It’s everyone’s desire to drive a sharp, shiny late-model vehicles that will really turn heads and make your friends jealous. But before you run out and spend your hard earned money, there are several key traps to be awared of as you begin your shopping.
Equip yourself with the basic knowledge necessary to make a quality, informed decision on the vehicle as well as your financing options. The majority of most nice, used vehicles are purchased through utilizing some form of credit, making this all the more important of a decision as you are committing hundreds of dollars per month of your FUTURE earnings.
If you are utilizing financing, you are basically purchasing two items: 1) a vehicle and 2) a loan. So take heed and make sure you follow some of the bare essential guidelines when buying your next used vehicle. Avoiding the common pitfalls where our people have been taken advantage of in the past will save the average Native buyer at least $3,000…yes, you read it correctly, $3,000!
For most of us, the purchase of a vehicle represents the 2nd largest purchase we’ll make over our lifetime. During this process, In doing so, be sure you “Don’t get taken for a ride” though. A wrong decision can lead to thousands of dollars of debt, huge repair bills, or possibly even years of tarnished credit. Make sure you are buying a vehicle that fits your needs, your budget, does not have major existing mechanical problems and is not overpriced.
That all sounds easy right…we’ll it actually is if you take your time and follow our short list of tips. I’d like to share with you some of the things to keep in mind when shopping for your next used vehicle.
Here is a short list of the important guidelines to follow:
Don’t pay too much! As simple as that sounds, I am amazed when people tell me who much they paid for their newest ride. By simply logging onto the internet and going to www.nada.com
to utilize estimated retail value tools you can at least find out how much not too pay. Consider “book value” or “retail” value as the most you would have to pay for a vehicle in absolutely excellent condition with some sort of warranty. Another way of saying “Book Value” or “Retail Value” is by saying FULL PRICE. Who wants to pay full price for anything, much less pay over full price as many unsuspecting buyers have done? As a general rule of thumb, never pay more than 85-90% of average book or retail value for a vehicle. This will vary by model but is a good rule of thumb, large trucks and SUV’s will sell at a much lower percentage to book value than a small-mid size car. There are far too many used vehicles for sale to have to pay full or over full price for one. If you don’t have access to the internet, simply ask the dealership to show you book value from one of the sources listed above….and be prepared to hear the sales jargon about why their’s is worth more than book but stick to you guns and don’t fall for it! On an $8,000 vehicle, that 15% difference between book valude and the 15% you below book you should be paying is about $1,200! Unfortunately, some of the BHPH lots don’t stop at book value, they actually have the audacity to assume you’ll pay whatever they say and will charge sometimes thousands above book…they tell you all you have to do is sign on the line and the keys are yours but Buyer Beware.
Don’t assume that you can’t get a bank loan. Credit history is obviously one factor that banks look at in making a loan decision but it is not the only criteria they evaluate. They also look at debt to income, job time, residency time, previous job times, the amount of your down payment, and the value of the vehicle you are looking to purchase compared to book value. Even if your credit history is not perfect, if you have any other strengths they will consider those factors as well. Bottom line, banks are looking to make loans to people they believe have the ability and willingness to the loan back. You demonstrate that by having anything positive in your applciation profile…it’s not just solely your credit score. BEFORE YOU GO TO ONE OF THOSE “Buy-Here-Pay-Here” or “Everyone is Approved” lots, apply for a loan to at least 2 different banks (or credit unions). You have nothing to lose and the worst they can say is “no, not at this time”. If you they do decline your loan, make sure you find out what things you would need to change in the future to be able to get a regular bank loan. On average, the interest rate on a bank financed loan will be over 9% lower than one of those “Buy-Here-Pay-Here” lots. On an $8,000 loan, the bank loan will save you over $1,800. That is nearly ¼ the price of the car, just in interest savings alone!
Know what you’re buying. Do a proper road test of the vehicle before you buy it. Key things to look for: tire condition, excess oil or fluid leaks, squeaking or growling from brakes, excessive ticking noises from the motor, and make sure the transmission shifts firm but smooth. If you have a friend or relative that is knowledgeable in these areas, don’t hesitate to take them with you or take the vehicle to them for their opinion. Also, once you think you have found the right vehicle for you, it may even be worth spending the $20 or so to have a mechanic do a basic safety inspection on the vehicle and have them advise you on any areas of potential concern. Keep in mind, a used vehicle is exactly that and most vehicles on the road probably need something so your not necessarily looking for pure perfection but you are trying to avert buying a vehicle that shows any signs of major, potential problems. The closer the vehicle is priced to book value, the fewer mechanical or cosmetic issues the vehicle should have. You may be able to avoid hundreds of dollars of repair bills if discovered before you buy the vehicle….use this as part of your negotation on the price. They may not cover everything in the price, but many dealers will do some sort of price concession if there are items found that legitamitaly deserve attention.
