Zero Percent Pitfalls
The hidden numbers behind 0 percent financing
By BANKRATE.COM
Nothing could be more enticing than free money, and that's what the current round of zero-percent finance deals seem to offer. Remember the adage, "There's no such thing as a free lunch?'' Well, free money is equally suspicious. There are strings and conditions to nearly all such offers from manufacturers.
Aside from the usual requirement of sparkling credit, there are ways in which zero-percent car loans can trip up a buyer.Most interest-free financing offers require financing terms of three years or fewer. So you'll have to shell out some pretty hefty monthly payments if you qualify.Example: Let's say you're borrowing $20,000 to pay for your new car. With a three-year term at zero percent interest, your family would have to shell out more than $555 a month in car payments. A five-year term at 3.9 percent with monthly payments of $367.43 may be more manageable, even though you have to pay interest.
If you are financing $20,000…
Interest Rate
Monthly Payments
Total Interest
3 Years
0%
$555
$0
5 Years
3.9%
$367.43
$2,045.71
And some zero-percent offers come with the stipulation that the buyer has to put down as much as 25 percent, whereas most other finance deals can be had with 10 percent or even nothing down, though it's often not wise to cut your down payment to a minimum because it will take longer to build equity. We discuss that issue in the next chapter.
Thursday, February 7, 2008
Financing Tricks
Financing Tricks
Buyers, trying to get more for the 'same money,' are putting themselves deep into the red.
NEW YORK (CNNMoney.com) - New car buyers are taking out longer and longer loans to finance their vehicle purchases, according to data from the Consumer Bankers Association. More than half of new car loans made by the group's member institutions were for five years or longer.That marks the first time that most new car loans have been written for more than five years, the group said. The biggest jump was in six-year loans.At the same time, leasing is also increasing in popularity, according to data from J.D. Power and Associate's Power Information Network. Leases accounted for more than 21 percent of U.S. new-vehicle sales between December of last year and February of this year. That's the highest level in five years.The biggest motivation for this, experts say, is that people want to buy more expensive cars without actually paying more each month."They want more car, they want more luxury and they're stretching out their loans," said Jack Nerad, editorial director at Kelley Blue Book and author of the "Complete Idiots Guide to Buying or Leasing a Car."
Prices for vehicles of the same size with the same features have actually been going down in recent years, but buyers are purchasing larger vehicles with more luxury features, said Paul Taylor, chief economist for the National Automobile Dealer's Association..The improving quality of cars may embolden some buyers to take out longer loans, said Taylor. With today's cars routinely running for well over 100,000 miles, customers don't worry about being forced to buy a new one.There are serious downsides to this approach, though. Besides paying thousands more in interest, buyers taking out long car loans are more likely to find themselves in a financial bind if they need a new car again in just a few years. That could happen because of an accident or simply because a car owner is tempted by a newer model.They could well find themselves "upside down," meaning that they owe more money on their current car than it's worth. Ordinarily, a new car buyer would simply trade in or sell their old car and use the money they get from that to pay off any remaining loan balance. In this situation, that's not possible.Longer-term loans increase the chances of that happening.One commonly-used solution is simple. The remaining balance from the old car loan is refinanced as part of the new car loan and, to keep payments low, the new loan term is stretched out some more. "Financing of over 100 percent of the car's value is not unusual these days," said Nerad.The loans, then, keep getting longer and longer.Solutions to the problem Some car buyers who find themselves "upside down" when going to get their next vehicle probably should have considered leasing. For customers who normally change cars every few years, leasing can make more sense than repeatedly "flipping" cars.In a lease, the customer pays an agreed upon amount each month to keep the car for a set period of time, usually just a few years. The amount the customer pays is based on the amount of value the vehicle loses during that time.Leasing works best for customers who are sure they will drive no more than an agreed-upon number of miles per year -- usually about 15,000 -- and who take good care of their cars. Lease contracts include penalties for damages to the car.If leasing isn't right for you, make sure to research your financing options before going to the dealership. You don't have to take the financing offered by the dealership.
Often, the car company's own financing arm will offer an unbeatable deal, said Brian Reed, vice-president of Capitol One Auto Finance, an independent company that offers pre-approved loans. Having another arrangement ready to go, however, could at least give you some negotiating leverage.Another way to keep monthly payments down is to simply purchase a less expensive vehicle. With cars lasting longer, used cars can offer a viable, and much less expensive, alternative to a new car, Nerad points out.When shopping for a car, keep your eye firmly on the price, not the monthly payment. There's no point to discussing monthly payments until you've negotiated the lowest possible price first.
