This is an excellent series! Just fantastic information. I will post each of the four chapters over the next day or so. Even though it was created back in '97, it still has much, much to say.
Credit Union Car Facts
Vehicle Buying Guide
Prepared for CUNA by Remar Sutton
©1997 by Credit Union National Association Inc. All rights reserved, including the right of reproduction in whole or in part in any form.
Contents
What's Really Happening Down at the Dealership?
Buying a Car the Right Way—the Car Facts Way
Dealing With the Dealership—Negotiate the Right Way
Buying a Used Car
Chapter 1 - What's Really Happening Down at the Dealership?
To listen to the ads, you'd think saving money on a vehicle was as easy as going down to the showroom and signing your name. But it's much more complex than that. Did you know a dealer can sell you a car for exactly what he paid the manufacturer and still make $500 to $1,000 on just the car? Or that "zero percent" financing may cost you more than financing at a credit union—even if the credit union's rate is 10%?
The entire automotive market is about the last place in America where you must survive on your bartering skills. To save money, to get the car that's right for you at the best price, you must know what you're up against and how to negotiate in that high-pressure arena. This Credit Union Car FactsSM Vehicle Buying Guide will give you that valuable education. If you will read and work carefully, you might keep up to $3,000 or so hard-earned dollars in your pocket—rather than putting them into the dealer's. Ready to learn how?
Start by looking at what you're up against. You need to understand this first. Then we'll discuss how to find the right car—new or used—and how to negotiate its purchase the right way—the Car Facts way.
The pressure game starts even before you get to the dealership. Just look at dealer ads: They promise low payments, big sales, big money for your trade, and respect for your intellect. But, often, these promises come with some crossed fingers. For example, did you know that many dealers make more during sales than they do at "nonsale" time? That's because we consumers automatically equate the word "sale" with "save." That's dangerous math. Dealer advertising really has another purpose: to get you to rush down in a fit of excitement ("Really? Just $99 a month?!") without stopping to think or, not coincidentally, stopping to compare costs or products.
Then dealers put you in the dealership "track system," a tried-and-true selling process with one objective in mind: to get more money from each part of the transaction than you were planning to pay. Want to spend $250 a month? A savvy dealership will get you to pay $300. Or they happily will sell you a car for $250 a month—but it will be a car you could have bought for $200 a month.
Even if their ethics are clean, face it—they're pros at selling cars, and you're likely an amateur at buying them. The people at the dealership, nice and smiling though they may be, simply have a different objective in the car transaction than you do. Their goal always is to maximize profit.
And that might mean leaving out an important fact or two. To take one example, what would you do if you owned a dealership that sold cars ranked lowest on the government crash safety reports? Would you tell all your customers, "Oh, don't forget—our cars are the most dangerous on the road."
See the problem? To survive, dealerships generally can't give you all the answers you need to questions about such matters as a car's safety, reliability, or resale value, or its cost to the dealer, or the amount you should budget to pay for a new vehicle.
But those questions are important, aren't they? And you'll need the answers before you even look in the direction of the dealership. Why? Because once you're there, the "track system" will take over—whether you like it or not.
What are track systems?
Track systems are simply different ways to control you, confuse you, and put you on the approach to maximum profit for the dealership. Recognize and understand the system, and put yourself on the approach to saving big money. Here are the most popular track systems and selling techniques:
The deposit/driver's license technique. You're barely seated when the salesperson requests your driver's license, or your Social Security number, or a deposit "to show my boss you folks are serious." Two things are happening here: If they get your money, you won't leave; and if they have your driver's license and/or Social Security number, they can run a credit check on you. Oh, did they forget to ask you first? Why would they do that? To plan the amount of profit they'd like to make.
The "T.O." system. T.O. stands for "turnover." You're sitting in a salesperson's office, thinking about how much more fun it would be to live in a dentist's chair than go through this, when your salesperson returns with reinforcements. The new smiling face asks for more money. And then the salesperson asks for more. And then the dealership chaplain comes in.
The T.O. system operates on the principle of "fresh faces can work miracles." A miracle, in this instance, is defined as more profit. And as long as you give, they'll keep asking.
