27 - The Auto Loan Deep Dive: Buying Your Next Ride

Don’t let the "new car smell" cloud your judgment! In this episode, Daniel and Shanna take you behind the scenes of the auto industry to show you how to walk onto a car lot with total confidence. We break down the massive advantage of stopping by the bank to run your actual numbers first, explain the 20/4/10 rule for budgeting, and reveal why "GAP insurance" might be the most important safety feature you buy. Whether you're a first-time buyer or a seasoned pro, tune in to learn how to turn yourself into a "cash buyer" by having your financing plan ready before you ever visit the dealership.

Is your sensitive financial data sitting in an unsecured mailbox? Switching to e-Statements is one of the easiest ways to protect yourself from identity theft. Moving your records from the street into our high-security digital vault provides faster access, clears the clutter, and keeps your information safe. 

Subscribe today, wherever you listen to your podcasts (Spotify, Apple Podcast, etc.) and send your questions to podcast@fcbtn.com.

Transcript

Daniel Hill 0:02

Shanna, have you ever noticed that the moment you pull into a car dealership lot, you can almost feel the eyes on you. It's like the Jaws theme starts playing in the background.

Shanna Browning 0:19

Yes, and I'm laughing because I've been there. You haven't even unbuckled your seatbelt yet. You're pulling in and you just see this person in a polo shirt halfway across the pavement with an iPad and a big smile.

Daniel Hill 0:32

They're opening your car door.

Shanna Browning 0:33

They are.

Daniel Hill 0:35

And it's because they know something you might not know. They know that the car buying process is 90% emotion and only 10% logic for most people. They're waiting for that moment you sit in the driver's seat and catch a sniff of that new car smell.

Shanna Browning 0:57

Oh, that smell is so dangerous. It's a mix of fresh leather and I don't know, pure potential. The last time I was shopping, I sat in this SUV, and for about five minutes, I completely forgot about things like interest rates, insurance premiums, or the fact that my current car runs perfectly fine. I was just in that new car smell moment.

Daniel Hill 1:22

Oh, yes. And you know, that's exactly what they're banking on. They want you to fall in love with the feeling so you stop thinking about the math. They want you to talk about the sunroof and the heated seats while we want you to talk about the annual percentage rate and the total cost of ownership.

Shanna Browning 1:41

I know, and I get that. And that's where people get in trouble. They walk onto that lot with an open heart and a closed mind. And then they end up signing a contract that makes perfect sense for the dealer, but zero sense for your family budget.

Daniel Hill 1:56

They end up with the empty wallet.

Shanna Browning 1:58

Yep.

Daniel Hill 1:59

And today we're gonna give you our listeners a virtual nose clip for that new car smell.

Shanna Browning 2:05

I'm gonna need that.

Daniel Hill 2:06

We're gonna talk about how to walk onto that lot with the upper hand by doing the hard work before you even put your hands on the wheel. I'm Daniel Hill.

Shanna Browning 2:28

And I am Shanna Browning. And so last week we made it. We survived Tax Day. Yay! And this week we're gonna hit the road. Whether you're looking for your very first car or you're upgrading the family van, an auto loan is really one of the biggest financial commitments most of us will ever make.

Daniel Hill 2:46

And yet, Shanna, it's often the one we spend the least amount of time researching. We'll spend 10 hours, 10 hours watching YouTube videos about cup holder configurations and zero hours looking at our financial options.

Shanna Browning 3:05

Oh, that is so true. But today we're gonna change that. We're gonna talk about the power of knowing your numbers first, the math behind a smart purchase, and what it really means to have your financing handled before you ever talk to a salesman. So let's really start with the big one. Most people just show up at the dealership and I'm gonna need y'all to do your research. I need you to go with power in hand when you go and you pick a car, and that salesperson says, find them a rate, and it seems convenient. But why is that actually a risky move for your wallet?

Daniel Hill 3:39

It's risky because of how the industry is structured. When a dealer finds you a rate, they're acting as a broker, they're sending your information out to multiple lenders, and those lenders send back an offer.

Shanna Browning 3:55

But the customer doesn't always see that original offer, do they?

Daniel Hill 3:59

Exactly. This is called the buy rate. If a bank tells the dealer you qualify for a 5% interest rate, that dealer might come back and say to you, Great news, we've got you a 7% rate. They get to keep that 2% difference as a commission. And over a five-year loan, that convenience can cost you thousands of extra dollars.

Shanna Browning 4:21

And that is such a hidden cost. And that's why we always tell people run the numbers with us first.

Daniel Hill 4:28

Absolutely. And here at First Century, we don't do those generic pre-approvals that you see some of the big banks advertise. We want to be specific. We want you to stop by, sit down with the loan officer, and let us run the actual application.

Shanna Browning 4:45

Right. And I know most people probably think, well, I don't have time to do that. But you do when you are in control and it puts money in your wallet. So we want to get the numbers in the system. We check the credit and the income and we tell you exactly what you're approved for and what your rate will be. It's not a guess, it's an answer.

Daniel Hill 5:03

And you know, that power changes the whole dynamic of your negotiation strategically. You walk onto that lot already knowing your budget and your rate. You aren't asking the dealer, hey, what can I afford? You're telling them this is what I'm paying. And that's power. It turns you into a cash buyer in their eyes. Since the financing has already been handled, you can focus purely on the price of the car.