Buyers, trying to get more for the 'same money,' are putting themselves deep into the red.
NEW YORK (CNNMoney.com) - New car buyers are taking out longer and longer loans to finance their vehicle purchases, according to data from the Consumer Bankers Association. More than half of new car loans made by the group's member institutions were for five years or longer.That marks the first time that most new car loans have been written for more than five years, the group said. The biggest jump was in six-year loans.At the same time, leasing is also increasing in popularity, according to data from J.D. Power and Associate's Power Information Network. Leases accounted for more than 21 percent of U.S. new-vehicle sales between December of last year and February of this year. That's the highest level in five years.The biggest motivation for this, experts say, is that people want to buy more expensive cars without actually paying more each month."They want more car, they want more luxury and they're stretching out their loans," said Jack Nerad, editorial director at Kelley Blue Book and author of the "Complete Idiots Guide to Buying or Leasing a Car."
Prices for vehicles of the same size with the same features have actually been going down in recent years, but buyers are purchasing larger vehicles with more luxury features, said Paul Taylor, chief economist for the National Automobile Dealer's Association..The improving quality of cars may embolden some buyers to take out longer loans, said Taylor. With today's cars routinely running for well over 100,000 miles, customers don't worry about being forced to buy a new one.There are serious downsides to this approach, though. Besides paying thousands more in interest, buyers taking out long car loans are more likely to find themselves in a financial bind if they need a new car again in just a few years. That could happen because of an accident or simply because a car owner is tempted by a newer model.They could well find themselves "upside down," meaning that they owe more money on their current car than it's worth. Ordinarily, a new car buyer would simply trade in or sell their old car and use the money they get from that to pay off any remaining loan balance. In this situation, that's not possible.Longer-term loans increase the chances of that happening.One commonly-used solution is simple. The remaining balance from the old car loan is refinanced as part of the new car loan and, to keep payments low, the new loan term is stretched out some more. "Financing of over 100 percent of the car's value is not unusual these days," said Nerad.The loans, then, keep getting longer and longer.Solutions to the problem Some car buyers who find themselves "upside down" when going to get their next vehicle probably should have considered leasing. For customers who normally change cars every few years, leasing can make more sense than repeatedly "flipping" cars.In a lease, the customer pays an agreed upon amount each month to keep the car for a set period of time, usually just a few years. The amount the customer pays is based on the amount of value the vehicle loses during that time.Leasing works best for customers who are sure they will drive no more than an agreed-upon number of miles per year -- usually about 15,000 -- and who take good care of their cars. Lease contracts include penalties for damages to the car.If leasing isn't right for you, make sure to research your financing options before going to the dealership. You don't have to take the financing offered by the dealership.
Often, the car company's own financing arm will offer an unbeatable deal, said Brian Reed, vice-president of Capitol One Auto Finance, an independent company that offers pre-approved loans. Having another arrangement ready to go, however, could at least give you some negotiating leverage.Another way to keep monthly payments down is to simply purchase a less expensive vehicle. With cars lasting longer, used cars can offer a viable, and much less expensive, alternative to a new car, Nerad points out.When shopping for a car, keep your eye firmly on the price, not the monthly payment. There's no point to discussing monthly payments until you've negotiated the lowest possible price first.
Credit Score Basics
Credit Score Basics
What to know about this mysterious number
By ERIC PETERS
Posted: 2006-08-18 19:21:39
In the olden days, if the store manager didn't like your face, the price of your lay-away might mysteriously go up. Today, you can be as good-looking as Brad Pitt and still pay through the nose for a new car loan -- if you happen to have an ugly credit score.Credit scores are a form of financial profiling lenders use to predict the statistical likelihood of a buyer not keeping up with his payments -- or going bankrupt altogether.They are based on things like your income, employment history, length of time at your residence, buying patterns, history of credit applications, repayment of loans, revolving debt (credit card balances, etc.), record of defaults, bankruptcy proceedings and so on.All this data is monitored and recorded by the three major credit reporting bureaus -- Equifax, Trans Union and Experian. The info is fed into a mathematical equation developed by the finance/lending industry to assign you a "risk profile" relative to past experience with people who have similar records of income, debt payment and so on. All this is ultimately reflected as a number ranging from 300 on the "homeless and hopeless" end of things to 800 (perfect credit) on the other.The higher your score, the better your credit -- and the lower your interest rate should be.Check Your FREE Credit Report HereHere's how it breaks down:About 35 percent of your credit score is derived from your payment history -- how well (or not) you keep up with your current obligations. Any record of late/missed payments, etc. will negatively affect your score -- even if it happened several years in the past and you've had no incidents since that time. (Credit records typically go back seven years.)Another 30 percent of your score is based on the amount of money you owe to various lenders -- everything from your monthly mortgage payment to outstanding credit card balances. If the proportion of your debt relative