Reduce the cost of your next auto loan

Know your interest rate.

You should know your interest rate before you step foot in the dealership. Most people don't know that dealerships do not always shop for the best rate. They will often go with the lender that is offering promotions or lenders that they "owe" something to (they may have helped the dealership out on a previous deal). You can visit websites like www.bankrate.com to determine the national averages for interest rates. Based on your personal situation/credit score, you should have an idea of what interest rate to expect.

Dealers also have the ability to "mark up" your interest rate and share the additional interest rate you pay with the bank. You can frequently save 10% easily by making sure your rate is not marked up. Say you have a $20,000 loan at 10% for 60 months. Your payment would be $425 or a total amount of $25,500 over the life of the loan. However, if the dealership "marks up" the rate to 13%, your payment would now be $455 or a total of $27,300 ($1,800 difference over the life of the loan).

Secure a financing option before you begin negotiations.

There are many websites that will shop lenders for you and will typically provide you with the most competitive rates available. You will find several options just by typing "auto loans" in a search engine. There are generic shopping sites like www.lendingtree.com, but many major banks like Chase and Capital One offer "blank check" programs that approve you for a loan amount and send a blank check to your home. You can then shop for a car and negotiate like a customer who is paying CASH. This puts you in a position of strength with the dealership. Also, don't be afraid to shop on line for a loan if you don't have perfect credit. Most on line lenders have programs for non-prime customers.

If you have an account with a local bank or credit union check with them and see what kind of rate you can get through them. Often, they want to keep all of your business with them and will be very competitive (especially if you have some dents or dings on your credit).

Don't tell the dealer what payment you are looking for.

If you have followed the advice above and have your own financing then you will be shopping and negotiating on price - not payment. If the dealer is securing your financing, NEVER, NEVER, tell them what your target payment is. Once you do this you have lost. They will find a vehicle that they can maximize their profit by selling it to you slightly above your target payment (they know you won't pass up the opportunity to buy a car today for an extra $10 - $50 per month, but that translates into $600 - $3,000 extra cost to YOU over the life of the loan). This allows the dealer to sell you a lower value car at a higher price and possibly make money on the financing by marking up your rate.

This can be avoided if you are negotiating on the price of the car like a cash customer. You can start with what they are asking for the vehicle and go from there. This takes away the dealerships opportunity to do things like "creative financing" where they change numbers around but convince you that your payment is still where you want it.

Avoid dealership add-ons.

The dealership also makes a great deal of money selling things like Credit Life, Accident & Health, Warranties and various other products. If you have life insurance and health insurance through work or other sources, skip the Credit Life and Accident & Health.

A vehicle warranty is a personal preference, but you definitely come out better setting up a savings account for vehicle maintenance and funding that each month in lieu of buying a warranty. Let's say a warranty cost $2,000 - not bad right? Well, once you finance that $2,000 over the life of your loan (ex 60 months @ 13% or $45.50 per month) you actually end up paying $2,730 for the warranty. Still doesn't sound that bad for peace of mind? If you put that same $45.50 per month away for just 12 months - not the full 60 - you would have $546 in your vehicle maintenance account and $1,092 after just 2 years. Most vehicle repairs do not cost more than $1,000 and you can keep saving it over the course of the loan if you would like REAL peace of mind. The great news is, if you don't use the kitty for maintenance, you now have a source of funding for your next down payment. Also, warranties that you purchase run concurrent with the manufacturers warranty so you are double covered for a period of time.

GAP coverage is another coverage that most people do not need. If you are trading a car with zero or positive equity, you have a cash down payment and/or you have done a good job negotiating, you should be in a positive equity position on your new purchase. The one exception to this is situations where you are trading a vehicle with "negative" equity and rolling that in to your new purchase. In cases like this, you should strongly consider GAP coverage. You can typically buy this coverage for $500 - $700 at the time of purchase. This coverage pays the difference from your loan balance and the vehicle's value if your vehicle is totaled in an accident or stolen.

People often spend hours or days researching the type of car and finding the best price for their new purchase but they will walk into a finance manager's office blind. Knowledge is power, and in this case...it can save you MONEY!!

Life Insurance - Term or Cash Value

When shopping for new or replacement life insurance you need to know what type of coverage to buy. For most situations, term is a better option, but not always. Educate yourself on the two types of life insurance and ask lots of questions when buying a new policy. Here are a few things to consider:

Term Insurance
Pros
- Term insurance provides a set amount of coverage for a set amount of time (term).
- Term is less expensive than cash value/permanent insurance.
- Term can rates do not increase during the policy period/term.
- Term insurance is pure insurance and does not involve surrender charges, maintenance fees, and other costs typically associated with cash value policies.
- Term insurance pays the full face value of the policy if the insured dies.

Cons
- At the end of the term you may not be insurable or the premiums may be extremely high due to increased age or health issues.

