Experts tout research to avoid finance pitfalls.
Experts tout research to avoid finance pitfalls.
Experts tout research to avoid finance pitfalls.
Experts tout research to avoid finance pitfalls.

Despite a summer dip in consumer confidence, data released last month by the Colorado Automobile Dealers Association indicated a 5.7 percent increase in new car and truck registrations through August compared to the same eight-month period in 2013.

“Strong sales over the Labor Day weekend put Colorado’s new car and truck sales back into positive range, which helped the state’s auto industry rebound from July’s minor downturn,” Tim Jackson, president of CADA, said. “Consumers are still taking advantage of strong manufacturer incentives as well as financing terms which continue to be affordable.”

A news release from CADA indicated mid-size SUVs led in market share gains for the period.

The used vehicle market in Colorado was up 0.8 percent in August 2014 (vehicles 7 years old or newer) and improved 3.5 percent year-to-date.

According to Cory Shultz, chief lending officer for Air Academy Federal Credit Union, auto loans make up approximately 65 percent of the credit union’s lending portfolio, averaging approximately $12 million a month. He said the end of the calendar year is normally a busier time for auto loans because dealers provide incentives to purge older models in order to make room for new ones.

“If there is a sweet spot [for lending], it’s when manufacturers are making room for new models at the end of the year,” he said.

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“It’s usually October, November and December.”

Shultz said there are some things to consider before entering a dealership, bank or credit union in search of financing.

“You need to understand your budget and what kind of payment you can afford,” he said. “Can you afford a $30,000 car? That’s a $500 monthly payment.”

Shultz said a good starting point would be preparing to invest 15-18 percent of income on an auto loan.

He added the average interest rate for a new car loan in 2Q 2014 across all lending platforms was 4.59 percent. The average rate for credit unions during the same quarter was 3.79 percent.

The interest rate for a used car loan averaged 8.82 percent for all lending platforms during 2Q 2014, while credit unions averaged a rate of 5.75 percent.

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Auto financing tips

• Never shop based upon the monthly payment

• Dealers can extend the length of your loan in order to get the monthly payments down

• Dealers can put overpriced extras into the loan so you don’t notice you’re being ripped off

• Avoid getting scammed by comparing the APR of several loan options

• Figure out your budget before shopping so you know what you can afford

• Don’t give a cash deposit, you can dispute a credit card charge if there is an issue

• Know your credit score so the dealer can’t lie to you to charge you more

[/pullquote]Shultz said credit unions often offer the lowest rates for auto loans and are therefore utilized by dealerships more than banks.

He said, in Colorado, credit unions finance 39.51 percent of all car loans, while banks hold 27.84 percent of all loans. Alternative financing methods account for the remainder.

Shultz said Air Academy Federal Credit Union’s average borrower keeps his or her vehicle for 28-32 months, but financing options can include up to an 84-month loan.

Pump your brakes

In 1998, consumer advocate Jeff Ostroff co-founded a website dedicated to helping consumers navigate the auto market. Ostroff is now CEO of the Florida-based carbuyingtips.com, which claims to have saved its users more than $13 million since its inception.

Ostroff said there are many things to consider when purchasing a vehicle, and making payments for more than 48 months should not be one of them.

“We suggest never getting a loan for more than 48 months,” Ostroff said. “Car loans with payments for 60 or 72 months is nonsense. … We suggest you try and put down 20 percent to reduce payments and to prevent falling down the depreciation curve. Cars depreciate most in their first year, losing 25 to 30 percent of their value. If something happens to your new car, you’ll be upside down on your loan.”

Ostroff says it’s also vital to understand your credit score when negotiating a loan.

“I say you should know three things: your blood pressure, your cholesterol and your credit score,” he said. “Credit scores of 680 or above tend to get the best interest rates. Some underwriters are more strict and looking for a score of 700 or more. Below 680 is the next tier down and rates will go up. Below 600 and you’re entering a realm where financers don’t consider you a good candidate. Below 550 and you’re likely to get rejected and the dealer will want someone to co-sign.”

Ostroff also stressed the importance of a budget before walking into a dealership or searching for a car online.

“A big problem is people are in a rush. They have money burning a hole in their pocket, but no game plan,” he said. “Then they’re blindsided in the finance office and paying 15 to 20 percent APR and find out later they can’t handle the payment. They’re stuck trading in a car less than a year old and lose staggering amounts of money.”

Regarding leasing, Ostroff said don’t do it if you foresee needing out of the contract or are moving out of state in the next three years. And especially don’t lease if you drive a lot.

“Leases only allow 10,000 miles a year and can be 15 cents a mile after that,” he said. “I’ve had people contact me with $5,000 in mileage fees asking what to do.”

Ostroff advises consumers to research dealer claims and rebates, and if it sounds too good to be true, it is.

“You’ll see deals where the dealer says he’ll pay off your loan no matter how much you owe,” he said. “That sounds great if you’re upside down on your loan. … By trading in for a new car, that financial burden is gone. Right? That’s a huge tactical error many people make. The dealer is paying off your old loan but then taking that amount and folding it into a new car loan. You end up paying off one and a half loans.”

If credit history is an issue and results in a high APR, Ostroff recommends making additional payments toward the principal when possible to gradually reduce monthly costs.

Finally, Ostroff said to play dealers off one another to find the best deal, adding he negotiates via email as a way to quickly share offers among multiple dealers.

“You never know which dealer will come in with the best price,” he said. “One might be two sales from a huge bonus.”

  • Steven Shepard

    If you need or want and discouragement to buy a new car just look at the price the State of Colorado is going to charge you for new tags for a brand new vehicle. The rate is ridiculous and only goes up for the larger vehicle you buy and for the more expensive vehicle you buy. Also there is no incentive from the State to buy small or electric. The taxpayer is pretty much screwed. And any claims that these licensing funds are used for road maintenance are dubious considering the condition of many state roads.