to your income is too high, your score will be lower.15 percent of your score is based on the length of your credit history -- the more established you are, the better your credit score will generally be.10 percent of your score is based on recently applied-for/new credit applications -- the more such applications, the more it hurts your score.10 percent is based on the types of credit you have and are using -- is it a "healthy mix"? (Excess revolving/credit card debt is "unhealthy," as an example.)Your credit score will also change from year to year as new information about your income, current spending patterns, recent payment history and so on are factored into the mix.Basically, if you don't spend more than you can repay -- and your record shows a steady track of responsible conduct with money matters -- you should have no trouble getting loans at favorable rates.It seems pretty straightforward -- and for the most part, it is. However, there are some things to be aware of that may have nothing to do with how well you manage your finances as such. People who are very conscientious with their money are sometimes surprised to discover their credit's not as good as they might have imagined. And folks who assume their number's got to be really low based on their high debt load may have higher-than-expected credit scores.Here's why:Absence of payment history -- Some people think it's smart to avoid credit card and other debt entirely, preferring to pay for things as they go with checks or cash in order to avoid living beyond their means. This is prudent in terms of keeping within one's limits -- but as far as your credit score goes, it leaves a black hole on your record that can be just as lethal as having too many cards or getting in over your head with debt. The problem is that without a paper trail, no one really knows how good -- or bad -- a risk you really are. Having a Visa or Mastercard creates that paper trail for you. It also shows that you can handle credit -- and that's ultimately what it's all about. This is especially important for young people just entering the work force.Too many cards -- Even if you never carry a balance (or always make your minimum monthly payment) having too many credit cards can hurt your credit score as badly as having too few (or no) credit cards at all. The assumption is that with access to all those potential lines of credit, you might over-spend yourself into the poorhouse without realizing it until it's too late. It's easy to fall into the trap of having too many cards given the weekly deluge of offers most of us get in the mail each week -- but to keep your credit score healthy, avoid having more than 3-4 credit cards in your wallet.Too many credit inquiries -- If you're thinking about a car (or other loan) avoid applying for new store cards, a home equity line or other forms of credit during the weeks/months prior to applying for your loan. Each time an inquiry is made into your credit history during the application process, it is reported -- and that can negatively affect your overall credit score. Again, the assumption (as far as the credit equations go) is that you're too extended, or in danger of becoming over-extended.Finally, everyone should periodically check their credit report for accuracy -- and immediately contest any erroneous information that may have found its way onto your record.
What to know about this mysterious number
By ERIC PETERS
Posted: 2006-08-18 19:21:39
In the olden days, if the store manager didn't like your face, the price of your lay-away might mysteriously go up. Today, you can be as good-looking as Brad Pitt and still pay through the nose for a new car loan -- if you happen to have an ugly credit score.Credit scores are a form of financial profiling lenders use to predict the statistical likelihood of a buyer not keeping up with his payments -- or going bankrupt altogether.They are based on things like your income, employment history, length of time at your residence, buying patterns, history of credit applications, repayment of loans, revolving debt (credit card balances, etc.), record of defaults, bankruptcy proceedings and so on.All this data is monitored and recorded by the three major credit reporting bureaus -- Equifax, Trans Union and Experian. The info is fed into a mathematical equation developed by the finance/lending industry to assign you a "risk profile" relative to past experience with people who have similar records of income, debt payment and so on. All this is ultimately reflected as a number ranging from 300 on the "homeless and hopeless" end of things to 800 (perfect credit) on the other.The higher your score, the better your credit -- and the lower your interest rate should be.Check Your FREE Credit Report HereHere's how it breaks down:About 35 percent of your credit score is derived from your payment history -- how well (or not) you keep up with your current obligations. Any record of late/missed payments, etc. will negatively affect your score -- even if it happened several years in the past and you've had no incidents since that time. (Credit records typically go back seven years.)Another 30 percent of your score is based on the amount of money you owe to various lenders -- everything from your monthly mortgage payment to outstanding credit card balances. If the proportion of your debt relative to your income is too high, your score will be lower.15 percent of your score is based on the length of your credit history -- the more established you are, the better your credit score will generally be.10 percent of your score is based on recently applied-for/new credit applications -- the more such applications, the more it hurts your score.10 percent is based on the types of credit you have and are using -- is it a "healthy mix"? (Excess revolving/credit card debt is "unhealthy," as an example.)Your credit score will also change from year to year as new information about your income, current spending patterns, recent payment history and so on are factored into the mix.Basically, if you don't spend more than you can repay -- and your record shows a steady track of responsible conduct with money matters -- you should have no trouble getting loans at favorable rates.It seems pretty