How To Get A Car Loan Like A Pro: Life Kit Whether you're a pro at car buying or intimidated by the thought of stepping into a car dealership, there are always ways to play the car-buying game better. This episode will help you strategize to avoid the potential pitfalls when it comes to getting a car loan, so you can drive away with a great deal.
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How To Buy A Car (Without Being Taken For A Ride)

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How To Buy A Car (Without Being Taken For A Ride)

How To Buy A Car (Without Being Taken For A Ride)

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CHRIS ARNOLD, HOST:

Car buying can be tricky. Those folks at the dealership - they know everything about how to play this game, and you don't.

PHILIP REED: When I was being trained to be a car salesman, the teacher drew what looked like a speedometer on the whiteboard. And he said, you need to get your customer up on the excitement meter.

ARNOLD: That's Philip Reed. He's spent decades helping people make smarter car buying decisions. And that excitement meter he's talking about - you want to keep an eye on that, too.

REED: So they ask, what is this car worth? You say, well, you know, we can sell it to you for $19,000. But look at the car. Can you imagine having this in your driveway? Can you imagine your friends saying, whoa, you've got a new car? So that's the excitement meter. And they're always trying to get you as high on that as possible.

ARNOLD: So your job is to not get as high as possible on the excitement meter. You know, we don't tend to make the best financial decisions when our emotions are going, like, 100 miles an hour.

REED: So to counteract that, what you need to do is you need to think of your needs. So if you have a new child, do you need a bigger car? You know, let your needs dictate what you're going to do.

ARNOLD: Welcome to NPR's LIFE KIT.

(SOUNDBITE OF MUSIC)

ARNOLD: Today's episode - car buying. I'm Chris Arnold. And I cover personal finance and consumer protection. And whether you're someone who thinks they're, like, a pro at car buying or you're super intimidated by the thought of stepping on to a car dealership, we are going to learn to play this game better. We're going to go over how to pick the right car, pay the right price, get the right loan so that you can drive off into the sunset feeling good and not suffering financial pain.

(SOUNDBITE OF MUSIC)

ARNOLD: OK, we're in luck today because we have a great expert to pull back the curtain on how to buy a car. Philip Reed is the autos editor for NerdWallet. And before that, he was with the car buying site edmunds.com. And Edmunds had a pretty cool secret mission for him.

REED: When I first started there, they actually sent me out to get a job as a car salesman. And I worked at two different dealerships in Los Angeles. And then I came back and I wrote a long article. Actually, it was almost, like, a novella. It was 90 pages long.

ARNOLD: Phil wrote a novella about car buying. I mean, how many people have done that, right? So Phil knows the business inside and out - the games, the tricks, the mistakes that it's all too easy to make.

When people talk to you and they say, you know, Phil, I mean, you know, you know everything about cars - like, I'm going to go buy a car this weekend - you know, what's, like, a first thing you tell them they should do before they even step foot in a lot.

REED: Yeah, well, far and away. The most powerful step that you can take before you go car shopping is to get preapproved for a loan.

ARNOLD: And that is our first tip. Number one, get preapproved for a loan before you set foot in a dealer's lot. For one thing, it's going to get a bank or a credit union to take a look at your finances, run a credit check. And you're going to find out what interest rate they're willing to give you on a car loan. That's really important because then you can go online and say, all right, I can get a four-year or a five-year-long car loan, 5% interest rate - whatever it is. And then you got to figure out, what's the payment that I can afford? And that's going to tell you your budget. You say, OK, I can afford a car that's no more than, say, $19,000.

Which is very different than wandering on the lot and being like, oh, I like the red one. And then if they can stick you into some seven-year loan and be like, oh, we can make this work for you, and then - you know, that's just a totally different scenario.

REED: Exactly. I mean, it makes you a much more informed and targeted shopper once you answer a number of those simple questions. And it also makes you decide, am I going to buy a new car or a used car?

ARNOLD: Phil was talking about needs and wants. And so what kind of a car do you actually want? So that's what we're going to look at now. And to find a car that you're going to like on your budget, this can happen any number of ways. I mean, some people are not particularly strategic.

DIANE WITTMEYER: You know, I drove him home. He was drunk. And I really liked his car.

(LAUGHTER)

ARNOLD: Did someone actually say that to you?

