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Making extra money by letting people borrow your car is the thrill of peer-to-peer auto marketplaces like Turo and Getaround. You can turn an idle car into some extra cash. But, how do you make sure that your insurance coverage is adequate to keep you and your bank account safe? Read this article to learn best practices for protecting your assets while making passive income on your car. As the vehicle’s owner, would your regular insurance policy cover car sharing? No. Jason Hargraves, managing editor of InsuranceQuotes.com says, “The most important thing to understand is that your personal auto insurance will NOT cover accidents that occur when your car is being rented out.“Most likely, your personal insurance policy excludes coverage when you are renting out the car to a third party customer. Guests will not be covered by your personal car insurance policy. They will either need to be covered by their own personal policy or choose to get coverage through the rental marketplace during checkout. This is just like when you rent a car at Hertz or Enterprise, and they ask if you want the insurance or to waive the coverage.KAAS Law explains, “Personal auto insurance policies are now being written to specifically exclude peer car-sharing apps from coverage. While, companies such as Uber or Lyft provide liability insurance coverage to accommodate peer-to-peer car sharing, it is best you check if the P2P car sharing company you are participating offers such coverage.” Do P2P car-sharing platforms offer insurance? “Most platforms offer a basic package of liability coverage for the host (the owner of the car being rented),” according to Hargraves. “Many also have tiers of coverage if you want more, so it’s what you feel most comfortable with. These tiers can include varying levels of collision and comprehensive coverage, such as excessive wear and tear or providing a replacement car while yours is having repair work done. Each company will be different, so pay attention when you sign on. I always suggest asking what’s NOT included in whatever tier you choose. Also, look for time parameters. Often you need to make a claim shortly after you discover damage.” What insurance do owners need to safely participate in P2P car sharing? Do I really need two insurance policies on the same car? Turo states, “We do not expect your insurer to cover losses arising while the car is shared. That’s why Turo has purchased a $1,000,000 liability policy and also provides protection for physical damage.” There are a few different things to think about. To cover the car while someone else is in possession of it, you will either need to look into a commercial auto insurance policy or choose a policy through the marketplace or app where you are listing it for sharing. “You need ample coverage,” says Hargraves, “and I would suggest making sure you add comprehensive and collision to the basic liability coverage offered by these platforms. If you find what they offer insufficient or too pricey, then consider taking out a commercial auto policy on your car. Most auto insurers offer these policies for people who use their car for business.“ You need to keep your own personal policy, in case you drive the car or it gets damaged as it is parked outside your home or apartment. “Regardless of what coverage you choose for car-sharing,” Hargraves advises, “you will still need a personal auto policy on the car. Why? Your car-sharing insurance only covers your car while it’s being rented out. If you drive your car or something happens to it when parked on the street and not in use, then that is on you. Don’t make the mistake and forgo a personal policy.” Turo also suggests that owners check with their insurance company before signing up. Why should you check with your insurance provider before joining a P2P car sharing service? Insurance policies and exclusions are highly variable and depend on the company you are covered by and the state or local laws. You want to make sure that joining the service doesn’t void your insurance. Turo warns, “Your insurer’s response to car sharing will depend on their specific policies and the laws of the state in which your car is registered. If your insurer is concerned about your participation in our marketplace, we believe you should be able to withdraw from Turo and retain your coverage. If you receive any indication that your insurance is in jeopardy, we would like to know about it so we can address it with the insurer and potentially with your state’s insurance regulator.”In a carinsurance.com article, the site’s consumer analyst Penny Gusner advises, “To be completely covered properly, I’d recommend talking to your car insurance company at the onset of participating in a P2P car-sharing program. Your insurer will tell you what, if anything, your personal policy covers and if you need to upgrade to a commercial policy. It is better to be proactive so you don’t get yourself into a financial bind by not having the coverage you need.” KAAS Law warns that if you don’t inform your insurance company of your participation, it’s possible that the insurer will cancel your coverage. “Thus,” says KAAS, “its best to check with your insurer before placing your car for rent on a car-sharing app.” Additionally, if your policy is ever canceled by your insurer, it can be harder to get insured. What if the unthinkable happens, and the car is damaged? Will your current insurance policy respond if something happens to your car while it's rented out? Policies from car sharing platforms like Turo and Getaround are meant to take care of the accidents that happen when the guest is in possession of an owner’s vehicle. They are primary to both the owner and the renter’s personal policies. However, Turo explains an exception regarding underinsured and uninsured motorist (UIM/UM) protection and personal injury protection (PIP), “In some states, certain coverages may continue to stay with the vehicle, even during the rental period. In states where the UIM/UM, PIP, and liability coverages ‘follow the vehicle,’ in the event of an accident, the host’s insurance could be implicated. To note, Turo, through its third-party liability insurer, provides the statutory minimum UM/UIM coverage in all states, which may sometimes be zero.” How does insurance work for Turo and Getaround? From a vehicle owner’s perspective, there are a couple of different things to worry about when it comes to car sharing. Owners may be on the hook for third-party liability and financial consequences of physical damage to the shared vehicle. What does that mean?Both Turo and Getaround use a $1 million liability policy. As NerdWallet explains, this liability policy is used “in case a renter crashes your car and you’re held responsible for others’ injuries or property damage. Even if you and the renter have your own liability insurance, coverage from the car-sharing company is the primary insurance, meaning you can use it before any other policy.” Idaho attorney David Leroy says via KIVITV, “For the most part, a million dollar policy should cover almost all potential losses that the owner of the vehicle who was renting it out could suffer.” Much like renting a car from traditional car rental companies, drivers who use the Turo app can choose to purchase insurance coverage for a percentage of the trip price or decline coverage. Both companies also include protection against physical damage, but amounts vary, depending on a host’s service level. They both offer physical damage protection for the value of the car. Turo Insurance Turo offers a couple different perks, based on the protection plan you choose: Basic, Standard, or Premium. Here is a quick breakdown of the Turo protection plan and its coverage for car owners: Basic Plan Cost — 15% of the Turo trip price Third-party liability — $1 million Necessary repair costs — Turo covers 20% of the first $3,750 for uninsured repairs, then 100%, up to the lesser of the value of the vehicle or $125,000. Basically, you would have a $3,000 deductible. Replacement vehicle reimbursement — not covered Exterior wear and tear — not covered Loss of hosting income — not covered Standard Plan Cost — 30% of the Turo trip price Third-party liability — $1 million Necessary repair costs — For uninsured repairs, Turo the pays up to the cost of the vehicle, $125,000 max Replacement vehicle reimbursement — Turo covers up to $30 per day for 10 days max Exterior wear and tear — not covered Loss of hosting income — not covered Premium Plan Cost — 45% of the Turo trip price Third-party liability — $1 million Necessary repair costs — For uninsured repairs, Turo the pays up to the cost of the vehicle, $125,000 max Replacement vehicle reimbursement — Turo covers up to $30 per day for 10 days max Exterior wear and tear — Turo covers, if it is an eligible claim Loss of hosting income — Covered by Turo, based on the last month or year's average. But of course, as with all insurance policies, there are several specifications: Check out the full policy here. Renters are on the hook for damage, unless they pay for a damage waiver while renting. Much like a standard car rental, drivers who use the Turo app can choose to purchase coverage for a percentage of the trip price or decline coverage. Will your own personal car insurance be affected by a renter’s accident? Turo says this: “As a general statement, we believe that your insurance should not be affected if your vehicle is covered under one of Turo’s coverage plans. … If the guest gets into an accident, our insurance policy will go into effect. That should leave your personal policy untouched.” Getaround Insurance Combined single limit liability — $1 million Necessary repair costs — up to the cash value of the vehicle Replacement vehicle reimbursement — Getaround will pay up to $25 per day, max $30 days, while it is being fixed Excessive wear and tear — covered Loss of hosting income — Getaround will pay up to $25 per day, max $30 days, while it is being fixed The plan also offers roadside assistance. Check out the full policy here. Exception — New York For both P2P marketplaces, the state of New York is its own exception. Getaround requires that each car owner get a commercial insurance policy, while owners in New York aren’t allowed to rent out their vehicle through Turo. Are there any car sharing insurance red flags to look out for? Hargraves explains, “This is a very new industry and as such the rules and laws are constantly changing. I suggest investigating a car-sharing company thoroughly before choosing one. Go online and look for reviews. You are entrusting a platform with what is probably one of your larger assets, so it pays to do your homework. If you can’t get straight answers in a timely manner, then find another company. Also, keep up with your state laws regarding these companies and the insurance requirements. Laws vary by state so if you move, it might be time to change car-sharing companies.” So, before you add your personal vehicle to the sharing economy, make sure that you contact your insurer, and understand your options, between the different companies and insurance plans. Special thanks to Jason Hargraves, managing editor of InsuranceQuotes.com for contributing to this article!