straightforward -- and for the most part, it is. However, there are some things to be aware of that may have nothing to do with how well you manage your finances as such. People who are very conscientious with their money are sometimes surprised to discover their credit's not as good as they might have imagined. And folks who assume their number's got to be really low based on their high debt load may have higher-than-expected credit scores.Here's why:Absence of payment history -- Some people think it's smart to avoid credit card and other debt entirely, preferring to pay for things as they go with checks or cash in order to avoid living beyond their means. This is prudent in terms of keeping within one's limits -- but as far as your credit score goes, it leaves a black hole on your record that can be just as lethal as having too many cards or getting in over your head with debt. The problem is that without a paper trail, no one really knows how good -- or bad -- a risk you really are. Having a Visa or Mastercard creates that paper trail for you. It also shows that you can handle credit -- and that's ultimately what it's all about. This is especially important for young people just entering the work force.Too many cards -- Even if you never carry a balance (or always make your minimum monthly payment) having too many credit cards can hurt your credit score as badly as having too few (or no) credit cards at all. The assumption is that with access to all those potential lines of credit, you might over-spend yourself into the poorhouse without realizing it until it's too late. It's easy to fall into the trap of having too many cards given the weekly deluge of offers most of us get in the mail each week -- but to keep your credit score healthy, avoid having more than 3-4 credit cards in your wallet.Too many credit inquiries -- If you're thinking about a car (or other loan) avoid applying for new store cards, a home equity line or other forms of credit during the weeks/months prior to applying for your loan. Each time an inquiry is made into your credit history during the application process, it is reported -- and that can negatively affect your overall credit score. Again, the assumption (as far as the credit equations go) is that you're too extended, or in danger of becoming over-extended.Finally, everyone should periodically check their credit report for accuracy -- and immediately contest any erroneous information that may have found its way onto your record.
Lease or Buy?
Lease or Buy?
By ERIC PETERS
Car leasing is a lot like renting an apartment; you pay a monthly fee to use it but don't own it -- and aren't making payments toward ownership. The leased vehicle remains the property of the lessor -- the company that issued the lease.As with an apartment rental contract, car leasing will have a fixed period -- typically two or three years. You're obliged to make monthly payments for the length of the contract. While you can get out of the lease before then if you want to, there will typically be extra costs -- for example, an "early termination charge" -- typically spelled out in the car leasing contract you sign. And as is often the case with renting an apartment, you'll likely have to put down some cash as "security deposit" at the lease inception. This money will be used to pay for any damages to the vehicle -- such as door dings, stains on the seats, any needed service work, etc. -- when you return it at the end of the car leasing term.
Or, if you prefer, you can "afford" to drive a more expensive car when you lease, since the monthly payments will be comparatively lower. This is one of the biggest single attractions of car leasing for many people. A car (or truck) that might cost you $500-$600 per month to buy might cost $100 per month less with car leasing.Another nice thing about car leasing is that you're always driving a new or nearly new vehicle. And of course you don't have to worry about the potentially expensive repair and/or maintenance problems that inevitably crop up as a car ages -- and gets out of warranty. The leased car will typically be under factory warranty for the duration of the lease -- and car leasing contracts often have add-on provisos that cover routine maintenance, such as oil changes, etc.Car leasing may also have tax advantages for you -- but this is something you'll have to ask your accountant about. In the past, most people who did car leasing were those who used their vehicle for business, such as realtors -- and who therefore could claim deductions for car leasing not available to those who purchased them outright.
Car leasing had the additional attraction of freeing up assets for investments and so on that would otherwise be locked into a depreciating asset -- the person's car or truck.There are downsides to car leasing, of course. Since you're only making what amount to rental payments each month, you won't have anything tangible to show for your money at the end of the lease. If you spend, say, $12,000 on car leasing payments (about $450 per month) over two years, that money is gone forever.A person who buys his vehicle, on the other hand, has the comfort of knowing that one day, it will be "paid for" and -- assuming it is still in good shape at that point -- will provide "free transportation" until it breaks down or the owner decides to get rid of it.In addition, a person who owns his car has equity (cash value) in the car or truck. Even though it will continue to depreciate with each passing year, so long as it's still serviceable transportation, it will always be worth something. That value can be used as a trade-in; or the vehicle can be sold privately to help raise money to pay for a new one -- or for some other need.The person who opts for car leasing must start from scratch every time.There's also the mileage issue. If you decide on car leasing, your contract will typically stipulate the maximum number of miles you're allowed before the end of the lease. If you exceed that figure, it can get expensive. Per-mile charges over the stated maximum listed in the car leasing contract are often exorbitant -- so if you drive more than the allowed miles in the contract annually, leasing could turn out to be more expensive then you thought.