Cash Value Insurance
Pros
- The coverage and premiums remain constant even if you have had a major health event (i.e. heart attack, cancer).
- In some cases, the cash value in the account is enough to cover premiums and would eliminate the need to pay for the life insurance in the future.
- Cash value policies provide a dual purpose of paying for life insurance while investing at the same time.

Cons
- The life insurance provided is expensive - you can get 3 or 4 times of term coverage for the same cost
- Annual fees and maintenance costs are extremely high, and most policies contain a surrender charge if you cancel the policy.
- Your cash balance is not really your cash balance.
* If you die, the face value of your policy is reduced by your cash balance (i.e. you have $100k cash value life insurance policy with a $10,000 cash balance. Upon your death you would receive $100,000 - not the $110,000 you should receive.
* If you borrow all or part of your cash balance, you can be required to payback the loan with interest - TO THE INSURANCE COMPANY!
- The savings vehicles inside the cash value policies are expensive and often have marginal returns at best.

Ideally, if you are proactive and disciplined, you can buy the right amount of term insurance and invest the difference you would pay in No Load Mutual Funds. See for yourself. Get a quote for $100,000 of Cash Value/Permanent life insurance. Ask what the maintenance fees, surrender charges, surrender period, and other fees associated with the policy would be. Then ask for the 5 & 10 year returns of the mutual funds the agent says you will invest in via the Cash Value policy.

Then go to an on-line service like Select Quote www.selectquote.com and get a quote on a 20 year term policy with a face value of $100,000. Now take the annual savings and multiply that by 20 years and see how much you could invest. Also, consider the fact that the term policy does not have annual maintenance fees or surrender charges. You can cancel the term insurance at anytime without being charged a surrender charge.

The bottom line is, you should always purchase financial products like life insurance - never allow someone to sell them to you. Life insurance agents are very good at accentuating the positives of cash value (high commissions for them and very profitable for their company), but do not typically tell you the whole story. Educate yourself while you are shopping and ask lots of questions

There are several great articles on financial websites. I ran across the following article on MSN Money

http://articles.moneycentral.msn.com/Insurance/InsureYourLife/TheRagingDebateOverTermvsWholeLife.aspx

Reducing Debt

My wife and I spent the first couple of years of our marriage living paycheck to paycheck. We were young and didn't make very much money, and our debt seemed insurmountable. To make matters worse, we continued to spend money we really didn't have and go deeper into debt. We were miserable and had to make a change. We decided to make some pretty quick and dramatic changes in our financial life.

We decided to sell our condo and move back into an apartment. This would free up housing cost and eliminate some of our monthly expenses (i.e. association fees). We agreed that we would not consider buying a home again until we had paid off all of our debt, saved enough for a comfortable emergency fund and down payment on a new home.

Our method for paying off our debt was a little unusual. We created an inverse pyramid with our debts listed smallest to the largest. After a debt was paid, we would add the payment amount of the debt we had just paid off with the next smallest debt. The process continued all the way up the pyramid until all the debt was paid.

During this process we learned a lesson about our spending habits - we had bad spending habits. I guess you could say we were convenience spenders. We would go out to eat after work rather than cooking, and we really couldn't tell you where our money went each month. This was another area we had to change.

The obvious answer to this was a budget. We decided to create a budget each month and use cash rather than our usual credit cards. To solidify our commitment to this, we cut up all of our credit cards. We each kept a Visa debit card, but all of our true credit cards were gone.

Living on a budget was difficult for us - the convenience spenders. Now we had choices to make and a budget to keep. Too much spending on Friday night could wipe out your entire entertainment budget for the weekend. We learned pretty quickly that we had to be careful on the weekends.

Keeping to the budget did have a benefit we had not anticipated. Remaining faithful to our budget actually freed up a great deal of our money and allowed us to put more toward retiring debt. Each paycheck brought the excitement of determining how much additional payment we would be able to make toward our debt repayment plan. Prior to this our paychecks were gone before we received them and we were barely making the minimum payments on everything.

Paying off our debt was such a liberating feeling, and paying the debt from smallest to largest kept us motivated and it really picked up pace as we leveraged the payments paid off debt against the remaining debt. Most financial advisers say to pay off debt with the highest interest first, but for us, feeling the rush of paying off the smaller debts really worked for us.

We were so excited when the time to pay off our last debt - a $5,100 credit card balance. I was supposed to get a bonus that would allow us to wipe out that credit balance and be debt free so we wrote (or I guess you would say that we we floated) a check to the credit card company. We took the opportunity to write all kinds of comments on the check like "we're debt free" and "here's the last of the money you will see from us." Just to emphasize our point, we used a spray paint pen to make these comments. Unfortunately, my bonus got delayed 1 pay period and we had to call and ask them to not process our payment. When I explained the situation to my bank, the nice lady stopped the payment because she said I changed my mind about the payment (she pointed out to me that it was against the law to write a check if you knew there were not sufficient funds to cover it). My wife mused that they probably had our check posted in their office somewhere for everyone to laugh at. Needless to say, we didn't make the same mistake when we sent the "final" final payment a few weeks later.