I’m a person who likes to know what to expect: Is it going to be sunny or rainy? Is the library busy or empty? Is the wait at Disneyland short or long? Am I going to know anyone at the party?If there’s too much uncertainty, I will likely avoid an experience at all costs. I know that I’m not alone. As someone who has always had help when shopping for a car, I wondered, what would the dealer experience be like? What variables can I control? Will I be able to handle it on my own?If you are new to car shopping, you might have some questions about what to expect when you go to a car dealership. Here are dealership experience questions, asked and answered, to give you confidence when buying a car. To help people who are nervous about going to a dealership, what kind of questions can they expect to answer from salespeople? “A good salesperson will only ask questions to help you narrow down a vehicle that will best suit your needs,” says Ryan Mason from Jacksonville Auto Mart. “If you have social anxiety, much of the interaction can be done via Facebook or text messaging. Only once a trade-in price needs to be solidified and paperwork for your new car [needs to be filled-out] would you need to actually visit the dealership.”However, other types of salesmen out there may ask different qualifying sales questions. Paul Maloney, known as the “Car Buyer’s Advocate,” owner of Car Leasing Concierge, and best-selling author of the book, How To Beat The Car Dealer Every Time! It's So Simple, It's Ridiculous, explains, “Salespeople qualify you by asking the following questions 95 percent of the time: 1. How soon are you looking to buy a car? 2. Who is the car for? 3. Are you looking to buy or lease? 4. What payment range are you looking to be around? By asking these prying questions, the salesperson is getting you to unknowingly show your hand. Once they see what you have, it’s very easy for them to play their trump card and siphon the money out of your wallet.”For a detailed (and long!) behind-the-scenes look, check out this car sales training video. Should customers call first to make an appointment or walk-in? Autotrader reports that initial contact with dealerships in 2018 was as follows: 49 percent walk-in, 26 percent phone, 17 percent email, 4 percent online chat, 2 percent text, and 1 percent social media. Valerie Coleman, head of automotive at 5miles.com, explains that how you contact a dealership initially should depend “on how quickly you want to go about finding — and buying — a car.” Coleman suggests that calling ahead can help the dealer prepare for your appointment. It also allows time to “get many of the preliminary questions (i.e. what are you looking for? what’s your price range? etc.) out of the way so that it can be a more efficient car shopping experience.”Susanna Williams from Superior Honda in New Orleans says, “If you make an appointment, you’ll be saving yourself a lot of time and your car shopping experience will be off to a professional start. By letting the dealer know which car(s) you want to see ahead of time, you give them the ability to find the car and clean it up. If you show up unannounced, the whole process could take some time.” Mason puts it another way, “Walk-ins are fine, but if you want to see a specific salesperson set an appointment. This will allow your salesperson to have a specific vehicle you'd like to check out pulled up, plated, and ready for you to check out. It also allows you to ask any specific questions you may have between certain vehicles to save you time.” What paperwork or identification do people need to bring with them? “What you need to bring depends on what you plan on doing at the dealership,” explains Williams. You may need some, or all, of the following items: insurance card loan release proof of residency SSN (at least know it to run a credit check) recent pay stubs references registration title valid driver’s license Test driving — valid driver’s license “If you’re looking to test drive a car you’ll need a current valid driver’s license.” — Maloney Buying a car — insurance, recent pay stubs, references, proof of residency “Paperwork that will be needed depends on a couple different things and will vary state to state. If one is paying cash for a vehicle and have no trade you may only need your ID and a check. If you are financing its best to bring an insurance copy, proof of any income, an ID and any downpayment money.” — MasonTrading-in a car — title, registration, loan release “If you have a trade, be prepared by getting a 10-day payoff on your current loan, your registration copy, and/or the title to the vehicle” — MasonNOTE: NPR suggests that you bring your own photocopies of your ID, and ask for them back when you leave to avoid identity theft issues. Can you describe the test drive process? What happens if there is a fender bender? “Test drives will vary a lot from dealer to dealer,” says Mason. They can vary by process, whether you will drive alone, and whether you have to leave some sort of collateral. For more explanation, insurance broker Jeff Ryan explains on Quora: “Generally, dealerships only require you to show your driver's license. Many dealerships will require a photocopy of your driver’s license. Some may “hold” your license until the test drive is completed.In some cases, the dealer may keep the keys to the vehicle in which you arrived to the dealership. On rare occasions, the dealer may require that a Vehicle Test Drive Agreement be filled out that includes additional information such as the test driver’s auto insurance company and policy number. You can see a sample Test Drive Agreement with the examples below: Riskpoint.com — Vehicle Test Drive or Use Agreement DealerSupply.com — Test Drive Agreement Whether or not a dealer carries their own insurance or requires signing a test drive agreement, it is always in your best interest to carry your own auto insurance while driving a vehicle owned by someone other than yourself.” When it comes to the actual drive, you may be accompanied by a salesman, or you may not. This can depend on the dealership’s rules, its insurance rules, whether you are taking out a new or used car, and possibly the price range of the vehicle. As for the actual driving route, it can vary as well. Mason explains, “Some dealerships will have a set path and have both you and the salesman drive, others will give you the choice to decide, or simply throw you the keys and answer any questions you may have when you return.”“Don't be scared of getting in a fender bender,” Mason says. “Life happens, you won't be expected to cover any damages caused by an accident. While on a dealer plate, you are covered by that dealer's insurance.” If someone is just browsing and not ready for the pressure of a one-on-one sales experience, what is the best way to proceed? Maloney suggests, “Let the salespeople know upfront that you are here to look and test drive only as ‘I’m in the early stages of comparing other brands. Without driving them first, I won’t be able to decide if it’s a good fit for my needs.’”Comfort is key. “Browsing online or finding a salesman you're comfortable with will save you from the high-pressure push of some dealerships,” says Mason. “We aren't all that way and most will be happy to open some doors and simply allow you to sit or look around the cars without them immediately present. Simply return the keys after and ask any questions you may have.”At other dealerships, it might be a little different. A Reddit AMA’er explains, “If you don't want me to pitch the car just say, ‘Hey man, I'm not trying to get your pitch. I know about cars and I just want to experience this one first hand.’ I'll say, “Okay, well we can just hang out while you test it out and if you have any questions just ask.’ I'll probably just talk to you about what you do with your spare time and other things you might actually want to talk about. Most of the time I would prefer people like you because I hate pitching cars unless it's one that I really love that is tons of fun to drive.” What is the deal with dealerships' digital sales teams? Coleman explains, “Nowadays you can peruse most car dealers’ inventory online, and then, when you’re ready to speak with someone about a particular car, email, call, or simply stop by the dealership. With the ever-growing popularity of buying cars online, most dealerships also offer fair prices online. There does tend to be less wiggle-room though, since the cost of marketing, shipping, etc. all must be factored in.““A digital sales team's job is to convert you from an online shopper to an in-person shopper,” adds Mason. “Generally, the larger dealerships will have a sales staff dedicated to specifically following up with people who have submitted their information for follow up.” You can submit information a number of ways, but most commonly, customers start on a third-party site, according to the Car Buyer Journey 2018 report. One example is TrueCar, which requires information to get access to the TrueCar Price Report. What is the least busy time of the day/week to go to a dealership if you want one-on-one attention? On this question, we got a few different well-reasoned answers from our experts. “Skip out on the weekends and go on a Monday,” suggests Williams from Superior Honda. “After the weekend rush, dealers will have more time to spend with you and you may be able to get a better sale price on a day that isn’t that populated.”Mason has a similar opinion, “A dealership is typically busiest on the weekends and evenings. I would recommend setting up an appointment for any time that works best for you or walking in mid-morning for the best one-on-one attention.”“Wednesday afternoons are typically the best time to visit your local car dealership,” instructs Danny Baker from Marshall Goldman Motor Sales. “Wednesday afternoons between 2:00 p.m.- 5:00 p.m. are best for receiving the one-on-one attention that some car buyers are looking for. If you’re a first-time car buyer or have a lot of questions about a particular vehicle, make sure you don’t show up right before closing time and always give yourself enough time to make the right decisions about your purchase.” Maloney suggests going on “Any weekday or evening.” He says, “Most people buy cars on weekends as their time is usually limited during the week.”TLDR: Not on the weekends How do you help people narrow down options when they aren't sure what to look for? Most people know what they want. “The beautiful thing about today's market is that most shoppers are very educated before they land at the dealership due to the amount of time they've browsed online,” says Mason. “If you're still not sure exactly what you want when you arrive to the dealership, no worries. I can ask you qualifying questions like size, budget, etc. and help you find the perfect fit for your life.” What's the best thing about working for an auto dealership? “I've been obsessed with cars since I was a child. My father runs a local auto repair shop and has some classic cars. I participate in organizing car shows in my city and have a weekend car to have some fun in. The best thing about working at a dealership is sharing my knowledge and passion for cars with others. A car can change someone's life. It's an awesome feeling to help so much!” Mason shares. What is the one thing that you wish the general public knew about what goes on behind the scenes at a dealership? “One of my pet peeves of the industry that should be brought to light are some of the less than truthful online marketing [strategies used] to get you in the door, says Mason. “You'll see payments promised way under reality or noting several thousand dollars down at signing, payment calculators online for terms that aren't possible, no payments for XXX months, etc.” He cautions, “Stop being sucked into this generic bait. Find the car you like and see if you can agree on a price with the dealer. Most dealerships will be pricing their used car from what they could get out of it taking to an auction. This means we generally own comparable cars for the same cost as long as the condition is similar.”“Most people dread the car buying experience,” says Baker, “but what they don’t know is that dealerships love to have fun! Car salesmen usually have a bad reputation, but we have great personalities and love making our buyers happy. We like to have a good time and we genuinely care about our customers. We keep their interest at heart, because it's not about just one sale for us, it's about building a relationship with the customer.” There are pros and cons of working with a dealership vs. a private seller, says Coleman. “A dealer or salesperson can do only so much for a customer. While car dealerships tend to have better financing and warranty options than a private seller, a private seller does not have commission or typical business operating expenses to account for, so he may be able to get more aggressive with pricing. You also typically can get more context or information about the condition of a car (one owner, mostly city miles, etc.) from a private seller, as well as a quicker transaction time vs. spending hours at a dealership.” Do you really have to check with your manager? “My short answer is sometimes,” explains Mason. “This industry is flooded with newbie salesmen that jump from store to store. I joke and call them door greeters vs. salesman. I personally can handle everything from the first hello to a handshake after the sales, but most salesmen do not have access to any of the actual margins and are simply presenting an offer someone else has written for them.”Maloney agrees, “Yes, unfortunately, most dealerships just use salespeople as pawns to get the information they’ll need from you on how to proceed next so they can extract as much money out of your pocket as they can.” Another salesman recently explained what happens when he goes back to talk with his manager in a Reddit AMA: “I literally go to the back to try to get my manager to do whatever it is you asked me to do. I have ABSOLUTELY no control over any of the numbers so I basically go to my manager and beg him to sell you the car for cheaper so I can get a sale. Even if I’m not making any money off the sale it helps get our monthly bonuses. Sometimes it's just not possible to get what someone is asking because we have too much invested into the vehicle. I actually have to basically fight with my manager to drop the price more.” What happens at the finance office, and what experience can people expect? Will everyone judge me for my credit score? “A finance office's job is to find a bank to work with low credit score individuals or get the best terms/rate possible for those who score higher,” explains Mason. “Dealerships work with a variety of banks and probably can get you a payment you’re comfortable with,” says Coleman; however, “it may not be for the exact vehicle you want though.” As for any credit-score-related embarrassment, Mason assures, “The finance office will see scores between 400 and 800 every day. Don't be ashamed if you score low or have no credit. They only review the facts of the deal and work as the middle man for the bank to save everyone time."While car dealerships offer to be a go-between to help save time, it may not be the best loan terms for everyone. Coleman warns, “Zero-percent financing or low interest rates are reserved for those with excellent credit, so be mindful. Dealerships also can be compensated for handling the loan, which means you may be paying a higher interest rate. Some of the best rates, in fact, can be found at credit unions if you're shopping price, and not simply payments.” Do dealerships help with government paperwork like registration? Yes, mostly. Mason explains, “Dealerships will generally handle all of the title and plate/registration work needed when you purchase your car. This exception will be made if you are purchasing across state lines. This situation will vary state to state, but you are often times responsible for tax and title upon returning to your home state!” What is with the free popcorn? “Free popcorn is an old subliminal sales tactic,” Mason explains. “One presumes subconsciously that they are to return a favor if they've been given something. This favor would be buying a car. For what it's worth, our dealership doesn't have popcorn, haha!”Special thanks to star contributor Ryan Mason from Jacksonville Auto Mart in Jacksonville, Illinois, for answering every question we threw at him, even if they were silly (see popcorn above).