The person who owns his car, meanwhile, can drive it as much as he wants, and do pretty much whatever he feels like with it, too. He can swap out the stereo, add different wheels and tires, change the exhaust system -- whatever. Do this with a leased car and you'll have to pay whatever if takes to put the car back the way it was. If you own your vehicle, the inevitable door dings and dents -- as well as coffee stains on the seat -- can also be shrugged off.People who lease their vehicles, on the other hand, can expect to be charged for every nick, tear or spill at the end of the lease. The cost of these repairs will be deducted from the security deposit.Car leasing is also more complex than buying so always closely read -- and be sure you understand -- every proviso of the lease contract before you sign. If you're unclear about anything, get expert advice -- or walk away.
By ERIC PETERS
Car leasing is a lot like renting an apartment; you pay a monthly fee to use it but don't own it -- and aren't making payments toward ownership. The leased vehicle remains the property of the lessor -- the company that issued the lease.As with an apartment rental contract, car leasing will have a fixed period -- typically two or three years. You're obliged to make monthly payments for the length of the contract. While you can get out of the lease before then if you want to, there will typically be extra costs -- for example, an "early termination charge" -- typically spelled out in the car leasing contract you sign. And as is often the case with renting an apartment, you'll likely have to put down some cash as "security deposit" at the lease inception. This money will be used to pay for any damages to the vehicle -- such as door dings, stains on the seats, any needed service work, etc. -- when you return it at the end of the car leasing term.
Or, if you prefer, you can "afford" to drive a more expensive car when you lease, since the monthly payments will be comparatively lower. This is one of the biggest single attractions of car leasing for many people. A car (or truck) that might cost you $500-$600 per month to buy might cost $100 per month less with car leasing.Another nice thing about car leasing is that you're always driving a new or nearly new vehicle. And of course you don't have to worry about the potentially expensive repair and/or maintenance problems that inevitably crop up as a car ages -- and gets out of warranty. The leased car will typically be under factory warranty for the duration of the lease -- and car leasing contracts often have add-on provisos that cover routine maintenance, such as oil changes, etc.Car leasing may also have tax advantages for you -- but this is something you'll have to ask your accountant about. In the past, most people who did car leasing were those who used their vehicle for business, such as realtors -- and who therefore could claim deductions for car leasing not available to those who purchased them outright.
Car leasing had the additional attraction of freeing up assets for investments and so on that would otherwise be locked into a depreciating asset -- the person's car or truck.There are downsides to car leasing, of course. Since you're only making what amount to rental payments each month, you won't have anything tangible to show for your money at the end of the lease. If you spend, say, $12,000 on car leasing payments (about $450 per month) over two years, that money is gone forever.A person who buys his vehicle, on the other hand, has the comfort of knowing that one day, it will be "paid for" and -- assuming it is still in good shape at that point -- will provide "free transportation" until it breaks down or the owner decides to get rid of it.In addition, a person who owns his car has equity (cash value) in the car or truck. Even though it will continue to depreciate with each passing year, so long as it's still serviceable transportation, it will always be worth something. That value can be used as a trade-in; or the vehicle can be sold privately to help raise money to pay for a new one -- or for some other need.The person who opts for car leasing must start from scratch every time.There's also the mileage issue. If you decide on car leasing, your contract will typically stipulate the maximum number of miles you're allowed before the end of the lease. If you exceed that figure, it can get expensive. Per-mile charges over the stated maximum listed in the car leasing contract are often exorbitant -- so if you drive more than the allowed miles in the contract annually, leasing could turn out to be more expensive then you thought.
The person who owns his car, meanwhile, can drive it as much as he wants, and do pretty much whatever he feels like with it, too. He can swap out the stereo, add different wheels and tires, change the exhaust system -- whatever. Do this with a leased car and you'll have to pay whatever if takes to put the car back the way it was. If you own your vehicle, the inevitable door dings and dents -- as well as coffee stains on the seat -- can also be shrugged off.People who lease their vehicles, on the other hand, can expect to be charged for every nick, tear or spill at the end of the lease. The cost of these repairs will be deducted from the security deposit.Car leasing is also more complex than buying so always closely read -- and be sure you understand -- every proviso of the lease contract before you sign. If you're unclear about anything, get expert advice -- or walk away.
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