The note system. Rather than send in reinforcements, the salesperson steps out, returning with a nice note from the sales manager asking for more money. And then another note, then another. Usually, they come back with five, and usually the last two ask for raises of odd amounts of money—for instance, $113.29, or, finally, $23.19. The note system has one basic problem. It makes you think the dealership is negotiating when it's really only play-acting.
Consider the odd raises. These are designed simply to make it look like you're really a shrewd bargainer. You know, you think you've got them "down to the pennies." At note system dealerships, customers generally are given all five notes asking for more money—even if the customer already has agreed to pay full list price!
The "foursquare" system. The salesperson divides a piece of paper into four squares and then asks for your "wish list": What do you want to pay a month? What do you want for your trade? What do you want to pay for the new car? However ridiculous the sums, each is written in a square. Then they ask for your signature in the fourth square and a large deposit.
Then they begin to "work" you on each square separately, starting with a figure far from yours and very slowly negotiating down, constantly scratching through figures. By the time they finish, the paper is illegible, you're so frazzled you've forgotten your name, but the salesperson is smiling. You've agreed to pay an additional $1,200 to $1,500 profit.
The foursquare system probably is the worst system in use today because it negotiates the four squares as if they're not interrelated. For instance, as if changing the down payment and trade-in allowance doesn't affect the payment. Baloney. Don't deal with dealerships that use this system.
Spot delivery. "You can take it home today!" That is the most expensive statement any car dealer can make. Spot delivery means emotion is ruling you, rather than good sense. It also means you (very conveniently for the dealer) won't have the opportunity to compare costs and terms. Never buy a car on your first visit. Wait a day and the price will tumble.
The finance manager approach. Even if you have the cash in your pocket, you'll be forced to talk with most dealerships' finance people. Why? Because dealerships make the real profit in the finance office. If the dealership can convert you to its financing, it'll sell you credit life and credit disability insurance that's almost always more expensive than a credit union's but sounds downright cheap on a "pennies a month" basis. Then they'll sell you "protection" packages—rustproofing, undercoating, fabric conditioning—"for just $19 per month." Why, you can afford that! But over 60 months, you will pay more than $1,140 for products you don't need—or if you think you do, could get for $800 less elsewhere. The same approach works for extended warranties or mechanical breakdown insurance, too.
Remember: Finance managers, even if they're called "advisers" or "counselors," are simply high-pressure salespeople.
The "leasing is better" approach is the newest ploy in system selling. Even if you've negotiated a great deal (as a matter of fact, especially if you've negotiated a great deal), most dealerships these days have one final surprise for you: They're going to try to "switch" you to leasing rather than buying. They're not doing this as a public service, either. Leasing a vehicle generally is much more profitable to a dealership than selling that very same vehicle. Most of the time, it's thousands of dollars more profitable.
Leasing can be a smart way for some of us to finance a vehicle. And your credit union may offer either a leasing program, lease-like loans, and/or our Car Facts Vehicle Leasing Guide. But leasing is smart only if you've done your homework. Don't lease a car from a dealership or even from a credit union without really understanding the transaction and its actual costs, both in the short run and the long run.
Track systems, in any shape or form, are not friends of your pocketbook. Please repeat. And daily, the methods grow more sophisticated and subtle. For instance, many dealerships now track customers' movements by computer, rate their moods on scales entered into computers, and flash their progress in the buying process on computer screens so managers and other salespeople throughout the dealership can monitor the careful plan to sell. How can you avoid the traps? Read on.
"This beautiful custom van can be yours for $1 under invoice. Unbelievable! And we got zero percent financing. Even more unbelievable. Take it home tonight! We're open to midnight. No gimmicks, just good deals. Come see us."
Wednesday, January 17, 2007
This is a good article from MSN Money
Sometimes I find the "advice" handed out by columnists tend to err on the side of the advertisers that buy large blocks of space in their publications. However, this one is full of good info by Liz Pulliam Weston.
7 home-buying traps - MSN Money
Liz Pulliam Weston
The Basics
7 home-buying traps
First-time home-buyers face an unfamiliar road and risk purchasing the wrong place at the wrong time. Here's a guide to the potholes.