Whether you are buying a new or used vehicle, you have two options: pay the full purchase price upfront, or make payments over time.While personal finance gurus may suggest trying to pay for your car in cash, that may not be feasible for every American in need of new wheels. In fact, as of 2017, 44 percent of adults in the United States had an auto loan — that’s more than 108 million car loans in the country, a number that has been trending up since 2012 (see chart below). "Auto financing can be a headache," says Will Craig, managing director and CEO of LeaseFetcher, "particularly if you have a challenge with debt." If you are unfamiliar with the process, or you are a first-time car buyer, understanding your financing options can make or break your financial situation for years to come. “If you go to a dealership,” says Michael Rudge at Rudge Automotive and Paytons Auto Body, “NEVER get sucked into the payment conversation: "What would you like your payment to be?" It's financial suicide.” How do we avoid car shopping mistakes like this? LeaseFetcher's Craig instructs, "When it comes to auto financing, knowledge is definitely power. The more information you have about auto finance, the better chance you'll have of being able to find the right loan for your circumstances." If you’re in the market for a car, start with these three essential steps: 1. Know your credit score “Start with your credit score,” suggests Sonia Steinway from Outside Financial. “Auto loan interest rates depend on the borrower’s credit history and score. The higher your credit score, the lower interest rates you should expect because lenders view lending you money as lower-risk. Your credit score doesn’t just change the interest rate; it can also mean the difference between being approved and declined. Many lenders won’t lend money to anyone with a credit score below a certain number. By law, you can access each of your credit reports for free once a year at annualcreditreport.com. Before you car shop, make sure yours is accurate and up-to-date. Most auto lenders prioritize a borrower’s history with car loans specifically, so a first-time car shopper may want to ask a close friend or family member to be a co-borrower to secure a better interest rate.”Your credit report will affect the annual percentage rate of the loan. Check out these images from Wallet Hub illustrating the difference between loan percentage rates for consumers with excellent and fair credit scores. Source: WalletHub Even having a fair score increases the percentage rate, not to mention what a loan looks like for someone with poor credit Please remember that with any lender, rates and terms for your loan, including your monthly payment, will depend on whether you have good credit or bad. The lower your credit score, the higher the interest rate. (see image below) As knowledge is power, knowing your score is essential. LeaseFetcher's Craig says, "Companies use [your credit score] to assess how much of a financial risk you might be when it comes to repaying debt so it makes sense to get this in good health before you start applying for finance. Gather information about your credit score and take steps to improve it before you even start looking for finance for the car. Your bank balance will thank you in the long-run." 2. Create a budget Once you know your up-to-date credit score, your next step may require a little homework. “Know what you can spend in a month,” suggests Jake McKenzie from Auto Accessories Garage. “If you plan on buying your first car and financing it, you may have never made a comprehensive budget. But if you want to know what kind of car you can afford, having a budget beforehand is essential.” Knowing how to account for your monthly car payment in that budget is essential. “It’s important to know what you can afford and stick to that budget,” advises Ivan McBride, vice president of automotive lending products and sales at PenFed Credit Union. “You don’t want to take on a payment or loan term that does not fit your budget.” So, how much of your budget should you set aside for a down payment? What about a monthly payment? Valerie Coleman, an auto expert previously with AutoTrader and now with 5miles.com, explains, "The generally accepted rule is to spend no more than 15 percent of your pre-tax income on your monthly car note. And always assume a downpayment. Be prepared to put $1,500 down, for example, on a vehicle that costs between $23,000 and $34,000 (e.g. good buys like Chevrolet Malibu, Mazda 3, Nissan Rogue, Subaru BRZ, Toyota Prius)." 3. Explore your lending options Auto financing is available from several different sources, including community, regional, and national banks and credit unions, car manufacturers themselves (for new models), and in-house financing set up through the car dealer in the finance office. Car buyers should know that dealership financing means that your loan package can be marked up by about $1,700 on average, according to Outside Financial. A typical dealer finance package markup includes $250-$2,000 added to your loan, as well as fees for things like a service contract or extended warranty and GAP insurance.What will interest and repayment terms be like for a car loan? Of course, these will depend on the financial institution you decide to go with, whether you have good or bad credit, how much of a down payment you can afford, the cost of the vehicle, and many other factors. McBride says, “According to ValuePenguin the average interest rate for a 36-month term auto loan is around 3.71 percent APR. Most manufacturer financing is pretty competitive since they’re up against banks, but consumers should also look to credit unions. PenFed offers an auto loan as low as 1.49 percent APR on new cars through TrueCar.” Check out this graphic from WalletHub, showing the differences between several car finance options and terms, when it comes to buying a car with different lender types. Source: WalletHub "Finally, shop price and not payment," advises auto sales expert Valerie Coleman, from 5miles.com. "Payments can be deceiving when stretched out for up to 84 months. Utilize all of the online resources available. There are sites out there that compare prices for vehicles, looks at total cost of ownership, reviews, recalls, vehicle history and alternate vehicles to consider. Approach a car as a commodity and avoid having an emotional attachment (even if it’s your dream car). This will give you the best ability to negotiate and be an educated consumer."
Driving has become a rite of passage in American culture. Many teens anxiously await the day when their parents or guardians hand over the car keys. Some parents also look forward to the day when their teen no longer needs daily rides to school or activities. Giving your teen a personal vehicle can make life easier for you and your child but it also brings its own set of worries and frustrations. Compared to other drivers, new drivers have a much higher risk of being involved in a serious motor vehicle crash. Learning to drive takes experience, patience, and proper judgment. Enrolling your child in driver’s education and letting them practice while you are in the car can reinforce safe driving habits. Taking the time to select the right vehicle also has a major impact on your teen driver’s safety. Whether you choose to gift a car for a special occasion or let your teen borrow a family car, consider the specific needs of your child before handing over the car keys. We’ve compiled some of the top considerations from leading automotive, financial, and teen driving experts to help you determine the right motor vehicle for your child. Topics New vs. used vs. hand-me-down Key factors in selecting the best car Safest cars for teens (Toyota, Honda, Nissan, Chevrolet, Subaru, and Hyundai) Financial and lifestyle considerations Additional resources for teen driving Making the final decision New vs. used vs. hand-me-down A big question for parents is whether to buy a used or new car for their child. Handing over the keys to a shiny, new car to your first-time driver might seem like a huge mistake. Young drivers have a higher likelihood of accidents and don’t always make the best judgment calls. However, a new car can give parents increased peace of mind knowing that their child is driving a vehicle with the best safety features. Buying a new car Buying a new car for your teen or young adult means you get to choose the size, model, trim level, and safety features. New cars come with a factory warranty, so you and your child don’t have to worry about costly maintenance within the first few years. New car models also come with the latest connectivity technology reducing the need for added distraction while calling or getting directions in the car. Some parents may be reluctant to give their teen a new car because of the liability. There is more to lose if your teen crashes a new car versus an old used car. Parents should also consider that new cars are often more expensive than used cars and depreciate quickly when you first drive them off the lot. Buying a used car Some parents choose to purchase a used car for their children. Used cars have a couple of advantages compared to new cars including lower depreciation rates, lower initial costs, potentially lower insurance premiums, and less liability when new drivers make mistakes. If you buy the right type of used car, you don’t have to worry about constant repairs or the longevity of the vehicle. For example, some Toyota models last over 300,000 miles. Other factors to consider include safety, customization, and technology. Depending on how old the vehicle is, the car may not have advanced safety features or updated hands-free calling. These features can help new drivers avoid accidents and distractions on the road. Gifting a hand-me-down Some families have a tradition of purchasing a new car for the parents and then gifting the old car to the newest family driver. This is a great method for parents who want to save money by avoiding another car purchase every time their child turns 16 or graduates. Some kids even think it’s cool to be driving around a nostalgic vehicle that once belonged to their parents. However, similar to buying a used car, a hand-me-down may not last as long, be as safe, or be as cheap to maintain as a new car. Is the car really a gift if your son or daughter ends up with a lot of additional maintenance fees and high fueling costs? These are all factors to consider when deciding between a new, used, or hand-me-down vehicle. Key factors in selecting the best car Car salesmen and other auto experts often have suggestions for parents looking to buy their teens a car. Instead of waiting to talk to a car salesman, we’ve compiled some of the top advice to help you narrow down the perfect car for your teen. Determining a budget Before you start your journey for the perfect vehicle, determine a budget. Your budget may be dependent on your son or daughter’s willingness to contribute. Some parents agree to contribute half of what the teen can pay. Other parents are willing to pay for the car in full. Whatever you choose for your family, aim for a budget that can pay for an economical and dependable car. Buying your child a fancy vehicle has some unforeseen consequences. Expensive cars increase the price of insurance. New drivers are also much more likely to get into accidents even if they are small fender-benders. This is a major reason why parents choose affordable new cars or reliable used cars. In a recent survey conducted by BestCompany.com, around 24 percent of respondents who had either gifted or received a car advised parents to purchase a used car rather than a new car. Respondents also mentioned that parents should find a good balance between a car that is reliable but not “too nice.” Researching vehicle safety ratings and features Safety is a top priority for new teenager drivers. According to Carsurance, “Most of the fatal teen car accidents occur six months after obtaining the license.” Advanced safety features can help prevent fatal accidents by alerting the driver of possible dangers and reducing overall distractions. Pam Fisher, the Senior Director of External Engagement at the Governor Highway Safety Association, provides insight into the top safety features parents should consider when selecting a car for their teen(s). Pam Fischer Teen Driving Safety expert Expert Tip: My number one recommendation is that parents buy the car with the most safety features they can afford because teens have the highest crash risk of any age group on the road. They should also check a vehicle’s crash ratings awarded by the National Highway Traffic Safety Administration and the Insurance Institute for Highway Safety/Consumer Reports’ best vehicles for teens. Fisher mentioned several different safety features parents should check: Airbags — Airbags lessen the impact on passengers during a crash. Look for cars that come with plenty of airbags to improve overall safety. Electronic Stability Control — This feature stabilizes the steering on turns and prevents skidding. Cars manufactured in 2012 and after come standard with electronic stability control. Backup Camera — Backup cameras help new drivers avoid hitting objects, people, or other cars behind them. Fisher recommends finding a backup camera with alerts to signal when an object is in the backup path. In-Vehicle Parental Control — Some automakers offer parental controls through a connected smartphone app. Popular parental monitoring technology includes Ford’s MyKey, Chevrolet’s Teen Driver, and Volvo’s Care Key. Parents can set speed caps, radio volume limits, and access teen driving reports. Evaluating options for vehicle size Vehicle capacity and height are two factors to consider when purchasing a car. A vehicle with less seating restricts how many passengers can accompany your new driver. According to the Teen Driver Source, “crash risk doubles when teens drive one peer passenger and triples with two or more teen passengers.” Limiting the number of passengers with vehicle size along with enforcing restrictions can