Shanna Browning 5:32

So let's talk about the first question a salesperson usually asks, What monthly payment are you looking for? Why should that be a red flag for our listener?

Daniel Hill 5:41

Well, because that's the ultimate shell game. If you tell them you need to stay at $400 a month, they can make that happen. But they might do it by stretching your loan out to 72 or even 84 months.

Shanna Browning 5:56

And while the payment is $400, you're paying way more interest over those extra years.

Daniel Hill 6:02

Way more. And even worse, you end up underwater. Let's tie that back to our Jaws theme.

Shanna Browning 6:10

Yeah, that's right.

Daniel Hill 6:11

That means you owe $20,000 on a car that's only worth $15,000. If you try to trade that car in later, you have to roll that $5,000 of negative equity into your next loan.

Shanna Browning 6:26

So we see that all the time in the branches. People are paying for their last car while they're driving their new one. It's really a cycle that's hard to break.

Daniel Hill 6:36

It really, it really is. And that brings us to gap insurance. Now, gap stands for guaranteed asset protection. If you drive the new car off the lot and someone hits you 10 minutes later, your standard insurance only pays the market value of the car.

Shanna Browning 6:55

And we all know that as soon as you drive that car off the lot, it dropped in value.

Daniel Hill 7:01

Exactly. And if you put little money down, you might owe $30,000. But the insurance only pays $25,000. You're on the hook for that $5,000 difference for a car you can't even drive. Gap insurance covers that quote unquote gap. If you're putting less than 20% down, it's not just an add-on, it's a financial safety net. Making sure you have that safety net in place allows you to focus on the actual purchase. And speaking of numbers, we hear a lot of questions in our branches every day regarding the car buying experience.

Shanna Browning 7:43

We truly do. And one question that comes up more than any other is how much should I realistically save up before buying my first or next vehicle?

Daniel Hill 7:52

That's the million-dollar question. We like to tell folks to aim for the 24-10 rule.

Shanna Browning 8:03

I love a good rule of thumb. Break that down for us, please, with a real example.

Daniel Hill 8:08

Okay. So let's say you're looking at a $30,000 car. The 20. Aim for a 20% down payment. In this case, that's $6,000. This ensures you aren't underwater the moment you drive away. And I'm going to tie back really quick to one of the episodes we had last season. We talked about setting financial goals with the SMART acronym. This is where you can apply that. Something that is measurable, that you know I can do it in this time frame. Set up your goal to save that 20% down payment before you even start looking at cars.

Shanna Browning 8:46

Yeah, it's a great thought.

Daniel Hill 8:48

So that's the 20. The four, keep the loan term to four years or 48 months or less. Shorter is always better for your wallet. You're paying less interest. If something happens sooner, you've you've paid down more. So keep it at four years or 48 months. And then the 10, make sure your total transportation costs, that's the payment, the insurance, the gas, keep that under 10% of your take-home pay. Well, very important.

Shanna Browning 9:20

That 10%, you're right, is very important. It's really the part people forget. They think if they can afford the payment, then they can afford the car. But we often see people surprised by how much their insurance premiums go up with a newer vehicle.

Daniel Hill 9:35

Absolutely. Another common question we get at the branch is does a car loan help or hurt my credit score in the long run?

Shanna Browning 9:44

So we talked about credit mix back in season one. An auto loan is an installment loan. Having a mix of credit cards and an installment loan and paying them both on time is a huge boost to your credit score. It proves to future lenders like mortgage companies that you can handle different types of responsibility over a long period.

Daniel Hill 10:05

And just a word of caution: a car loan only helps you if you stay consistent. One late payment on an auto loan can be a major hit to your score that stays with you for seven years. Respect the loan and it will help you build your future.

Shanna Browning 10:24

I like that. Respect the loan.

Daniel Hill 10:26

All right, Shanna, let's give everyone their actionable tip for the week so they can shop with confidence.

Shanna Browning 10:34

Let's do it. Your actionable tip for this week is number crunching head start.

Daniel Hill 10:40

If you are even thinking about buying a car in the next month or two, do not go to the dealership lot first. Come see us at any of our branches.

Shanna Browning 10:53

Yes, please. You need to do exactly that. Come in, grab a cup of coffee, sit down with one of our loan officers, tell them exactly that you're thinking about a new ride and you want to run those numbers.

Daniel Hill 11:04

You'll go through the application together. And if you're approved, you'll know exactly what your rate and your limit are before you ever leave our branch. And if the numbers don't quite work just yet, we'll help you figure out exactly what you need to do to get there.

Shanna Browning 11:20

And I love that about who we are. That either way, you're gonna leave with a plan. When you walk onto that lot with that knowledge in your hand, you are in control. You can enjoy that new car smell without the lingering scent of a bad financial deal. So, Daniel, I feel like I'm ready to go car shopping. With a calculator in hand, of course.

Daniel Hill 11:46

That's the only way to do it. Next week, we're switching gears for a very special rooted in community episode. We're gonna talk about what actually happens to your money when you deposit in a local bank and why local decisions matter more than people realize.

Shanna Browning 12:03

Ah, my passion. It's an episode that gets right to the heart of why we do what we do. And you don't want to miss it. Make sure you're subscribed so you don't miss the update next Tuesday.