By Liz Pulliam Weston
Buying your first home is an exercise in faith. You don't really know what you're getting into, you're awash in unfamiliar terminology and everyone you meet seems to have strong (and utterly contradictory) ideas about which way the housing market is headed.
You may not be able to avoid every home-purchase mistake, but you can keep your regrets to a minimum by avoiding the following traps:
Blindly using your agent's inspector
Your agent may recommend a home inspector because he does a good job -- or because he keeps his mouth shut about problems that could torpedo the sale.
Yes, it's terrible to have to be so suspicious, but this is a big investment you're making. A good home inspection can keep you from buying a money pit. You can ask your agent for a recommendation, but get referrals from other recent buyers and try to interview at least three potential candidates before making your choice.
Few states regulate home inspectors closely, so real-estate columnist Ilyce Glink recommends you choose someone who belongs to the American Society of Home Inspectors, which requires its members to complete at least 250 inspections (or 750 if they don't have other licenses and experience). Ask about fees (which typically range from $300 to $700) and whether the inspector is licensed, bonded and insured, said Glink, author of "100 Questions Every First-Time Home Buyer Should Ask." Make sure you get a detailed, written report and, if at all possible, accompany the inspector so you can discuss the findings while they're still fresh.
Taking advice about what you can afford
Your agent, your broker and your lender don't know what you can afford. At best, they know the underwriting guidelines for various loans, which are designed to minimize the lenders' losses, not ensure that you'll maintain your financial health.
As I wrote in "8 big mortgage mistakes and how to avoid them," lenders know that you'll do whatever it takes to pay your mortgage, even if that means shortchanging your retirement, forgoing vacations and piling on credit card debt. You need to be the one to set limits on how much you want to borrow and how you borrow it. In general, limiting your housing costs -- including mortgage, property taxes and homeowner's insurance -- to 25% of your gross income will ensure you have enough money left over to cover other goals, like retirement savings.
Getting a 'temporary' loan
I'm hearing this potentially dangerous advice more often now that so many markets are spiraling out of the reach of first-time home-buyers: Get a mortgage with a low payment now, then refinance in a few years when your income is higher. This is the way some brokers and lenders are hawking adjustable-rate mortgages as well as their more exotic cousins, interest-only and flexible-payment loans.
There are a couple of problems with this advice. The first and most obvious is that no one can predict where interest rates will be five years from now. If they're substantially higher, you will have just passed up the opportunity to lock in rates when they were near generational lows. If your payment has been rising with those rates, you may not be able to afford your home even if your income is higher.
The other problem if you opt for one of the exotic mortgages is that you may not be building any equity in your home. If prices drop, you may owe more on your house than it's worth, which is going to make refinancing pretty tough unless you can come up with a ton of extra cash.
More experienced homeowners who are disciplined about money might be able to handle a trickier mortgage.
The better advice for first-time home-buyers may be to opt for a loan that will remain fixed at least as long as you plan to be in the home. If you plan to move after five years, for example, a good choice might be hybrid loan that remains fixed for five years before becoming an adjustable-rate mortgage. If you'll be in the home for a decade or more, or aren't sure how long you'll be there, you might want to opt for the security of a 30-year fixed-rate loan.
"You're locking in your housing costs for the next 30 years," said real-estate investor Gary W. Eldred, author of "The 106 Common Mistakes Homebuyers Make (and How to Avoid Them)." "If interest rates go up, your payment stays the same, and if they go down, you can refinance." Before you decide on a mortgage, spend some time in MSN Money's Home Financing Decision Center and educate yourself about the options.
Opening or closing credit accounts
Both can hurt your all-important credit score, the three-digit number lenders use to help gauge your credit-worthiness. That can result in your getting stuck with a higher interest rate or losing the loan you want all together. (Read more about credit scores at MSN Money's credit rating Decision Center.)
Real-estate columnist Tom Kelly knows how important credit scores are, but didn't think much about the ramifications when he applied for a new credit card while in the process of applying for a home-equity line of credit. That, plus his wife's closure of a few other accounts, shaved more than 30 points off the couple's credit score.