help reduce the crash risk. Vehicle height can influence a driver’s ability to access current road conditions. Sedans are a popular choice for new drivers because of the cost and capacity. However, you may want to consider an SUV crossover if your driver feels too short in a sedan. Taller and heavy vehicles also offer additional protection in the event of an accident. Try to avoid vehicles that may be too large as they can be more difficult to maneuver. Tricia Morrow, a Chevrolet Safety engineer, has more than 20 years of experience at GM and has worked across a wide variety of roles. As a mother of a teen driver herself, she offers advice to parents searching for a car that will suit their child’s needs. Tricia Morrow Automotive Safety Expert Expert Tip: Parents should look to ensure their teens are physically comfortable in the vehicle they will be driving. I taught my daughter Ellie to drive last year, and one of my key consideration points was based on her height. Since she's a bit shorter, I wanted to make sure the vehicle featured a seating position that allowed Ellie to see the road and provided easy access to all of the vehicle's controls. Safest cars for teens Safety is a high priority for new or inexperienced drivers. Organizations such as the NHTSA and the Insurance Institute for Highway Safety (IIHS) stay up-to-date with current safety ratings for new and used cars. The National Highway Traffic Safety Administration (NHTSA) began testing vehicles in 1978. New, high-volume models receive a 1–5 star rating in front-impact, side, and rollover crash tests. IIHS conducts its own crash tests on over 100 new or updated car models every year. Based on the IIHS rating system, cars can earn a Good, Acceptable, Marginal, or Poor rating on each of the six crash tests. The cars that receive a “Good” rating on all six crash tests and “Good” or “Acceptable” rating for headlights become a Top Safety Pick+ for the year. Below are some of the safest new and used vehicles for teens according to IIHS, NHTSA, and Consumer Reports. In addition to top safety ratings, these car models come with electronic stability control and have a weight greater than 2,750 lbs. Some models have recommended trim levels for optimal safety. All of these car brands also fall into the top 10 best car brands on BestCompany.com with reviews highlighting customer experience of purchasing a car for teens. Toyota Toyota is known for its reliability and longevity. Some Toyota car models are still on the road with 300,000 miles or more. Toyota offers top safety features for new teen drivers in its Toyota Safety Sense package. With hybrid options, parents can find fuel-efficient options that will keep costs low for teens with a long commute. Toyota has its own page dedicated to the best Toyota models for teens. Recommend models for teens New: Toyota Corolla (XLE/XSE sedan + Advanced Lighting; XSE hatchback + Preferred package) New or Used: Toyota RAV4 (2015 or newer) New or Used: Toyota Prius Prime (2017 or newer) Used: Toyota Prius v (2015-2017) Customer Review: Mindy Baumann "Great cars that run forever and ever! My teenage daughter drives an FJ cruiser and we feel good about her being in a safe, reliable vehicle." Honda Honda excels in areas of dependability, safety, and affordability. Parents can find new and used Honda vehicles that are comfortable and safe for new drivers. HondaSensing technology offers advanced features such as collision avoidance, road departure system, lane-keeping assist, and adaptive cruise control. Recommend models for teens New or Used: Honda Accord (2013 or newer) New or Used: Honda Insight (2019 or newer) New or Used: Honda CR-V (2015-16, 2019 or newer) Used: Honda HR-V (2017-18) Customer Review: Jaylene "When buying a car for my 16 year old daughter, Honda was a natural choice. Although it scared me that she would be out on the roads driving alone, I knew that putting her in a Honda car would keep her safe. And it proved to be true. Only two years after buying her car, she got in a life threatening car crash, and walked away without a scratch on her. Thanks, Honda." Nissan Nissan is known for its diverse lineup created to fit your budget and needs. New Nissan vehicles start at around $15,000. Nissan offers the following safety features: forward collision warning, blind-spot warning, lane intervention, back-up intervention, around view monitoring, and distance control. Recommend models for teens New: Nissan Altima (SR, SV, SL, and Platinum trims) New or Used: Nissan Rogue (2017 or newer) New or Used: Nissan Murano (2015 or newer) Customer Review: Cristi Stafford "When it was time to buy my daughter's first car last year my husband and I knew exactly what it would be. A Nissan Altima. We knew it would be a good dependable and safe car for our 16, and she has loved it." Chevrolet Chevrolet manufacturers affordable vehicles with a proven reputation. The company takes extra steps to ensure teen driver safety. In 2019, Chevy released the first buckle-to-drive feature that requires drivers to fasten their seatbelt before the car can be put into drive or reverse. As mentioned by Pam Fisher, Chevrolet has teen driver technology that includes speed caps, buckle-up reminders, stereo volume limits, and speeding notifications. Recommend model for teens New or Used: Chevrolet Equinox (2016 or newer) Customer Review: Cathy Sewall "I really could go on forever on how much I love your vehicles! We have 4 in our yard right now, and when my son is old enough to drive... he will get a Chevy too!" Subaru Subaru creates a safe and smooth vehicle with the ability to master any terrain. Subaru cars have one of the highest resale values among car brands. The majority of new Subarus are still on the road ten years after purchase. Although Subaru prices are a little higher than competitors, parents can have peace of mind that their child is driving a safe and dependable vehicle. Recommend models for teens New or Used: Subaru Impreza (2014 or newer) New or Used: Subaru Crosstrek (2018 or newer) New or Used: Subaru Forester (2016 or newer) New or Used: Subaru Outback (built after October 2019) New or Used: Subaru Legacy (2013 or newer) Customer Review: Ryan Larsen "I recently purchased a Subaru Outback for my daughter. It is a great value and great car. I like their safety features and the car is extremely reliable. I would highly recommend a Subaru." Hyundai Hyundai vehicles feature the right balance between safety and style. Hyundai has several models that rise to the top of safety rating sites. The automaker also has the best factory warranty in the country: 5 years or 60,000-mile basic policy and 10 years or 100,000-mile powertrain warranty. Recommend models for teens New or Used: Hyundai Santa Fe (2017 or newer) New or Used: Hyundai Kona (2018 or newer) New or Used: Hyundai Elantra GT (2018 or newer) Customer Review: John Burnside "Quality is acceptable and the quality for value is very good. I've purchased three other used Hyundai's over the years for my daughters and all have been good vehicles. It's my opinion that Hyundai offers the best value in compact cars. They are hard to beat." Financial and lifestyle considerations Many teens look forward to the day when they receive the keys to freedom (or in other words access to a car). Some parents give their children a car for their 16th birthday. Other parents make deals to gift a car at a high school or college graduation. Whatever the tradition is in your family, you should take financial and living factors into consideration. Financial factors If you are gifting a car to your child, you are likely not too concerned about the financial costs that are associated with owning a car. However, determining who will pay for gas, maintenance, and insurance before gifting the car can help you avoid any incorrect expectations. Here are a few questions to consider pertaining to vehicle expenses. Can your child pay for upcoming vehicle maintenance? Can your child afford to pay for the gas? Can your child afford the insurance premiums? Some parents require their children to pay a portion of the overall vehicle cost. This method teaches children how to save money and sacrifice time for a long-term goal. You may consider this agreement if you are worried about your child’s level of financial independence and responsibility. Patti Black from the Bridgeworth Wealth Management Group suggests involving your teen in the car buying process to help them learn about personal finance. Patti Black Financial expert Expert Tip: Talk about a budget for buying the car, and also a budget for insurance, gasoline, maintenance, and repairs. My son found an old used luxury car that he could afford to buy, but, after talking with other people who owned this brand of car and to our insurance agent, learned he could not afford to insure and to maintain it. Lifestyle considerations Children often plan on going off to college or leaving the house after they graduate from high school. The young adult years bring about spontaneous adventures and unexpected life changes. When purchasing a car for your child, you should consider their 5–10 year plan. This will help you determine if you should hand over ownership early on or wait until they are settled in an area before turning over the title. Here are a few questions to consider concerning living conditions. Will your child need a car if they are going to a college out of state? Will your child be moving to a highly congested city area such as New York or Boston? Will your child be moving to a place that has different weather conditions warranting specific vehicle features or tires? Additional resources for teen driving Outside of choosing the right car, you can find apps and programs to help improve the safety of your new driver. These resources may help you monitor your teen’s driving habits, create safety guidelines for the first year of driving, and prepare your teen for unexpected situations behind the wheel. Location and driving app Some parents use a location app to keep tabs on their new driver. These location apps often have additional features such as roadside assistance and distracted driving reminders. Life360 — Life360 is a free location sharing app that notifies you when people in your circle have arrived or left designated locations. The Life360 app also has crash detection that can alert help when a crash is detected. Paid features include 24/7 roadside assistance, 24/7 emergency dispatch, individual driver reports, and SOS help alerts. Mamabear — Mamabear is an all-in-one parenting app that includes features for monitoring drive activity and location. Receive alerts when your child goes over the speed limit. You can also use Mamabear to chat and send messages. Truemotion Family Safe — This app offers another option for monitoring your teen’s driving behavior. Truemotion Family Safe is a free app that allows you to locate your driver, see their latest drive route, receive notifications if they are texting/calling while driving, and get an overall driving score for everyone on the app. Everyone in your family can join the app and compete for the best drive score. Graduated Driver’s Licensing Program (GDL) Each state has different rules for newly licensed drivers. These are called the Graduated Driver's Licensing Program. For example, in the state of California, new teen drivers are required to complete 50 hours of supervised driving with 10 of those hours being nighttime driving. They must also log at least 6 hours of driving course instruction. After a California teen is licensed to drive, they must wait at least 12 months before allowing a passenger under the age of 20 into the motor vehicle without the supervision of a licensed driver over 25 years old. The teenage driver must also be accompanied by a licensed driver over the age of 25 if they are driving between 11 p.m. and 5 a.m. Each state will have different requirements and guidelines for new drivers. The GDL program was created to safeguard new drivers from distractions and impaired judgment. Before putting your teen behind the wheel, learn about your state’s GDL program. Defensive driving courses Let the professionals teach your new driver about common situations on the road. A defensive driving course can teach teens about what to look for past just checking mirrors and turning on a blinker. These courses can help teens get used to their car and learn safe driving practices. Tire Rack Street Survival is a defensive driving course that offers classes across the U.S. Bill Wade, the National Program Director for Tire Rack Street Survival explains the advantages of signing your child up for a defensive driving class. “We recommend every first-time driver take a driving safety course in their vehicle. It's not enough to just know the logistical rules of the road. Driving relies on your expertise to react appropriately to other drivers' actions — and that's where driving safety courses can give your first-time driver the opportunity to learn in a safe, controlled environment the proper reactions to things like sudden stops, wet traction control, avoiding sudden obstacles at a fast speed and ultimately avoiding accidents. Driving safety courses that allow you to learn those reactions in the actual car you will be driving are best. Every vehicle has different limitations and they need to know how to control their daily driver.” Making the final decision After conducting research and narrowing down your options, you now need to make a final decision. You may choose to consult with a spouse or relative to help you think through the possible options. If you aren’t planning on surprising your teen, you may include him or her in the discussion. Car Insurance for Your Teen Once you’ve chosen a car for your teen, you will need to figure out the insurance logistics. Check out the next article in the series for car insurance recommendations and tips on how to lower your rates. Learn More Survey Methodology: Survey data was collected in March and April 2021 with 137 respondents through SurveyCircle, Survey Monkey, and emailing Best Company reviewers.
