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The savvy girl's guide to vehicle financing

Heather Barnett is a freelance writer and foodie whose work has been featured in blogs, websites, magazines, and TV and radio ads. She spends her free time relaxing with her soulmate, Keith; her dog, Mosby "The Fly Slayer;" and Felix th...

What you need to know before you hit the lot

Does the thought of actually stepping onto a dealership's lot give you the shakes? You're not alone. A car is the second largest purchase most people will make in their lifetime.
Confident woman buying a car

Add to that the unsavory image of the used car salesman, and it's enough to make anyone have a panic attack. But is that image really justified? Or is it a legacy of a bygone era?

The reality is, most of the people who work in car dealerships are just like you — hard-working people just trying to support themselves and their family. Sure, there are unscrupulous people in every profession, but perhaps the reason you're really nervous is that you don't understand the process. No one can take advantage of you if you're armed with knowledge. So, what exactly do you need to know?

Quick tip: If you're worried about multiple inquiries on your credit report decreasing your credit score, don't (at least in this case). The credit bureaus have now accounted for things like car and home purchases. They know you're getting multiple quotes on the same kind of purchase, so they've worked that kind of thing into their formulas. These will count as "soft inquiries" because they know you're not about to go on a spending spree.

Know where you stand

Before you even set foot on a dealership lot, get your credit score from all three major credit bureaus — Experian, Equifax and TransUnion. It's important to get all three because not every dealership will use the same bureau, which means when Dealership A runs your credit, they could potentially see a different picture than Dealership B.

Look for inaccuracies and get them corrected before you go to the dealership so you have the best chance of getting the lowest annual percentage rate (APR, the cost of credit for one year) possible because your credit history is the single biggest factor in determining the cost of credit. Note that the dealership will have to run your credit themselves, too.

You should also go to your own bank or credit union to find out what kind of deal they can get you on a loan in your price range. But don't just take their word for it. Dealerships process a lot of these types of contracts per month and have access to multiple lenders. For most people, the dealership will beat your bank and maybe even your credit union, so give them (and probably more than one of them) a shot, too.

The negotiations

When you step on the lot, the first person you'll talk to in most dealerships is the salesperson. This is the person who helps you select the vehicle. If you're like most people, you've already used the available online resources to research what kind of car you want before you get there. The salesperson will give you some idea of what your payments will be, but can't give you anything too accurate, yet, so if you know your credit score is extremely low or extremely high (or if you plan to offer a lower- or higher-than average down payment), be prepared for the real number to be different.

In most cases, after you choose the car, the salesperson will turn you over to an F&I (finance and insurance) manager to help you find the right financing and other options. This is where things start to really count.

The F&I manager will run your credit and submit your credit application to his or her available funding sources to find out what your options are. You'll probably get back a number of quotes with various terms and APR and the F&I manager will offer you the best one(s). You don't have to accept the first deal the F&I manager offers you, though. You can use any information you've found online to ask for a lower price on the car and even ask for a lower APR. Just keep in mind they only have so much control over the APR, and it may only go down a point or two (or not at all if you're a high-risk customer).

Quick tip: Don't take the first deal you're offered just to get it over with. You have the right to take the completed sales contract home and review it.

Negative equity

But the negotiation process isn't all about getting the lowest price or the best APR. Other things play into it, as well. One very specific thing you have to understand if you have a trade-in is negative equity.

Negative equity is what happens when you trade in a car you still owe money on. Many dealerships will offer to pay off your existing contract when you finance a vehicle with them. Why? They're paying off your existing contract so you can own the vehicle you're trading them for, so they'll have the legal right to sell it.

But you are going to pay off the remaining balance, plus interest, to the new lender. If you do this often, you'll pay thousands, especially if you tend to trade cars in when you're upside down on payments (you owe more than the car is worth).

Aftermarket products

After you come to terms on the price of the vehicle, the F&I manager will go over some of the other things you can purchase to protect or even just modify your car. Your knee-jerk reaction may be to stop listening, but don't. Some of these products are extremely valuable, and while your F&I manager can suggest the ones that are right for you, only you can really know what's best.

For example, one product many consumers find very valuable is GAP. While GAP is an acronym that's said to stand for multiple things, it's easy to understand as a product. Basically, if something unforeseeable happens to your car and it's totaled, GAP pays off the difference (the "gap") between what you still owe and what the insurance company is willing to pay (which is extremely valuable if you think you'll be upside down on your car). There are also vehicle service contracts that pay for repairs outside the warranty, theft-deterrent products and more.

Keep your ears open. Many of these products are low cost and can be financed along with the vehicle (adding only a few cents to a few dollars to your monthly payment). If you aren't sure what the product is, ask questions or look it up on your smartphone.

Best tip of all — you have the power

If you're still nervous about the vehicle-purchase process, take this important piece of advice from David Robertson, automotive-industry veteran and executive director of the Association of Finance & Insurance Professionals (a nonprofit that educates dealership financial services employees in the federal and state laws and ethics associated with vehicle financing).

"Every car buyer is in possession of the two most powerful consumer-protection devices known to man," Robertson notes. "It's their feet. If the dealership employee is unresponsive to your needs or questions, not familiar with what is being offered for sale or evasive when disclosing pricing or defining the seller's obligations, then just get up and walk out of the dealership."

More on buying a car

8 Tips for women car buyers
Car dealer financing 101 — glossary of terms
Car shopping advice for women: What you need to know before you shop

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