It was "really bad timing," Kelley said. "The lender for our proposed line of credit basically said, 'What have you guys been doing?' after our application had been filed and the new FICO scores had arrived."
Failing to investigate the neighborhood
"One common mistake is not looking at the property and the neighborhood at various times," said Dick LePre, senior loan consultant for RPM Mortgage in San Francisco and author of the RateWatch newsletter. "Look at it during the day, the late afternoon when kids tend to cluster, at night and on both weekdays and weekends."
This ongoing inspection can reveal good news, bad news or both. You may find your home is on a popular shortcut for commuters or near the gathering place for local kids, but only for a few hours a day.
"Something which you construe as a problem might only happen one day a week or at a certain time of the day," LePre said.
He also recommends quizzing a few neighbors about what they like and don't like, and about which direction the neighborhood seems to be going.
"Find out if there are any 'crazies' on the block," he said. "If there is empty space nearby, ascertain what the zoning is for that empty space. Is the next block over ... zoned commercial? Do you want a McDonald's as a neighbor?"
Buying when you're not ready
Buying a home is a great way for the average person to build wealth over the long run, but it's not for everyone in all circumstances.
If your finances are uncertain or your job prospects are up in the air, you might want to wait. Renting is also a better option if you're planning to move in a year or two.
Not buying when you are ready
All that said, you shouldn't let fear or uncertainty keep you on the sidelines if you're otherwise ready to buy a home.
Eldred notes in his book that the media have been decrying the high cost of housing and predicting price peaks at least since the 1940s. Although prices have fallen in various cities at various times, the overall trend has been upward.
Eldred recommends being cautious if your market is showing signs of weakening, such as:
* Properties staying on the market longer.
* A widening gap between the costs of owning and the costs of renting.
Even then, don't put off a purchase if you're able to stay put for several years -- long enough to ride out any downswings.
"In five or 10 years, prices will be higher than they are today," Eldred predicted.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
7 home-buying traps - MSN Money
Liz Pulliam Weston
The Basics
7 home-buying traps
First-time home-buyers face an unfamiliar road and risk purchasing the wrong place at the wrong time. Here's a guide to the potholes.
By Liz Pulliam Weston
Buying your first home is an exercise in faith. You don't really know what you're getting into, you're awash in unfamiliar terminology and everyone you meet seems to have strong (and utterly contradictory) ideas about which way the housing market is headed.
You may not be able to avoid every home-purchase mistake, but you can keep your regrets to a minimum by avoiding the following traps:
Blindly using your agent's inspector
Your agent may recommend a home inspector because he does a good job -- or because he keeps his mouth shut about problems that could torpedo the sale.
Yes, it's terrible to have to be so suspicious, but this is a big investment you're making. A good home inspection can keep you from buying a money pit. You can ask your agent for a recommendation, but get referrals from other recent buyers and try to interview at least three potential candidates before making your choice.
Few states regulate home inspectors closely, so real-estate columnist Ilyce Glink recommends you choose someone who belongs to the American Society of Home Inspectors, which requires its members to complete at least 250 inspections (or 750 if they don't have other licenses and experience). Ask about fees (which typically range from $300 to $700) and whether the inspector is licensed, bonded and insured, said Glink, author of "100 Questions Every First-Time Home Buyer Should Ask." Make sure you get a detailed, written report and, if at all possible, accompany the inspector so you can discuss the findings while they're still fresh.
Taking advice about what you can afford
Your agent, your broker and your lender don't know what you can afford. At best, they know the underwriting guidelines for various loans, which are designed to minimize the lenders' losses, not ensure that you'll maintain your financial health.
As I wrote in "8 big mortgage mistakes and how to avoid them," lenders know that you'll do whatever it takes to pay your mortgage, even if that means shortchanging your retirement, forgoing vacations and piling on credit card debt. You need to be the one to set limits on how much you want to borrow and how you borrow it. In general, limiting your housing costs -- including mortgage, property taxes and homeowner's insurance -- to 25% of your gross income will ensure you have enough money left over to cover other goals, like retirement savings.