Guest Post by Ethan Lichtenberg Everybody wishes they could waltz into the car dealership and slam a suitcase full of cash on the table and say “I'll take it.” That situation is a fantasy to most, but for some, it is entirely possible. Most people in today’s world finance cars either through a bank or through the dealership. This usually benefits everyone involved. You get to drive a nice, trustworthy car around and pay less money upfront (which can save you money on car insurance for your new vehicle), while the dealership gets to add a little interest to the price of the vehicle. There are positives and negatives to both financing your vehicle and buying it outright. Some outweigh the others, but overall it can be a tough decision if you do have the ability to buy a car in cash. Here are some pros and cons to help you weigh the options and find a sensible solution. Financing your car The most practical option for those who are unable to afford a cash transaction for a vehicle is financing your vehicle. Financing your car is a good thing to do… in most cases. A better car Let’s face it, we all want the best car we can possibly buy. It is human nature to want the best. If you have the ability to buy a car with cash, that’s the way to go. A solid warranty is a bonus as well. When you finance a new car at a dealership, more often than not it comes with a warranty that can save you a lot of money. For example, let’s say you take out $10,000 to buy a used car outright so you don’t have to worry about payment. It’s a good choice. It may even save you money in the long run; however, if you bring that $10,000 as a down payment on a new car, you’ll be able to afford a wider variety of cars on the market. That high of a down payment paired with a modest credit score will net you a low-interest rate and a low monthly payment. Monthly payments The downside to financing a car? The monthly payments may seem to reach never-ending astronomical numbers. Most people finance cars for 48 months or 60 months. That means you can guarantee a large monthly payment just to drive around for the next five to six years. Down payments can be a tricky game, but if you have a large down payment prepared, the monthly payment will be a lot less and auto-pay is also an up and coming way to pay bills. Regardless, a monthly payment is never fun and buying a car outright can eliminate that annoyance. Helping your credit score In the 21st century, we are all defined by a simple number — our credit score. Sad to say, but to buy anything of value, this number must be good. Having an acceptable credit score can get you a lot of things in life, so improving it at every chance you get is important. If you finance a car and make those monthly payments on time, your credit score will skyrocket. On the other hand, buying cash will simply eliminate you making your credit worse, but it won’t give you the opportunity to make it better. Trust me, you won’t be able to buy a house with cash (talking to you Millennials out there). Having a good credit score is everything. Buying outright Cash rules the world, and it always has. So how could there be any negatives to buying a car with cash and walking out with no worries? Monthly payments You can forget about having to worry about monthly payments. Also, you don’t have to worry about paying interest. If you walk into the dealership and finance a used car worth $8,000 and end up with a 3 percent to 5 percent interest rate, you can guarantee yourself paying a few extra thousand on that car. Buying that same $8,000 dollar car outright can save you time, money, and headaches. Be careful though — you could’ve used that money for a down payment on a sweet ride. Cash is still king Yes, cash still rules the world. Many car dealerships will even give you a large discount on all their cars if you pay with cash. Paying with cash eliminates the risks dealerships face, like losing money if you don’t make payments. The bottom line The car-buying world is a tough one. It will chew you up and spit you out if you don’t have the right tools and mindset. Anxiety may run high and keep you wondering which way buying a vehicle is best for you. These tips and warnings will get you ready to buy that car, whether you want to finance or buy it outright. Keep in mind the pros and cons of each, and know what to expect before you walk into the dealership. Ethan Lichtenberg is a writer for autoinsurance.org. He enjoys Edgar Allan Poe and sneaking off to the beach for an hour.
For people with unscorable or subprime credit, it can be hard to get a car loan. One of the most common ways that Americans solve this problem is by getting a friend or family member to act as a co-signer on a car loan. Before you agree to help, know that there are risks! According to the Federal Trade Commission, a co-signer agrees to guarantee the debt if the borrower doesn’t pay. This may also include late fees or collections’ fees. Depending on the laws in your state, the lender can collect from you without first trying to collect from the borrower if payments are missed. Collections can mean that you could be sued for the debt or have your wages garnished. If the debt is overdue, it can be reported as part of your credit report. Despite all of this, 71 percent of consumers establishing first-time credit with an auto loan depend on a co-borrower to get approved. On top of that, for many Americans, money is the number one cause of stress. In an American Psychological Association study, 31 percent of adults with partners reported money as a huge source of relationship stress. With that in mind, we have compiled these suggestions to help navigate the car loan co-signing waters with someone you care about, while still staying on speaking terms. 1. Lay ground rules “I think ground rules from both parties should be laid out before signing the loan. Each party needs to know what each other expects from one another. If you’re the one signing, you need to make it very clear about the huge risk you’re taking and the equally huge favor you’re doing for them.” — Laura Gonzalez, Marketing Manager at Audi Bellevue 2. Set expectations and discuss specifics “Co-signing a loan is like you taking out the loan yourself except that you won't be making payments as long as the original borrower keeps up their end of the bargain. If they default on the loan, your credit takes the hit and you will be expected to pay the loan. It is important that they know they are expected to make every payment in full and on time. You are only co-signing to help them get a lower rate or help get them approved. It's very important to know the terms of the loan you are co-signing. If the borrower cannot make payments, the loan company will go after you to fork up the money. Here's what you should know: total amount borrowed, interest rates, time frame to pay it off, monthly payments, defaulted fees, late fees, early repayment penalties (if any), cosigner insurance, cosigner release benefits, and if the loan can be transferred. Knowing the terms of the loan can help you when speaking about the loan to your friend or family member. It also lets the borrower know that you know what's going on.” — Marissa Sanders, Personal Finance Expert, Simple Money Mom 3. Establish trust and open communication “Each party should have faith in and trust each other for this to go smoothly. If the trust is not there, it could end poorly for your relationship should things go wrong. Communication is another key aspect of making this work. If it looks like they may not be able to make a full payment on time, they should feel comfortable telling you and you should encourage them to do so. Otherwise, you both will take a hit to your credit.” — Gonzalez 4. Make your own personal contract “If you still decide to help a friend or family member, you should consider how they handle their money. Although the loan is a contract already, you may want to write a contract between the two individuals about what happens if things aren't paid so there will be no misunderstandings. Trust will be tested in this kind of situation, so beware of what you get yourself into. Talk about how things would impact your relationship. Remember most people don't talk about their money with others, but if you are going into something together you have a right to know. This discussion can save you some heartache in the future.” — Damisha Ricks, Author, How to Move Out and Not be Broke!: Young Money Sense 5. Keep lines of communication friendly and open “Make sure to keep lines of communication open regarding the loan. An occasional, "Hey, how's the loan repayment going?" can keep that line of communication open. If there is any hardship, you want to make sure this person can come clean to you so that you aren't stuck in the dark. Make sure to get duplicates of all loan transactions and/or login information so that you are up to date on the loan. This way, the borrower knows you are well aware of the status and cannot lie about it.” — Sanders 6. Consider the doomsday scenario “If someone requires a co-signer for a car loan, it's likely based on their poor credit from failing to fulfill previous financial obligations. You have to consider the very real possibility you'll end up on the hook for this. Before agreeing to co-sign, ask yourself if you're willing to make the payments or accept the damage done to your credit score. Consider how damaging it would be to the personal relationship if it comes to that.” — Morgan Taylor, CMO and Financial Advisor, LetMeBank 7. It’s okay to say no “It can be hard to say no sometimes, especially when it comes to family members or close friends. However, it’s okay to say no. You should be thinking carefully and logically about this decision. Ask yourself these questions: Do they have a history of defaulting on loans? Do they have a poor credit history? Do I trust them enough with my credit history? Saying no can prevent the relationship from going sour. They might be upset initially, but it will work out in the long run.” — Gonzalez
You have a lot to think about when looking for a new car, whether it's new or just new to you. On top of that, there are many strategies and opinions about how to take advantage of a down payment when shopping for a car. While they might not be the same, most experts agree that a down payment can be a secret weapon in your auto financing odyssey. We asked experts for advice about how to make the most out of your down payment. Here’s what they said you should know: 1. Down payments apply to principal “A down payment is a payment that is applied to the cost of the car before the loan is applied. In other words, it gets applied to the principal.” — Chane Steiner, CEO of Crediful “Ideally, the larger the down payment the better. Large down payments equate to shorter payment periods and lower interest rates — thus, saving you money.” — Laura Gonzalez, Marketing Manager at Audi Bellevue. 2. The 20/4/10 car financing rule “A useful rule of thumb when purchasing a car is 20/4/10 rule. This rule states that you should make a down payment of at least 20 percent, have a loan of no more than four years, and total transportation expenses should not exceed 10 percent of your income.” — R.J. Weiss, Certified Financial Planner and founder of the personal finance site The Ways to Wealth 3. Budget with down payment calculator first, monthly payment second “A down payment can be anything from 0 percent to 99 percent of the loan. I've used down payments to get my monthly payment within a certain range. A down payment amount should be an amount of money the consumer is willing to part with permanently.” — Kreigh Williams, personal finance blogger, eat.money. "Most 'how much car can I afford' calculators focus on monthly payment, because that’s what most car shoppers focus on. (Because it’s the first question dealers ask!) But if you flip it, and start with how much down payment you can afford, you’re more likely to get the right car payments. So first, figure out how much cash you’re willing to part with right now to buy your car. Then multiply it by five. If you stick to that as your maximum car purchase price, you’re likely to get the car that’s right for your budget. Keep in mind that positive equity in a trade-in can count toward your down payment, so make sure you’re getting the most you can for your old vehicle." — Sonia Steinway, CEO, Outside Financial 4. Buy a car with 20%–30% percent down for new, 10% for a used, if you can afford it “A down payment for a new car should be at least 20 percent of the cost of the vehicle and 10 percent for a used car. You really want to try to get ahead of the depreciation that happens when you take the car off of the lot.” — Steiner “Most auto finance experts recommend putting down at least 20 percent of the purchase price on a new car, and at least 10 percent down on a used car. That can amount to a lot of cash. At Outside Financial, we recommend putting down as much as you can afford. — Steinway “A good rule of thumb is that a down payment should be 20 percent of the car's purchase price. A 20 percent down payment helps keep you from owing more on a car loan than the car itself is worth.” — Jamie Page Deaton, executive editor, U.S. News Best Cars “It is widely considered customary to put 20–30 percent down on a financed vehicle purchase, but many buyers wish to finance the entire purchase amount or pay as little down as possible. Most people would choose to pay cash for a vehicle, but this is often not a feasible option. However, for several reasons, it is in the buyer's best interest to put as much down as is reasonably possible. The higher down payment, the less one finances; resulting in fewer finance charges, greater equity in the vehicle, and may result in better financing terms.” — Rob Drury, Executive Director, Association of Christian Financial Advisors “Any money put towards a down payment is a piece of the vehicle cost that you won’t have to pay interest on, so it makes long term financial sense to put up as much as you can spare. But, since that is not always possible, 10 percent of the total cost is a good rule of thumb for a minimum on a car down payment.” — Jake McKenzie, Content Manager, Auto Accessories Garage 5. There’s always a risk when buying a car “Edmunds has reported that the average car down payment was 10.40 percent of the car’s total price. My recommendation is to put down between $1,000 to $2,500 for a car lease. I remember years ago at my old dealership — we had a customer put down a substantial down payment on an exotic sports car. The next day he got into an accident totaling the car and losing his down payment.” — Roland Reznik, former high-end car dealership owner, auto transporter, now with Credit Repair Kings 6. Understand your loan-to-value ratio and more “Because lenders know that cars lose value quickly, they worry that you’ll end up underwater (i.e., you’ll owe more on the loan than the car is worth) if you use your loan to pay for the entire car purchase. The more you’re able to put down, the lower interest rate you can usually get, and the more likely you are to be approved for a loan. That’s because lenders take into account a few key metrics, including the loan to value (LTV) ratio of the vehicle (how much they lend you compared with the value of the vehicle) and payment to income (PTI) ratio (how much your car payment will be compared to your monthly income).” — Steinway “Loans are underwritten actuarially, based purely on a quantitative assessment of the risk to the lender. The greater the risk to the bank, the higher the interest rate. Based on factors such as one's credit history and the vehicle's residual values (anticipated resale and salvage values), the lender will determine an LTV percentage authorized for the loan. This