Five tips to avoid the finance trap


Selling cars is an incredibly competitive market, where customers are able to compare the price of cars very easily. Because of this, most dealerships make the majority of their profit not by selling cars, but from add-on products like finance. 

When it comes to securing credit for a car, there are a lot of areas where, if you’re informed of industry terms and tricks, you can save a lot of money. 

Here are the top-five things you can do to make sure you’re not being taken for a ride on your car finance.

It’s all about the base

A base rate is what a lender is prepared to offer you for credit, but which is not advertised to you. The dealer will add a margin on that rate, but did you know that legally, this can be up to eight percentage points more than the base rate. For example, if your base rate is 4.2% a lender can charge up to 13%. Over the course of a five-year loan for $20,000 that’s the difference between total interest paid of $4,200 and $13,000. So be prepared to negotiate – there is plenty of room to do so.

Documenting the fees

There are a lot of fees associated with car finance, and it pays to know what they are and where you can negotiate. A documentation fee is essentially a commission a dealership receives for signing you up for finance. The fee is normally $500-800 and if you negotiate hard, you can have this fee reduced or even waived. Another of the fees you will encounter is a loan establishment fee that goes to the lender, this is the administration cost of setting up the loan, and it’s not able to be waived.

Don’t be a wood duck

A wood duck is the industry term for a customer who will pay any price presented to them. Don’t be a wood duck! A great way to do this is by gaining pre-approval for finance elsewhere before you’re even in a dealership – if the salesperson knows this, they will know they have to be competitive with any deal they have to offer you. But be aware that each time you apply for credit pre-approval, it affects your credit score, so don’t go through this process more often than is necessary.

Subverting subvention campaigns

You probably haven’t heard the term “subvention”, but you will almost certainly have experienced it – for example when a dealer offers zero percent finance. A subvention campaign is where a dealership promotes a lower than official rate on finance – sounds good right? Certainly, a low rate is a great thing, but be assured that a rate that is lower than a more standard rate of finance will have to be paid for. And it won’t be the dealer or the financier paying that difference – it will be you, most likely in the form of paying the full recommended retail price for the vehicle.

Hitting a home run on your mortgage

Probably the most efficient way to finance a car is by refinancing a home loan. The interest rates are vastly lower than a personal loan, credit card or standard car finance. But, and it’s a big but – remember that your home loan is typically over a period of 20 or 25 years, and a car loan is more typically for a period of five years. If you want to realise savings by financing through a home loan, be disciplined and pay the car off within a five-year period, or you will be paying interest you shouldn’t be. A simple way to do this is to set up a direct debit for a monthly payment on your mortgage to cover the cost of the car over a five-year period.

 Michael Higgins is Director of HelloCars.

This article first appeared on Yahoo7.