right?

Well, lots of people that can afford a new car are choosing used cars these days (as well as used clothing, used computer games, and so on.) What's more, cars last a lot longer today than in the past and they lose their value more slowly. According to Bankrate.com the average interest rate this week on a 36 month new car loan is 6.24% and for a comparable used car loan it's 6.59%.

Once you have your financing package lined up I'd negotiate as hard as possible on price. Remember, when your financing is established as far as the dealer is concerned it's no different than dealing with an all-cash customer. And in today's economy anyone with savings is in a good position to buy quality at a good price.

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Chris Farrell is the economics editor of Marketplace Money.
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Chris, is there a "no" missing in the next-to-last sentence?

<i>Remember, when your financing is established as far as the dealer is concerned it's <b>no</b> different than dealing with an all-cash customer.</i>

In some cases it may be more beneficial to purchase a new car than a used one. The reasons include: 1) US manufacturers like Chevrolet and GMC have 100,000 mile warranties; 2) Rebates on selected models; 3) Some have ZERO percent interest rates for 3+ years. If you have any maintenance performed on your used car that can cost a couple car payments in a hurry. If you are watching your money wisely also check into which models cost more to insure. Possible that a used car could cost more than a new one for insurance. And you didn't mention if you were handy with tools...

I am hoping you can clarify a few things, because this type of transaction has always been sticky for me.

What I have found in the past is that when working with a dealership, it is almost impossible to separate the two activities.

If you are trying to secure financing before you get to the dealership, they need to know the discrete information about the car you want to purchase as if you have already gotten to a point of discussing cost and deciding on a specific car. However, cost + interest rate = monthly payment, which may or may not be affordable in my budget. (For example, I might not care if I bought a Camry over an Accord if they are so similar, but they are sold at different dealerships, and to be able to secure financing I need to have already made the decision which of the two I want, when I havent yet discussed final price. The dealerships, if they look to get financing through Toyota or Honda, will sometimes play with price or interest rate to get it to the monthly payment I want).

In such a tight market where many people don't have wiggle room, getting a lower price from a dealer at a higher interest rate because you finance through them can be better than a higher price with a lower interest rate if you try to get a loan outside of the dealership.

When purchasing a car, I have always had to do up multiple spreadsheets of Total costs on the left axis (say 10,000 through 30,000 at 1,000 increments), and possible interest rates across the top axis (say 5% through 11% at .25 increments) to be able to see what monthly payments I can afford. This tells me I can afford the same monthly pmt of roughly $400 per month for a $16,000 car at 8% int for 48 months or a $20,000 car at 7.5% int for 60 months). Once i am armed with this information, I know there are a huge variety of combinations of total cost + int rate + length of loan that would result in the same impact to my wallet each month (which is what it always boils down to for someone like me who lives paycheck to paycheck). I dont have GREAT credit (its ok to good), so how does someone like me who doesnt have the best credit actually approach buying a car? I look at car buying as that there are many different cars I could walk off the lot with given that I am not a car afficionado and I care more about the features of the car than having my mind made up before I get to the dealer of a specific make and model I want (they can often show me a different make and model that has the features I want that would be a different price, or like in the scenario above two competing companies on different lots could have the same features but I wouldnt know what each of the monthly payments would be until I talked price AND financing with each dealer). So, to clarify my question: Can you offer a resource that can tell someone like me with imperfect credit the step by step way of getting a car and separating the financing from the purchase when I dont know the specific make or model I need to walk away from the lot with? Whats the best sequence of events to ensure I get the best price, the best int rate, and still get the features I want when I dont care about whether its made by Honda or Toyota?

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