is a ratio of how much of the vehicle's current market value the lender will lend; for example, if a LTV of 120 percent is authorized, the total amount approved will be 20 percent above the market value of the vehicle, to allow for such things as drive-off fees, negative trade equity, and warranties. If the authorized LTV results in an amount less than the total purchase figure, the difference will be required as a minimum down payment.” — Drury 7. Down payment = more equity = more refinancing “If you can swing a big down payment and get into an affordable car with lower monthly payments, it can be a great way to rehab your credit and get the transportation you need. As long as you keep the payments affordable and make them on time, you're helping yourself improve your credit rating. And, a larger down payment means more equity in your car. That equity can make it easier to refinance to a lower rate once your credit improves — saving you even more.” — Deaton 8. Big down payments can reduce interest or loan length “The bigger the down payment, the lower the financed amount. With a smaller financed amount, you can either take a lower interest rate and pay smaller monthly payments, or keep the monthly payments relatively the same and pay your car off in a shorter period of time.” — McKenzie 9. You can avoid GAP insurance via your down payment “A down payment should be as big as you can afford. You will pay interest on everything in a loan. Interest is money wasted. On top of that, with little to no down payment, you will find yourself upside-down on your loan. Vehicles depreciate quickly and if you buy a new car for $30,000 with no down payment, you will have a $30,000 loan and by the time you get home, your new car will have depreciated to $27,000. If it gets totaled by hail damage or an accident that night, you’ll be responsible to pay back the full $30,000 to the lender, but your insurance will only reimburse you according to the car’s value ($27,000). So, you’ll need to purchase GAP insurance when you buy your car to help you pay for that difference in what you owe and what the car is worth. You can avoid that extra insurance cost, though, if you pay enough down that you won’t be upside-down on your loan.” — Melanie Musson, insurance expert and writer, carinsurancecomparison.com 10. $1,000 down will affect your monthly car loan payments “Take a look at your budget and finances to see what amount of down payment you feel comfortable with. Consider that every $1,000 you put down, your monthly payment will drop by about $15 to $18.” — Reznik 11. Down payment = bargaining power = chances for better financing options “A significant down payment reduces the amount you owe on the car. When you owe less, it gives you more room to negotiate the price or interest rates down or crucial items together. Conversely, the more you owe, the less you have in bargaining power. It's a signal of your goodwill to the dealer, resulting in possibly much better terms — even if your credit rating isn't good.” — Gordon Polovin, finance expert and advisory board member, Wealthy Living Today. 12. A trade-in offer can affect down payments: Buying now and buying later “Try trading in your existing car as part of the down payment, so you are not paying cash-out-of-pocket.” — Polovin “And remember, the less you borrow, the less interest you have to pay over the life of the loan and the lower your monthly payment will be. That doesn’t just affect this loan, either; if you end up having to trade in your car with an outstanding balance on the loan, you may have to borrow more money for your next car purchase to cover the difference, at a higher rate.” — Steinway
"GAP stands for Guaranteed Asset Protection," says Sonia Steinway, CEO of Outside Financial. "It covers the difference between the value of your car and what you owe on your loan if your car is totaled or stolen. That 'gap' can be worth thousands of dollars because many people borrow more than the car is worth, even at the dealership, and cars depreciate as soon as they're driven off the lot." GAP coverage can be in the form of a GAP waiver or GAP insurance. These differ in several ways, but for the most part, offer the same type of protection to car shoppers. Read more: GAP Insurance vs. GAP Waiver: What's the Difference? To help you understand whether you need to consider this type of coverage, let's start with exploring how GAP applies to different types of car purchases. Car shopping and GAP insurance "Deciding how much to pay for a vehicle and whether to go new or used, own or lease is an important financial consideration," says Zhaneta Gechev, founder of One Stop Life Insurance. "Most people don't think about how their insurance will change with a different vehicle. They are thinking about the down payment, the monthly payments, the warranty (or no warranty). But knowing exactly how it will affect your insurance should always be a part of the equation. It affects your finances — and sometimes by a lot more than you'd expect." This includes the added cost of GAP. As Gechev mentioned, you have several options when you are in the market for a new set of wheels: buying a new car or a used car, or leasing a car, rather than buying it outright. How does GAP coverage apply in each of these situations? Buying new "New cars tend to depreciate the most quickly, so the likelihood of you needing GAP coverage is higher if you purchase new," says Melanie Musson, an insurance expert, researcher, and writer for carinsurancecomparison.com. Why? Gechev explains, "When you purchase a new vehicle, in particular, you can have a pretty wide gap between what your car is worth and what the insurance would cover if the car got totaled." Buying used When you buy a used car, you are probably less likely to need GAP coverage. Ryan Guina, founder and owner of The Military Wallet and CashMoneyLife explains, "large gaps between the amount owed and vehicle value is one strong reason to consider quality pre-owned vehicles [instead of new]. After over two years, a significant portion of that initial value loss has already occurred, so you nearly eliminate [the possibility of] owing more than the vehicle is worth." So buying a car more than two years old means that GAP coverage isn't a necessary cost, in most circumstances, unless you are underground on your loan due to other circumstances. Creditful CEO Chane Steiner warns, "Be sure to get gap insurance regardless of the age of the car! Any car could be totaled as soon as you get it off of the lot and then all of the money you spent would have been for nothing. You could even end up still owing money on a car you no longer have." Leasing Leasing a vehicle is a bit different. As risk advisor Charles R. Villafana explains, "When it comes to leases, the companies are a bit more rigid with their guidelines, requiring higher limits of liability and GAP insurance. Which in the end is a great thing, just because it takes care of the consumer as well as the companies' interest." "Sometimes the choice is made for you and you are required to purchase GAP insurance according to the terms of your lease," explains Joel Ohman, a Certified Financial Planner™ and the founder of Car Insurance Comparison. While your lease's terms are likely requiring you to get coverage, it can either be included in your financing deal, or not included. "As a general rule," explains Mike Scott, a Senior Mortgage Loan Originator at Independent Bank, "GAP is already included in the vast majority of leases done, so purchasing GAP waiver, or GAP insurance is not necessary in those transactions unless you are leasing through an off-brand company." Steinway advises that consumers be sure to check their lease if they aren't certain. With these three purchase options out of the way, let's examine just when GAP coverage would come into play. How does GAP insurance work? "In a nutshell, Guaranteed Asset Protection — better known as GAP insurance — covers the 'gap' between what you owe on your vehicle and what it's worth at the time of the loss," explains David W. Griffin Jr., Vice President at The Dowd Agencies. "If your car is totaled or stolen, your auto insurance policy only covers what your car is worth at the time of the claim, which may be far less than what you owe. GAP insurance can make up the difference so you can pay off the full balance of the loan." As Griffin mentioned, this would be a benefit to you in basically two circumstances: You get in a car crash and your car is totaled Your car gets stolen What are you risking without GAP insurance? Basically, all insurance is about risk avoidance. With GAP insurance or waiver protection, what is the risk that you are actually trying to avoid? Gechev has some insight to understand the heavy financial toll that neglecting this type of coverage can have: "Prior to launching [onestoplifeinsurance.com], I was an assistant manager at a major insurance company. I saw first hand the devastation that could come when people did not have GAP coverage." "Unfortunately," Gechev explains, "I've worked with many clients who did not have GAP insurance and for one reason or another, the car was a total loss. It might be an accident, it may be stolen. For an insurance company, it does not matter how much you owe on the car, just how much it costs to replace. There were many clients that were 'stuck' paying for a car that they no longer had. It is pretty upsetting when you have to do that." "In effect, GAP insurance saves you from having to continue making payments on a vehicle that you no longer own," explains Ohman. What type of problems can arise when you don't have GAP covered? No car to drive, but you still have to pay for it. — "GAP Insurance is an important protection," says Drew Scott from Scott Insurance. "Insurance carriers will pay the book value of a car if totaled or stolen. However, that amount may be less than the balance of the loan, leaving the insured with no car and money still owed." Two auto loans for one car — If you don't have GAP coverage and your car is totaled or stolen, insurance agent Brandon Tritten from JBLB Insurance Group explains, "you're going to buy a new vehicle and have a loan on your new auto — plus a vehicle you no longer own." That means paying two monthly payments to drive just one car, or wrapping your remaining balance into another loan. Either way, you pay a lot. What is the alternative to GAP? If you don't have GAP protection, you have to pay out of pocket for the difference. And who wants to do that? When weighing your options, it's pretty simple. Tony Matheson, CFP® is a Wealth Advisor and founder of Matheson Financial Partners LLC. He suggests looking at it this way: "With any insurance coverage, ask yourself 'Would I be able to cover the loss with my savings account?' If the answer is no, then you should consider purchasing insurance to protect yourself from a loss that could potentially devastate your finances. If you don't have the savings to cover a loss, GAP insurance is a good idea. We see this happen often when the value of the car is lower than the loan or lease obligation. This is often caused by a small down payment on a new car or when you have stretched the loan term out over five years." How does GAP insurance differ from car insurance? When you have a car, you are required to get car insurance. What's the difference between GAP protection and what you are already paying for your car insurance? "Standard auto insurance pays only what a car is worth at the time of a theft or accident," Car Leasing Concierge Paul Maloney explains. With car accidents, Guy S. DiMartino, DC, JD explains this general rule about car insurance: "Whether the claim is made through your own collision insurance or the other driver's property damage coverage, the insurer is only required to pay fair market value for the vehicle." And they don't just guess what the fair market value is. "Most insurance companies use the NADA program to calculate this actual cash value," says Kelly M. a paralegal at Hancock Injury Attorneys. "This amount is almost always less than what you owe on your lien." What does this mean for you? Because the car insurance payout is less than what you owe, Kristine Lee, a licensed insurance agent and content strategist at insurance comparison site, The Zebra, explains that the situation is likely "leaving you in a situation where you're not entirely 'made whole' by your insurer after an accident." How does GAP insurance help? "Gap insurance protects you financially if you happen to total your new car, as it fills in the gap between what your insurance company will reimburse you for and what you owe to your lender," advises Lee. Put another way, "GAP insurance comes to the rescue," says Maloney. "[It] supplements the payout you get from comprehensive or collision coverage if your car is totaled or stolen." Now that we understand that GAP insurance is mostly needed for newer cars, to cover your financial bases if you can't use your car anymore, let's examine the reasons why you might owe more money to your lender than your car is worth. Why would you owe more on your car loan than the car is worth? This can happen due to a couple of different circumstances: Taxes, fees, and ancillary costs — "Almost always you would owe more on a car than it is actually worth," says Gechev. "Just think of all of the expenses that are added on the back end: taxes, loan documents, warranties, trade-in balance, depreciation, etc." Trade-in wrapped into new loan — A consumer may "owe more on their vehicle than the trade-in value and the dealership wraps the deficiency [from the existing loan] into the new loan …" suggests DiMartino. Small down payment — "If you buy a new or newer car with little to no down payment," explains Musson, "there will be a period of time when your vehicle has depreciated and is worth less than what you have financed. So, you have to evaluate if you have the finances to pay that difference if your car is a total loss. If you can, then you can decide if you want to assume that risk. If you can't, then pretty clearly, you need GAP coverage." Long loan term — "Generally speaking, if you finance a vehicle over a term of 48 months or more, or you only put a small amount of money down then you should consider purchasing GAP insurance," advises Ohman. These last two, small down payments and long loan terms contribute to the biggest reason: Depreciation. What does depreciation have to do with GAP insurance? "GAP insurance is also important when a car is recently purchased, but no longer considered new," explains Drew Scott. "A vehicle's largest drop in value occurs the moment it is first sold and driven off the lot." This is critical. "It's critical to realize that new vehicles drop in value as much as 20 percent right after you drive off the lot," explains Gechev. "If you were to get into an accident or the vehicle is somehow damaged or stolen — you owe the difference between what the insurance will pay and what you owe on the loan. That can be a difference of thousands." Mike Scott from Independent Bank helps us understand how your car's value depreciates: "A vehicle depreciates the minute it is driven off the lot, and follows a normal depreciation curve, in which a large percentage of the depreciation happens within the first month to six months, and then it levels off as the vehicle depreciates slowly following that. Why? Well, let's look at new car sales. Right now (August of 2019), the 2019 double-cab Chevy trucks are being sold for 20 percent off of MSRP. That means that the vehicle you purchased three months ago is being sold for less than you may have paid and is also competing against the new vehicles. This is by no means exclusive to American vehicles. Nissan is currently offering $3,500 off of the