Services: Consumer Law: Vehicles: Buying a Car

Buying a Used Car on Credit? Don't Make a Mistake.

You need a car. You don't have all the cash saved to buy the car you want. What are your options?

You've seen the ads: No credit, No problem! Many Asub-prime Nevada used car dealers will gladly sell almost anyone a car. But you must consider not only the quality of the car, and the price, but what it will really cost you. You must know the annual percentage rate, i.e. the cost of your credit as a yearly rate, being charged on the loan. Many of these "sub-prime" dealers are currently charging as much as twenty-nine (29%) annual percentage rate!

Before you go to any used car lot, follow these steps in this order:

1. Know where you're going to get the money, and the current interest rates: (a) Best - a Credit Union (you must be eligible to join) is generally best, charging less than 7% currently; (b) Better - a bank, might charge a few percentage points higher; (c) Good - a mainstream used car dealer, selling first rate used cars, may charge about the same as a bank, currently around 9-10%; (d) Beware - low end used car dealers, selling older second and third rate used cars, may charge 25-30% or even more.
2. Know what price range of car you can afford: Use a loan calculator on the Internet. Try www.financenter.com/auto.htm click on "ClickCalcs" select What car can I afford? and follow the instructions. This one calculates the car you can afford when you input a down payment, a monthly payment amount, the number of months, and an interest rate. Or try www.auto.com, then click on "carhunter", then "San Jose/Contra Costa, Ca," then "Finance." You can enter various assumed loan amounts and rates of interest to calculate what your monthly payments will be. Generally, don't assume you can pay more than 18% of your income for a car payment.
3. Now that you know how much you can afford to borrow (and pay back!), pick a good bet for a used car in your price range: Go to the library and look at Consumer Reports magazine's most recent annual auto issue published each April. The magazine publishes a section of good bets in used cars in various price ranges. For a fee, you can subscribe online at www.consumerreports.com and the site also has free advice on buying a car.
4. While you're at the library, now look at the Kelley Blue Book. (Or you can access Kelley Blue Book over the Internet at www.autos.net; you can also obtain used cars values at www.edmunds.com. The publications will tell you the wholesale and retail value of any car. Don't forget to look at the front of the book for adjustments for equipment and mileage. You want to pay less than retail value and hopefully something closer to wholesale value.
5. Now that you have this information, you can go shopping for the car(s) you selected. If you don't have to rely on a dealer for financing, look in the newspaper (or on the Internet) to see if you can buy from an individual. Generally, you might get a better deal. But sometimes you can find a good deal at a used car lot too.
6. If you go to a used car lot: (a) don't get steered into a car you don't know anything about if a car you weren't considering looks interesting, go back to the library to check Consumer Reports and Kelley Blue Book; (b) ask if you can talk to the previous owner; (c) ask if you are permitted to have the car inspected by an independent mechanic (many will do this for around $30); if not, walk out; (d) be absolutely clear about the terms of any warranty, and get it in writing; if the dealer provides a standard warranty, ask to see it and read it before you sign a contract; if they won't show it to you, walk out; (e) before you make the final deal, ask to see the form documents you will be expected to sign; if they won't show them to you, walk out; (f) when negotiating a price, always negotiate a bottom line price plus tax, with no other extra charges; if you and the salesman agree on a price, warn the salesman you will not pay any additional charges and will walk out if any additional charges appear on the contract; (g) read the documents you are asked to sign; some dealers actually prepare and have the customer sign a lease instead of a sales contract; (h) make sure the documents state the deal you negotiated, including the price and the annual percentage rate (APR) if the dealer is providing credit; generally, it is not a good deal to buy credit insurance or service contracts; any extra charges, such as a document preparation fee are not required and are negotiable.

Remember, the cost of credit is important. By making a $500 down payment and paying $200 per month for 36 months, at a 10% rate of interest you will be able to afford a car that costs $6,700; but at a 30% rate of interest, you will only be able to afford a car that costs $5,200.