WITTMEYER: Oh, yeah. Yeah, I've heard that a couple times. Or, you know, I have a friend with such and such car. And we took a road trip, and it was really comfortable.

ARNOLD: That's Diane Wittmeyer, who sells cars at a Toyota dealership near Los Angeles. And this is our next tip - number two - you discover what car you really like the most by actually driving the car that you think you want to buy. And that might seem obvious, but she says, look. She constantly sees people these days who spend hours and hours online researching a car, finding the best price, all this other information. But then when they finally show up to drive it, it's like...

WITTMEYER: I didn't realize this seat was this way. This is not the model I want. This is the one I want. I've been doing this for 40 years. It used to be that people would go to a dealership and drive around and figure out what car they actually wanted, what their choices were, grab a brochure, narrow things down. Then they would start hitting the pavement, trying to get a better deal.

ARNOLD: So Diane says, look. You want to be old school in this sense and get away from the computer screen pretty early on and just actually drive cars that are within your budget. Now, she also says that means that you want to find salespeople who are OK showing you a bunch of cars and who are not, like, pushy. Are you going to buy it today? You're going to buy it today? And look. I mean, we know that not all car salespeople are pushy. There's, like, this stereotype about car salespeople, right? But, I mean, I actually buy cars from this guy named Tony. Shout-Out to Tony. And Tony is just, like, the nicest man I've ever met.

So I've heard something, Diane - that you have a nickname, the Prius Queen. Is that right?

WITTMEYER: My goodness. Yes. You heard it right.

ARNOLD: (Laughter) The reason Diane's groaning and ughing a bit is that, yes, she sells a lot of Priuses, and that's how she got the nickname. And I guess, like, everybody in the car business apparently has to have a nickname. But she wants to get her customers into cars that they really like, you know, whether it's a Prius or a pickup truck or whatever and also, regardless of whether it's a pricey car or they're on a budget.

WITTMEYER: I don't take anybody that walks in for granted. I mean, especially if you're walking in, and you're getting something that's 18, 19, 20,000, that person who can who can afford an 18, 19 or $20,000 car - to them, that's even a bigger deal than the guy that could just walk in and spend $40,000 on a Camry because he can.

ARNOLD: So find a salesperson like Diane, basically, who you feel comfortable with and isn't rushing you on what's really a big financial decision for most people. OK. Another thing you need to know right up front is that there is a scary monster out there in the car-buying world. And it wants to eat your wallet, wants to get a hold of your wallet and devour it. It's called the seven-year car loan. And it's our next tip - number three. Beware of the seven-year car loan. Run screaming from the seven-year car loan. All right. We're being a little dramatic but only a little dramatic.

Here's the deal. A couple decades ago, three-year car loans were the norm. Everybody got three-year car loans. And then to help people buy more expensive cars, five-year car loans became more common. And now a third of car buyers out there in this country are getting seven-year car loans. And you may be thinking, like, OK, so what's the big deal? Who cares? You stretch the payments out longer. That makes each payment cheaper. And so you can buy a bigger, nicer car. That sounds great. What's the problem? Here's what Diane said when we asked her about this. What do you say about these longer-term car loans?

WITTMEYER: OK. The salesperson in me wants to answer differently, but the mom in me wants to say if you need to finance a car for 84 months, you're in trouble.

ARNOLD: You're in trouble.

WITTMEYER: You're in the wrong car. You should have saved more money to lower the loan. If you need to buy something that's 30 or 40 or 50 grand and finance it for 84 months, I wouldn't do it. If a friend asked me, I'd say I wouldn't do it. I don't think you should have a mortgage on a car - maybe on a house because it's long term, an appreciating asset for the most part. But a car is never going to appreciate.

ARNOLD: And that right there - that is the reason car loans and home loans are fundamentally different things. And you have to think about them differently because houses over long periods of time almost always increase in value. So you're slowly paying off a 30-year mortgage year after year, but you're doing that while the value rises, right? So you're building equity. The house ends up being worth a lot more than what you owe over time. But with a car, it's the exact opposite.

REED: You're waging this battle against depreciation because, basically, you're paying off a loan while the car drops in value. And if you take out a seven-year loan, you'll probably very quickly be underwater, which means that you are upside down on the loan, which means that you owe more than the car is worth.