Rogue in addition to any dealer discounts, BMW is offering discounts of $2,000–$3,500 on most of their models, and pretty much every manufacturer discounts the remaining vehicles at the end of the model year. What this means is that, unless you placed a very large down payment (30 percent or more) on your vehicle, you probably owe more on it than it is worth. When we combine that fact with longer-term financing, the curve at which a vehicle is paid off means that we often don't reach a break-even point (the point at which what is owed is equal to the value of the vehicle) until three years or more into a five-year loan. Even financing it at 0 percent interest, you still won't break even for at least 30 months without a large down payment. Can you afford to cover that difference between what your insurance company would pay and what you owe? If not, then getting GAP insurance may not just be a luxury, but a necessity." Where and how do you get GAP coverage? GAP coverage can be in the form of a GAP waiver or a GAP insurance policy. These can be acquired in a couple of different ways: through the car dealership's F&I department, through your loan provider, or with a car insurance company. At the dealership, through your loan "GAP policies are one of the ancillary products often sold by dealerships in the F&I office (usually at highly inflated prices)," explains Steinway. Insurance agent Brandon Tritten from JBLB Insurance Group warns, "A lot of dealerships will include GAP insurance in your loan. It is important to ask… Is the dealership or lender offering GAP insurance? What is the cost? Can you opt out of it?" While GAP costs can be rolled into your new financing agreement, Mike Scott warns, "Keep in mind, however, that the GAP coverage is one of those items which a dealer can mark up considerably. As such, you may have significant room to negotiate the cost." For example, he shares, "On a recent purchase of a $40,000 vehicle, GAP cost my wife and me about $600." Through your own outside lender If you are getting outside financing rather than going through the dealership, you can still try to roll GAP coverage into your financing agreement. "Many people don't know, but there are banks that offer GAP insurance built into their loans," says Gechev. "You don't have to pay extra for it. You get the best of both worlds — the coverage you need without paying extra for it. The catch here is that you could not be upside-down on the loan." From your car insurance company The third place that consumers can procure GAP coverage is with an insurance company. "A GAP insurance policy is typically sold separately from your traditional car insurance policy," explains Ohman, "though it can often be sold by your existing car insurance company to ride alongside your current policy." "Generally, most auto insurance companies offer a form of GAP insurance you can add to your policy," advises Tritten. Although, he warns consumers that "It is an endorsement you have to ask for. It doesn't come automatic. Nor is it free." While most insurance companies do offer some kind of GAP coverage, it isn't a given. Gechev adds, "It's important to note that not all insurance companies offer GAP insurance, so you may also find it necessary to change insurance companies." Additionally, when adding GAP insurance through your insurance company, there is a time window you should know about. Ohman explains, "Typically you have a 30-day window to purchase GAP insurance after you purchase your vehicle." However, he suggests that consumers can easily add GAP at the same time they buy the vehicle, because you have to notify your car insurance company that you are adding a car to your policy immediately. While you do have to secure your insurance within a timely manner, you don't have to keep it forever. Griffin adds, "Remember, though, that the 'gap' [between what you owe and what your car is worth] shrinks as you begin to pay down the loan and the vehicle decreases in value, so you don't need GAP insurance throughout the life of the loan." "Once you're comfortable with your equity position in the auto you can remove the endorsement from your auto policy," explains Tritten. When you contact your insurance company about the new car you are adding to your policy, make sure to ask questions. Guina from The Military Wallet, explains, "It's important to note that a lot of insurances now have 'full repayment cost' or 'new car replacement,' so you may not need actual GAP coverage. It's best to calculate carefully and talk to your insurance agent to make sure you're fully covered. Don't assume." So, which is best? Getting a GAP waiver from the dealership, your bank, or a GAP policy from your insurance company? "I would weigh the cost of adding the endorsement to your auto insurance policy versus buying it from the lender/dealership," advises Tritten. Knowing the difference in cost will help to make the decision. It's really just important that you are covered in the case of a total loss. "Wherever you buy GAP," suggests Steinway, "make sure you ask the salesperson the following questions: Does the policy include the deductible on your collision or theft insurance? Does it include any negative equity or rollover balance from a previous loan? Does it exclude cars that are uninsured or underinsured? Does it cover interest and fees that build up starting when your car is stolen or totaled until the insurance payment is made? Does it include any obligation you may have for window etching or other add on products?" Experts advise when it is worth it to buy GAP and when it's not "Both GAP insurance and GAP waivers serve a vital role in protecting consumers' investment in their vehicles," says Danielle M. Diodato, Esq., Associate General Counsel at DOWC® "When GAP should be considered just depends on an individual's circumstances." She adds, "There is no magic formula to determine who should consider GAP protection, but thankfully for consumers, there are options." Without a magic formula, we asked the experts to tell us when GAP coverage is worth it, and when it is not. Here's what they said: When it's worth it: "The advice we give to our motor vehicle accident clients is the following: In the majority of cases, Gap coverage is worth it. Gap insurance is VERY inexpensive. If your car is a total loss from an auto accident, the insurance company will only pay you for the actual cash value of your car. The gap insurance pays the difference. This protects the client from having to pay any out-of-pocket or have a rollover into another car." — Kelly M., Paralegal at Hancock Injury Attorneys "When leasing or buying a car, compare your total cost, including taxes and fees rolled into the loan, to the car's MSRP and ask yourself the following questions: Do I owe more than the vehicle is currently worth? If I do, could I pay the difference between what I owe and what the vehicle is worth? If the answer is no, then purchasing GAP insurance makes sense." — David W. Griffin Jr., Vice President at The Dowd Agencies "It's worth having gap insurance if a) you have a financed or leased car, b) you made a small down payment, c) you're financing long-term, or d) your car's value depreciates quickly while you still have a loan. In instances where you're potentially in a position to lose money because of the financial gap of what you owe versus the value of your car, it's prudent to have gap insurance to cushion the blow if the vehicle is totaled." — Kristine Lee, The Zebra "You should get GAP on any purchase in which you are not putting a significant (30% or more) down payment on the purchase of the vehicle, particularly if you are also financing the vehicle for an extended period of time." — Mike Scott, Senior Mortgage Loan Originator at Independent Bank "If the vehicle purchase is financed, it is ALWAYS appropriate to get GAP insurance. GAP insurance is priced very reasonably, and like any insurance product, it is priced actuarially, reflecting the quantitative risk to the insurer. If the negative equity resulting from a total loss results is minimal, the premium will be very low. If the resulting negative equity would be great, the premium will reflect that, and the buyer is relieved of the responsibility for that loss. There is simply no decision to be made. It is extremely disheartening to have no vehicle but continue to have a car payment." — Rob Drury, Executive Director, Association of Christian Financial Advisors "A car buyer that can only make a small down payment or needs longer financing terms — up to 84 months — is a prime candidate to consider GAP protection." — Danielle M.Diodato, Esq., Associate General Counsel, DOWC "The purpose of GAP is to cover the difference between what your car is worth and what you owe on your loan. So anything that increases that gap — either because you borrowed a lot more than the car was worth or because the car lost its value more quickly — will make GAP more valuable. If you can buy it at a reasonable price, we recommend purchasing GAP if... Your down payment was less than 20 percent of your total loan. You drive more than 15,000 miles/year. Your loan amount is greater than the value of your car because you financed your fees, taxes, negative equity or rollover balance from an older car loan, a vehicle service contract, or other items. You bought a vehicle that is likely to lose its value, or depreciate, more quickly than the average. Your loan term is 60 months or longer." — Sonia Steinway, CEO, Outside Financial "Gap Insurance, in my opinion, is a very important part of your insurance coverage, especially when auto dealers offer the zero to little money down and longer financing terms. Driving off the lot the car will not appreciate, but depreciate in value, essentially creating a loan-to-value gap. This the most important time to have the coverage in place." — Risk advisor Charles R. Villafana When it's not: "Insurance companies make money by providing insurance. If you can self-insure yourself with an emergency savings account, that is the best option." — Tony Matheson, CFP®, wealth advisor and founder, Matheson Financial Partners LLC. "If you make a large down payment or purchase an older car for a good deal, and you know you won't be upside down on your loan, then clearly, you can forego GAP." — Melanie Musson, insurance expert, carinsurancecomparison.com "The ONLY way you DON'T need GAP is if you had put in a big down payment or if you owe less than what your vehicle is worth." — Zhaneta Gechev, founder, One Stop Life Insurance
From time to time, you may see offers to get pre-qualified or pre-approved to buy a car, especially when you are actively researching cars to buy or loan providers. What do these words actually mean? Are they a guarantee that you can buy a certain car? To understand this auto finance industry jargon, we asked financial experts to explain these terms. You might be surprised at what we discovered. When you are done reading this article, you will know the difference between these terms and when to use each in the process of your car shopping journey. What is car loan pre-qualification? Tim Owens, a consumer vehicle lending executive at Bank of America answers this one for us, "Prequalified means you have an estimate of how much you can afford based on several factors, mainly income. This is typically used for prospective buyers who are looking to have a better understanding of what is possible when car shopping." Sonia Steinway, CEO of Outside Financial explains, "If you submit your information to a car loan site (like Outside Financial) and they run a soft pull of your credit history, you're considered pre-qualified." When you shop for a car loan, rates for people with less-than-perfect credit are hard to track down. Most lenders say "rates as low as" and credit unions and banks only say the starting interest rate (for people with prime and excellent credit scores), not what it will be for people who have a credit score that they aren't so proud of. So, if your credit score is 700 or better, you can mostly see the rates as advertised. While the national average FICO score is at an all-time high, not everyone has a score over 700. Generally, you provide some unsubstantiated information about your income and employment, a soft-pull is done on your credit, and helps potential borrowers know if they are in a place to get a good loan. It can help to estimate rates and terms, as well as the budget level for shoppers. "It's important to remember," says Owens, "that with prequalification, you're not actually approved for financing, but you are given an estimate of what you could be approved for." What is car loan pre-approval? "On the other hand," says Owens, "pre-approval is as close as you can get to confirming your creditworthiness without having a purchase contract in place. It means the lender has examined your income, credit, and other expenses to determine the loan amount you qualify for." Another way that people often see pre-approved auto loan offers may sound more familiar. Sometimes, you can see this type of offer from your bank or credit union in email or snail mail offers. Steinway explains "If instead the site bought a list of people with certain credit history from one of the credit bureaus and sent a marketing email or letter to each one, those potential borrowers would be considered pre-approved." While it is a baby step up from prequalification, it still isn't guaranteed approval. You generally don't have to have the car already picked out to get pre-approved, but you may have to include a budget-level in your application. Be warned: some financial institutions may do a hard pull of your credit report for a pre-approval. Be sure to look for keywords mentioning that applying for pre-approval will not affect your credit score. If a pre-approval is completed with a hard pull on your credit score, Chane Steiner, CEO of Crediful explains, "they will stay on your credit report for about 12 months." Honestly, it's not the end of the world. Steiner suggests that you "Complete all of your pre-approval applications in the span of 14 days, so it has the impact of just one pre-approval application." Pre-qualified vs pre-approved Sometimes these terms are used interchangeably, but both are generally entry-level steps to understanding your car loan options. However, "both are different than being approved," says Steinway. "Pre-qualifications aren't as strong as pre-approvals," explains Steiner, "as they are based off of less information and do not guarantee approval for the actual loan. While pre-approvals are stronger than pre-qualifications, they don't guarantee approval either, though, your chances are stronger, especially if nothing changes in the meantime. They also give you more bargaining power at the dealership because it shows you have the assets for the purchase." "Pre-approvals can be either a soft pull or a hard pull," explains Mike Todaro, Sales Manager at Matt Blatt Kia of Toms River. So, while pre-qualification generally comes with a soft credit pull, pre-approval may or may not. The end goal: loan approval Actual loan approval (without the pre), requires a hard pull on your credit against information about the specific car you are looking to finance to see if you can be approved to borrow money for it. Many lenders restrict their funding to specific model, mileage, and other restrictions, with clear lines that they won't cross when it comes to specific vehicles. While "pre-approval and pre-qualified terms are subject to change," reminds Steinway, "approval terms are not, at least during the time that the approval is active." Only once you have an official loan approval are you able to make a purchase. Prior to that, it is still possible that your pre-approval or pre-qualification may not pan out.