Getting a 'temporary' loan
I'm hearing this potentially dangerous advice more often now that so many markets are spiraling out of the reach of first-time home-buyers: Get a mortgage with a low payment now, then refinance in a few years when your income is higher. This is the way some brokers and lenders are hawking adjustable-rate mortgages as well as their more exotic cousins, interest-only and flexible-payment loans.
There are a couple of problems with this advice. The first and most obvious is that no one can predict where interest rates will be five years from now. If they're substantially higher, you will have just passed up the opportunity to lock in rates when they were near generational lows. If your payment has been rising with those rates, you may not be able to afford your home even if your income is higher.
The other problem if you opt for one of the exotic mortgages is that you may not be building any equity in your home. If prices drop, you may owe more on your house than it's worth, which is going to make refinancing pretty tough unless you can come up with a ton of extra cash.
More experienced homeowners who are disciplined about money might be able to handle a trickier mortgage.
The better advice for first-time home-buyers may be to opt for a loan that will remain fixed at least as long as you plan to be in the home. If you plan to move after five years, for example, a good choice might be hybrid loan that remains fixed for five years before becoming an adjustable-rate mortgage. If you'll be in the home for a decade or more, or aren't sure how long you'll be there, you might want to opt for the security of a 30-year fixed-rate loan.
"You're locking in your housing costs for the next 30 years," said real-estate investor Gary W. Eldred, author of "The 106 Common Mistakes Homebuyers Make (and How to Avoid Them)." "If interest rates go up, your payment stays the same, and if they go down, you can refinance." Before you decide on a mortgage, spend some time in MSN Money's Home Financing Decision Center and educate yourself about the options.
Opening or closing credit accounts
Both can hurt your all-important credit score, the three-digit number lenders use to help gauge your credit-worthiness. That can result in your getting stuck with a higher interest rate or losing the loan you want all together. (Read more about credit scores at MSN Money's credit rating Decision Center.)
Real-estate columnist Tom Kelly knows how important credit scores are, but didn't think much about the ramifications when he applied for a new credit card while in the process of applying for a home-equity line of credit. That, plus his wife's closure of a few other accounts, shaved more than 30 points off the couple's credit score.
It was "really bad timing," Kelley said. "The lender for our proposed line of credit basically said, 'What have you guys been doing?' after our application had been filed and the new FICO scores had arrived."
Failing to investigate the neighborhood
"One common mistake is not looking at the property and the neighborhood at various times," said Dick LePre, senior loan consultant for RPM Mortgage in San Francisco and author of the RateWatch newsletter. "Look at it during the day, the late afternoon when kids tend to cluster, at night and on both weekdays and weekends."
This ongoing inspection can reveal good news, bad news or both. You may find your home is on a popular shortcut for commuters or near the gathering place for local kids, but only for a few hours a day.
"Something which you construe as a problem might only happen one day a week or at a certain time of the day," LePre said.
He also recommends quizzing a few neighbors about what they like and don't like, and about which direction the neighborhood seems to be going.
"Find out if there are any 'crazies' on the block," he said. "If there is empty space nearby, ascertain what the zoning is for that empty space. Is the next block over ... zoned commercial? Do you want a McDonald's as a neighbor?"
Buying when you're not ready
Buying a home is a great way for the average person to build wealth over the long run, but it's not for everyone in all circumstances.
If your finances are uncertain or your job prospects are up in the air, you might want to wait. Renting is also a better option if you're planning to move in a year or two.
Not buying when you are ready
All that said, you shouldn't let fear or uncertainty keep you on the sidelines if you're otherwise ready to buy a home.
Eldred notes in his book that the media have been decrying the high cost of housing and predicting price peaks at least since the 1940s. Although prices have fallen in various cities at various times, the overall trend has been upward.
Eldred recommends being cautious if your market is showing signs of weakening, such as:
* Properties staying on the market longer.
* A widening gap between the costs of owning and the costs of renting.
Even then, don't put off a purchase if you're able to stay put for several years -- long enough to ride out any downswings.
"In five or 10 years, prices will be higher than they are today," Eldred predicted.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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