ARNOLD: With almost any kind of loan, too, you're paying a lot more interest in the early years instead of the principal. So you're paying off what you actually go much more slowly in a seven-year loan.

WITTMEYER: There's so much interest frontloaded in that.

ARNOLD: And one big danger is that if you need to sell the car - you lose your job or you just have a kid or your third kid and you need a minivan - you go to sell that car, and you're going to find out that you owe thousands of dollars more than the car is actually worth, and you're going to be stuck. We talked to one car buyer who rolled over $17,000 into his next car loan because he still owed that much on his car. So a seven-year car loan can leave you just very upside down in your loan.

REED: So it puts you in in a very sort of vulnerable financial situation.

WITTMEYER: If a friend asked me, I'd say I wouldn't do it.

ARNOLD: But a lot of people are doing this. Thirty-two percent of new car buyers with the trade in are rolling over about $5,000 in negative equity into their new car loan. Phil says you just don't want to do that. I mean, you're paying interest for another seven years on a car that you don't even own anymore. And Diane says, look. If you have to stretch that much to get the lower payments and you're looking at new cars, she says, look at a used car. I mean, leasing has gotten very popular. And that means that there's, like, this big, wide flowing river of good used cars out there these days coming off of leases.

WITTMEYER: If somebody's sort of stretching to try and make a payment rather than going that extra year or two to get into new, one of those cars is a beautiful, viable option - having something late model that's low miles, that's been maintained well because it's a lease vehicle and they knew they had to. Something like that would be a terrific option for somebody just to keep their payment down. So don't rule that out either.

ARNOLD: OK. So let's say we've gotten to the point where you know what kind of car you want to buy. You drove it a bunch. You've fallen in love with it. You think it's super awesome. You got your loan preapproval. Now it's like let the games begin, kind of like "The Hunger Games," only not quite that bad. But this brings us to our next big takeaway - tip number four, start with the price of the car when you go to the dealership and don't talk about anything else until later. The salesperson might also ask you, like, you know, are you going to trade in a car? Do you need a loan? Don't talk about any of that because what's going on here is that you are playing a game against professionals. And it's in their interest to get you to show them all your cards early on. But when you play poker, you know, it's not like you're, like, showing everybody your cards, right? You keep them, like, close to your chest here. So you want to do the same thing at the dealership.

REED: In dealerships, they have what they call the four-square, which is a sheet of paper that they pull out. And it has the down payment, the trade-in, the financing and the new car price. And it becomes like a shell game, where they can just move things from here to there because what they're really looking at is total profit for the dealership. And they don't care really where they get it and how they move the pieces.

ARNOLD: So if you show all your cards and tell the dealership straight away that you need a car loan - you've got a trade-in - that's information that they can use against you in this four-square shell game that you don't really know how to play. So you want to do this one step at a time. So you can keep track of what's going on. And Phil says you start with the price of the vehicle. And look. If the salesperson is asking you other questions, you just say, look. All I want to do right now is just focus on the price. Just leave it at that. And a fair price is easy to research online. You got Kelley Blue Book, Edmunds, other websites. You can negotiate this with the salesperson even over the phone. Then what happens at the dealership is even if you have the nicest salesperson in the world, when it comes to making the actual deal in writing to buy the car...

REED: Then you're handed off to the finance officer to put it into a contract. And what you don't really realize is that you're now entering the most critical stage of the whole car-buying process.

ARNOLD: And so this person you just got handed off to - this person takes you back to this other room. It's called the F&I room for Finance and Insurance. It's also called the box. I guess, you know, it reminds me, too, of cop shows - like, police shows where it's like, you know, they got him in the box. You know, it's like they're going to work you over a little bit.

JOHNNY GIAMALVO: Yeah. It might be a little bit of that associated with that name.

ARNOLD: That's Johnny Giamalvo (ph). Sometimes, he goes by Johnny G. And he spent a lot of time working at car dealerships in New York City, selling...

GIAMALVO: Nissan and Toyota, Chrysler, Dodge, Jeep, Hyundai and Jeep, Fiat, Mitsubishi. And I worked at a mega used car lot that had a Kia and, back in the day, a Suzuki franchise.

ARNOLD: So you get the idea. Johnny G. has sold a lot of cars. And he's seen a lot of people get into the box who have not done their homework, and they have no idea how to play this game.