Negotiate. Don’t ever just pay what the dealer is asking. On average, an offer for 10-15% less than asking price is a reasonable offer. There is an 80% chance they likely will not accept your initial offer but this will start the negotiation process. From here, the dealer will likely counter-offer back to you and from there you should be able to find an agreeable price somewhere less than the full asking price. Most dealers build some “wiggle” room in their asking price and if you don’t ask they just “wiggled” several hundred dollars from your wallet! Now there may be times when a dealer just cannot go any lower than their asking price but you have to at least try or how will you know. Use tip #1 above to determine if their asking price is reasonable or not. If they are near or above book value (remember that book value equals FULL PRICE) and are unwilling to negotiate any further, you should keep looking. You’ll also find out a lot about the person you’re dealing with in this stage, if they get offended or short with you, move on and find someone who wants to work with you in a kind and courteous manner! There are too many dealers to have to put up with poor service and bad attitudes. Their attitude and true colors will come out in the negotiation stages of the deal and you’ll learn quickly if you want to do business with this person or not.
Avoid “Buy-Here-Pay-Here” arrangements. These types of dealers thrive on people that either don’t know they have other options available to them, are too lazy to try other options, or simply have no other choice than to buy from them due to credit or job time. If at all possible, your best option is to either pay cash for a car or to obtain bank financing and than negotiate your best cash price on the vehicle of your choice. Most BHPH dealers will show you the car they want to sell you which often times is the one they want to sell you because it is the one they will make the most money on selling you! Again, keep in mind if you go to a BHPH lot, you are in essence making two purchases from them….1) one is the vehicle and 2) the loan or financing. So in other words, they are making double the money off you! They are taking on the risk that you may not pay and as such, they have to charge you more interest than what a normal bank would because if you cannot get bank financing you are a higher risk on average. All too often though, these BHPH lots will jack the price of the vehicle in addition to raising the interest rate of the loan when in reality the risk they assume should be built into the price of the interest rate….NOT BOTH THE VEHICLE AND THE INTEREST RATE! So beware of the BHPH lots, they represent a double edged sword that can lead you into financial trouble quickly. If your only option is BHPH, at least make sure you go to one that can show you that the price of the vehicle is within the guidelines we have shown you in tip #1.
Consider buying less car for cash. If you are already planning on putting down say $500 as a down payment, consider saving up a little more and buying a little older used car first. If for instance, your new car payment would be $250.00 per month; if you waited 4 months and saved that payment in addition to your down payment, you would than have $1,500 of cash. Now this does not buy you the world’s greatest vehicle but it should get you a vehicle that should last you well over a year and one that should still be worth something when you go to trade it or sell it outright. What this would do for you is allow you time to fix items on your credit report or gain necessary job time to secure your most preferential form of financing for a newer car through traditional financing options.
In summary, there are many factors to consider when shopping for your next used vehicle. If you’re seeking financing for your next vehicle, apply for financing to at least two different banks (or credit unions). Many reputable dealers will actually submit your credit application on your behalf with the incentive of selling you a car if they can get you financed. If you’re denied financing, find out what factors lead to the decline so you know what you need to correct so you can get regular bank financing at a later point.
Obtaining traditional Bank financing always saves you money on interest. It should save you money on not only the interest rate compared to the Buy-Here-Pay-Here dealers but it also gives you greater negotiation power vs. when your only option is to go to the Buy-Here-Pay-Here dealership and sign a blank check to them, also known as the Financing Agreement. On average, you will save at least $3,000 overall on an $8,000 purchase price if you can avoid going to a Buy-Here-Pay-Here dealership.
I find it unfortunate that our Native people have been so vulnerable to being taken advantage of by many car dealers. Dealers have taken advantage of us by selling us over priced vehicles, unsafe or unreliable vehicles, and charging us excessive interest rates. Now is the time to educate ourselves on the basics BEFORE we fall into this trap again. It is my hope that some of the insight offered in this article would be utilized so that you can find yourself a safe, reliable, and reasonably priced vehicle that would meet all your needs and not become a financial burden for you for years to come.
Take the time to make sure you are getting the best deal and you are buying from someone you know and trust. If you’ve made these mistakes in the past, move on and try to avoid them in the future. Thanks for taking the time to read this article and I wish you the best of luck in your car buying!
Dennis Johnson is proudly enrolled as a member of the Red Lake Band of Chippewa Indians from northern Minnesota. Dennis currently resides with his wife and 3 children in Elk Point, South Dakota. Dennis is currently employed as the Chief Financial Officer of Ho-Chunk, Inc., the award winning corporation owned by the Winnebago Tribe of Nebraska, based in Winnebago, Nebraska. For questions and comments you may reach Dennis via email at firstname.lastname@example.org.