Do you dread shopping for a car? You aren't alone. A 2016 Beepi Consumer Automotive Index conducted by Harris Poll showed the following results: 87% of Americans dislike something about shopping at a car dealership 61% feel taken advantage of at the dealership 52% feel anxious or uncomfortable at the dealership 24% of people ages 35–44 would rather get a root canal than go to a dealership Let's just say that shopping for a car is not some people's favorite. If that sounds like you, let me introduce you to a concept: You can hire an expert to do your car-shopping for you — a car concierge. At the end of this article, readers will understand how a car concierge can help them during the car buying process and what it will cost them. What is a car concierge or car buying service? A car concierge is a professional car shopper, but so much more. Andrew Guthmiller, the owner of Minnesota-based Car Concierge, puts it this way: "A car concierge is an advisor working for you and your best interests to get you the right car for the best deal that can be found." Not only can they help to get the best deal, but they help simplify every step of the process, from picking a car to paperwork. LeeAnn Shattuck, The Car Chick®, runs a car-buying service focused on women, although it turns out that about half of her customers are men. She says her clients call her service: "How to get a great deal on a car without all of the [email protected]%%S#^&." While some services only deal within a specific geographic area, with the help of the internet, you don't have to live next door to a professional to find a pro to help you. Many of their services can be rendered remotely, though you are more likely able to get one-on-one service and delivery in big cities. Some professionals specialize in new car purchases or leases only, while others will also help customers with a used car purchase, although this can be a more intensive process. Either way, consumers could benefit. What services does a car concierge provide? As we know, shopping for a car is not a one-step process. It takes time and effort to select a car, make sure its a good fit, negotiate pricing, and find financing, before you ever get your keys. Shattuck says that she helps consumers get a great deal while avoiding "the hassle and frustration of traditional car shopping." While all car-buying or car-leasing concierge services are different and set different expectations, here are several things that they can help you with: Picking a car Only one in three car buyers know the exact make and model they want when it comes time to start shopping. "A big part of my service," says Shattuck, "is helping the client pick the Perfect Car™ based on their unique lifestyle, budget, and personality, whether that's a new car or a used car." Tom Paolella, owner of Car Concierge Plus adds, "Many of my clients have no idea what they're looking for so I'll listen to their needs and wants and then make unbiased recommendations on makes and models." For those of us needing help when picking a car, this is a HUGE benefit. Setting up test drives "I set them up on no-hassle test drives of (typically) two to three different vehicles that I think would suit them," says Shattuck. These pre-scheduled test-drives are set up at locations convenient to the client's home, explains Paolella. Negotiations and paperwork Shattuck says that she also handles "all of the legwork and negotiating, including their trade, financing (including leases), accessories and any "extras" like extended warranties, pre-paid maintenance, etc." This includes, says Paolella, overseeing "the contract details to ensure that no additional fees are being tacked on." Once all of that is done, how do you actually get your car? "Once a deal is reached," says Shattuck, "the client purchase/leases the vehicle directly from the dealership (not me)." The trouble with advising on a used car As we mentioned earlier, it can be hard for a car concierge not physically located in your city to help vet a used car. Guthmiller says that while some companies only help with new car purchases, Car Concierge helps customers with used car purchases, as well as new. He outlines some of the challenges that come about when trying to shop for a used car: "Working on used is a lot bigger challenge. We need to go through everything much more thoroughly as it could have damage or be a salvage vehicle. Is it mechanically sound? Do we trust the dealership is giving us true answers about the condition? Since we are not able to look at a vehicle in person all over the country, we take a lot of pride in asking the right questions and getting a gut feel regarding the dealership in question. If something feels wrong, we do a few different things dependent on the situation. Walk away from it altogether, have a third-party mechanic look at it and give us their feedback, or hire a company called Lemon Squad to do an in-depth inspection for us to make sure we know what we are getting into. These are the reasons, however, that a lot of companies will avoid used. Lot more at stake to do a good job and not have a disappointed client." What benefits do people get from using a car shopping concierge service? Whether you end up buying a new or used car, with a concierge at your side, says Guthmiller, "You gain a non-biased advisor who is only interested in what most greatly benefits you, meaning we aren't attached to any brand or bank. We just want to find you your best options." With that said, the benefits to customers seem pretty awesome. You get to avoid the stress of buying a car on your own, save time, and get a good deal on your car. Less stress"Buying a car can be stressful and anxiety-filled for some people," says Guthmiller. Using a service like ours allows you to be able to skip all of that." One part of that stress is often the research, especially for someone who worries that they don't know enough about cars. "We take care of all research required to get you the answers you need without any pressure from the dealership to buy a car," he says. What a dream. Save time"Not having to do any research or run to dealerships means more time doing the things that you love," explains Guthmiller. With a personal shopper handling all of the parts of the car shopping process that you don't want to, like research, talking with dealership staff, etc, you can save quite a bit of time, during each step of the shopping and purchase process. Paolella explains that his service "locates the exact car a client wants, saving up to 10 hours of online shopping time." On top of that, "Not having to do any research or run to dealerships means more time doing the things that you love," explains Guthmiller. Typically, people are dissatisfied by the amount of time it takes in a car dealership to finalize a purchase. Autotrader found that while people generally were satisfied with test-driving and interacting with sales staff, only 46% were satisfied by how long the process took. At an average of three hours spent at the dealership, half of that time is generally spent on negotiations and paperwork. "Don't spend days at the car dealer," advises Paul Maloney, Owner of Car Leasing Concierge, The Car Buyer's Advocate!. "A professional concierge can have your car and paperwork delivered to your door with simplified paperwork ready to sign, all within a 24-hr time period." Save moneyEveryone wants to get a good deal on their car purchase. No one wants to feel taken advantage of. With a professional car buyer on your side, there is a "High likelihood of saving a good amount of money," says Guthmiller. Those savings can be seen in several different places, says, including "Price, trade value, sales tax, interest, warranties, accessories, and not overpaying for hidden fees as we look through everything." Maloney adds, "A Licensed Professional Concierge will nearly always be able to get you a better deal since they've either worked in or directly with car dealers' fleet departments. Since most buy in volume, we usually have access to dealer incentives. These amounts can range from $500 to $20,000 in extra savings, depending on the vehicle the customer is looking to buy or lease. So before you sign at the car dealership, check to see if there's a concierge in your area." What does it cost to hire a car buying pro? In this industry, you will basically see two pricing models: Flat fee — A flat-rate fee that is often, but not always, paid upfront. This sometimes depends on the service package that you select, whether you are buying new or used, because there is often a more intense process. From the companies we reached, this flat rate can be between $199 to $650, but those services were not cookie-cutter options. Percentage of savings — Some companies offer to take their cut as a certain percentage of the savings on your car that they are able to negotiate for you. On top of the full-service deal, some car buying services offer educational resources to help you learn about how to get the best deal or a price-check service, for customers who are not so sure that they need help negotiating, but just want to check that they got a good deal. One example is Maloney's Car Price Check Service ($25): "It's just like buying a house — have a professional check it out before you buy. It should be no different when you buy a car. 95 percent of buyers don't have the correct information. They only have the information the dealers are smart enough to let them out with until it comes time to sign. With our service, customers let the experts check it out before you sign. Remember numbers don't lie, but salespeople will." When should consumers reach out to a car buying service? "We are open to helping people in any stage of the process," says Guthmiller. "We have helped people identify the right car for them to getting involved long after they have already ordered a car and everywhere in between." "Of course, he adds, "it is always easiest if you come to us with the exact car, features, and colors that you want to have, but we are not worried about what is easiest. We are only concerned with helping our clients have an amazing car buying experience without having to worry about a thing." Which type of consumers are best served? "Basically," says Maloney, "anyone who's sick and tired of salespeople blowing smoke up their tailpipe every time they go to buy or lease a new vehicle." "I can't say that I have an ideal client," says Guthmiller. "We have helped all kinds of people with prices between $7,000 to $225,000. It really just seems that most everyone hates the car buying process as it is and would prefer help." "Anyone uncomfortable negotiating a deal on their own, anyone who doesn't know enough about cars or the behind-the-scenes buying/leasing process, anyone who doesn't have the time or energy to play the back and forth game with dealerships, or anyone who likes saving tons of money would be best-served," says Paolella The bottom line If you don't want to have a typical car buying experience in a dealership, a car buying concierge could be just the service you have been looking for: someone with automotive knowledge, negotiating skills, and the power to help guide you through the process with minimal effort. As Paolella explains, "Car Concierge Plus was founded after hearing too many harrowing stories from friends and family about their negative car buying experiences. Getting a new vehicle should be a time filled with happiness and excitement. Unfortunately, for most, this day is tarnished with nervousness, angst, and in many cases regret — the regret of not knowing if you got a good deal, or have just been taken for a ride (pun intended). Car Concierge Plus brings the values of integrity and honesty to the car buying process. My mission is to be a true advocate on behalf of my clients, and to level the playing field between dealers and buyers. Most importantly, loyalty, trust and money-saving results are at the heart of every service I provide." For many consumers, a car concierge service may just be the lifehack they have been hoping for. As Guthmiller says, "Regardless of if you are too busy, not sure what you are doing, or just don't want to do it on your own, we are here to help." No matter your motivation or the reason why you dread going car shopping, a concierge can help. Special thanks to our panel of experts: Andrew Guthmiller, owner of Car Concierge started selling cars in 2008. Since 2017, he has worked professionally to help clients find the perfect car from anywhere. Check out his Facebook and reviews. LeeAnn Shattuck, The Car Chick® owns a car buying service focused on empowering shoppers, especially female shoppers, in this male-dominated industry. Check out her blog, podcast, and youtube channel. Paul Maloney, owner of Car Leasing Concierge, acts as The Car Buyer's Advocate, helping people to get the best price on their car. Delivery is available nationwide. Check out his ebook, podcast, and Facebook page. Tom Paolella, owner of Car Concierge Plus, shares his car buying knowledge with clients nationwide, helping them to get the best price possible on a new or used car. Check out his Facebook, Twitter, and testimonials.