GIAMALVO: And ultimately, the dealer is, you know, in a position where he's looking to roll that car over the curb. Yes. If he can make a couple of extra bucks in the F&I office, he certainly will. And, I mean, that's what they're there for. However, the more you prepare ahead of time, the smoother that transaction will be. And instead of sitting in the dealership for 3 1/2 hours, you'll be out of there in 45 minutes to an hour.

ARNOLD: One reason it can take 3 1/2 hours is that in the box, there are lots of ways for the dealer to make a few extra bucks or a few thousand extra bucks off you. And this brings us to our next tip - number five, dealers can make a lot of money off a car loan, so you want to negotiate the best loan that you can. First, Philip says a lot of people actually don't realize this, but the dealership can make extra money if they hit you with a car loan that has a higher interest rate than you actually qualify for. So let's say you qualify for a 5% interest rate.

REED: They would probably test you by saying, well, the best we can do is 7% because we both know that you had a few problems a few months ago. You missed a payment on such and such. So they might pull out the Sharpie and circle something on your credit history. And this immediately puts you in a defensive position. So you might...

ARNOLD: So you mean, like, there's, like, little tricks like that? Like, they print out your credit report. There's something negative that might not even matter that much, but they circle it. And then it's like, ooh, OK.

REED: Oh, it's definitely a manipulation so that they can mark up the interest rate.

ARNOLD: We should say that not all car dealerships will do this, but some will, and they're allowed to do it. And it's another reason why it's so important to get preapproved for a loan before you go to the dealership - remember tip number one - because if you already have an offer at a specific interest rate in your back pocket, say, from a bank, then if the dealer tries to hit you with a higher interest rate, you can just say, look. No thanks. I can get a 5 or a 4% rate. I'm just going to go with a loan from my bank.

REED: But they would at that point say, well, hang on, just to say let me check something else. You know, it's like, oh, you know what? We could you 3.5, you know? So that's sort of how the game is played.

ARNOLD: Because Phil says dealerships can often get you a better deal than anywhere else. They actually get you a better deal than even your bank. But you might have to negotiate like this in order to get it. And another tip, Phil says - it's OK to have a bit of a poker face in this whole thing.

REED: You'll go into the office. And they'll say, well, how are you going to pay for this? Well, I got preapproved through such and such bank. Oh, really? What interest rate are you paying? And what you should say at that point is, well, why don't you run my credit and see what you can offer me?

ARNOLD: How about them apples? And it works both ways. I mean, if you get preapproved for a loan, you're also going to find out if you have some actual problems with your credit that are going to get in the way of you getting a loan at a reasonable rate because Johnny G. says, look. If you don't have good credit, the dealership really might only be able to qualify you for a really high interest rate, even if they are trying to help you out and get you the best rate that they can. And you don't want to get hit with a nasty surprise after you spend a lot of time shopping for a car and not know if the dealership is trying to pull a fast one on you.

GIAMALVO: Actually walked by one F&I office. And you had a - guy had his whole family there. They came in from the Bronx. And the guy got hit with an interest rate. And it really was no fault of the dealership. It really was his rate that was (laughter), like, 10%. And he expected to walk out of there with a 2.9% deal. And there was really nowhere for them to go. And the guy went furious. I mean, it almost came to blows. And the customer threw the staple gun (laughter) at the F&I manager. I mean, it can get crazy.

ARNOLD: You know, Johnny G. says throwing the stapler is not a good negotiating tactic. That generally doesn't work. So look. These days with so many ways to check your credit score online and get prequalified for a loan, you can find out in advance from the dealership, you know, if your credit score is going to qualify you for the special rate that they're advertising - like, you know, 0% and all this stuff. So it is getting more rare that things get that crazy.

(SOUNDBITE OF MUSIC)

ARNOLD: The last card that you're going to play in this game is whether or not you've got a car to trade in.

GIAMALVO: Your dealer looks to make dollars on the trade-in. And the trade-in is certainly part of the deal that - where you have to recognize for yourself and have a fairly good understanding of what the value of your vehicle is.

ARNOLD: And here's our quick tip for trade-ins. You get a rough value online from Kelley Blue Book and other places. But the dealership - I mean, I've had this happen to me. I'm like, look. The Kelley Blue Book says it's worth $5,000 or whatever. And they're like, yeah, but, you know, nobody gets the Kelley Blue Book. And then you're in, like, kind of this argument. Phil says a more powerful move is to get a price quote from CarMax. And CarMax will actually make a real offer to buy your old car. And then if the dealership won't match that, you can be like, all right, fine, I'm just going to sell it to CarMax.

All right. We have one more quick takeaway here to help you in your car-buying journey because it's pretty easy to research a good price for a car online, right? But what that means is that dealerships now - they don't really make as much money as they used to on the price of the car, like, on just the sale itself. So when you're in the box, they make more money on the car loan and the trade-in and all this other stuff like we talked about but also a whole bunch of extras that they're going to try to sell you. And this is tip number six - don't buy any of those add-ons from the dealership the day that you buy your car. Or if you do, make sure you've researched a good price.

REED: I think that if you know you're going to be buying a car at a dealership and you know you're going to be in there Saturday afternoon, and it's midweek, call the dealership. Ask for the finance officer and say, what are the additional products that I'm going to be offered? Because I'd like to do a little research on it. So they'll give you a list of it. And go ahead and take a look.

ARNOLD: Dealerships will often try to sell you extended warranties, tire protection plans, paint protection plans, something called gap insurance.

REED: And what you'll find is that they may provide minimal value, but they are drastically overpriced. And also, you can get these things later. You can get them elsewhere. Even the extended warranty - if you're buying a new car, that extended warranty won't kick in for three years. So you're paying for something you won't even use for at least three years. So doing your research ahead of time will fortify you because it will convince you that you don't need these products.

ARNOLD: And if you wait to try to figure it out in the box, dealerships are very good at making you think that you need this stuff.

REED: In terms of declining them when you're actually in the office, this is much harder to do than most people would realize. In fact, I've talked to rather veteran car buyers who said, you know, they made it sound so good. And I had so much trouble saying no to it.

ARNOLD: So, you know, before you go, just be prepared. You're going to want to say no to a lot of things. You can even practice saying no because look. I mean, like we've talked about, car buying is a game. And it's not really a rigged game. But it's a hard game because you're playing against people who know a lot more about it than you do just by definition. They work at car dealerships, you know? So it can be confusing and intimidating and hard. But if you approach it the way that we've talked about here - you keep it simple, take things one step at a time - you got this.

(SOUNDBITE OF MUSIC)

ARNOLD: All right. So we covered a lot of ground here. So we can remember the most important stuff, here come the takeaways. Tip number one, get preapproved for a loan before you set foot on a dealer's lot. Tip number two, you discover what car you really like the most by actually driving the car you think you want to buy. Don't waste a lot of time, you know, negotiating things before you actually drive the car. And tip number three, beware the seven-year car loan. Run screaming from the seven-year car loan. That's really important. Tip number four, start with the price of the car and don't talk about anything else until later. And tip number five, dealers can make a lot of money off a car loan, so you want to negotiate the best loan that you can. And this is step number six - don't buy any of those add-ons from the dealership the day that you buy your car.

(SOUNDBITE OF MUSIC)

ARNOLD: For more NPR LIFE KIT, check out our other episodes. There's so many good episodes. Just go back and look. You're going to learn so much. You can find those at npr.org/lifekit. And if you love LIFE KIT and you want more, subscribe to our newsletter. Here, as always, is a completely random tip, this time from listener Nathan Beltran (ph).

NATHAN BELTRAN: You can get $2 bills from your bank if you request them. So I think it makes a very interesting conversation piece. Like, when you hand them to someone, they'll be like, hey, it's so cool. It's a $2 bill. I haven't seen this in a long time.

ARNOLD: If you've got a good tip, leave us a voicemail at 202-216-9823. That's 202-216-9832. Or email us at lifekit@npr.org. This episode was produced by Sylvie Douglis. Meghan Keane is the managing producer. Beth Donovan is the senior editor. Our digital editor is Beck Harlan. And our project coordinator is Clare Schneider. I'm Chris Arnold. Thanks for listening.

(SOUNDBITE OF MUSIC)

ARNOLD: We were transcribing our interview with him. And the computer translated your name to be Johnny GM Volvo.

GIAMALVO: (Laughter).

ARNOLD: So that might have to be your new nickname, we were thinking.

GIAMALVO: That's all right. It doesn't surprise me at all.

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