A few years after we became debt free I stumbled across a guy on the radio who advocates the changes my wife and I took to eliminate our debt. His name is Dave Ramsey and he now has a nationally syndicated talk show about personal finance. You can also listen to his shows live or archived at http://www.daveramsey.com via his website.

We created an inverse pyramid of debt (smallest to largest). Dave suggests the same thing and calls it the debt snowball (definitely a catchier term than inverse pyramid of debt). He also says everyone should live on a budget and pay cash for things. I wish we had found Dave when we were setting up our plan. It would have made things a little easier.

Getting scared about debt and controlling our spending was one of the best things that could have happened to us, and it was particularly beneficial to us that it happened early in our marriage. My wife and I can attribute our current financial success to a few things in our life and changing our spending habits and use of debt is definitely one of them.

Vacation in Cancun Mexico - All Inclusive Resort

I recently stayed at an all-inclusive resort in Cancun, Mexico. This was my first time at an all-inclusive and I must say, it was a great experience. The weather was great and the beach was awesome, and the all-inclusive aspect of our trip definitely added to our enjoyment.

Easy to budget. It is very hard to accurately budget for a big vacation, and I frequently find that it takes away from the enjoyment of the trip when I am trying to decide if I am staying close to my budget while on the trip. Airfare and hotels are easy to budget upfront, but meals, activities, and other parts of your trip can quickly drain your budget. The all-inclusive trip allows you to plan the airfare, meals, adult beverages, activities at the resort, gratuities, and various other aspects of your trip that are otherwise somewhat unknown.

Relaxing. My wife and I were able to have meals on our schedule and plan activities when we wanted to do them. We did not have to make reservations, and the restaurants were open late for our convenience. Also, the staff was great and went out of their way to make sure we had everything we needed.

Great service. We received excellent service throughout our stay. Many of the staff members called us by name and knew our usual drinks and preferences within a couple of days.

Pre-paid. One of the best parts of our trip was that we paid for the entire trip prior to taking the trip. I found that I was able to enjoy the trip more knowing that the cost of my trip was not increasing while I was on vacation, and I could do as much or as little as I wanted to each day. No choices to make due to budget constraints.

Choice. Our hotel had a variety of restaurants from which to choose. You could have a meal at a snack bar or buffet for one meal, and then have dinner at the steakhouse or Japanese restaurant. Or, you could enjoy elegant meal at an upscale restaurant. The choice was ours - no reservation required.

Open bar. The hotel had several bars throughout the property, but the poolside and beachside bars were probably the most frequented. Service was great here as well. It was very nice to be able to enjoy a beautiful day by the pool/beach and have someone drop off ice cold drinks from time-to-time.

We had a great time and would go back again in a heartbeat. I consider myself a frugal person, and my wife and I reviewed several options before choosing this resort. Vacations are the best investment that you will not get a financial return on, but the experiences and memories are priceless. Selecting an all-inclusive provided me with the opportunity to feed my adventurous wander lust side while appeasing my practical/frugal side. I feel I was able to have my cake and eat it too (cake was included in the all-inclusive meal plan).

Are you killing your credit score?

Everywhere you turn these days someone is running your credit to rate you as a customer, and many are now quick to report you as being delinquent or bad debt.

Credit scores are used by a wide variety of companies to rate new customers, determine which customers they want to keep, and target customers they would like to see leave.

Having a strong credit score can help you save money on everything from car insurance to the interest rate you pay on loans. It can also come in handy when you apply for service with a utility or cell phone provider. Check out www.myfico.com to learn more about what goes into determining your FICO score. Learning the things that affect your score is the first step in improving your credit score.

There is a great article on money.com today - "5 Ways to Kill Your Credit Score":
http://money.cnn.com/2006/07/10/pf/credit_killers/index.htm


The article discusses 5 areas that many people ignore or don't realize may impact their credit score. I will admit that I made 3 of these mistakes many years ago, and ironically, I thought I was being smart with my money at the time.

The article warns against, "Too many in-store cards," but one Christmas, several years ago, I decided to take advantage of every in-store offer to save the 10-15% by signing up for a credit card. I only took advantage of the offers where the savings would be $25 or more, and my savings was as high as $75 at one store. Unfortunately, my credit score probably plummeted 100+ points in December of that year, and it probably took close to a year to recover.

My next step was too clean up my credit report. I decided it was probably not wise to have open accounts on my credit bureau report that I was not using. I started contacting creditors and closing accounts. I included accounts I had just opened at Christmas, but I also included accounts that I had used in the past but were not currently in use. This most likely caused my credit score to drop even further, or at least recover more slowly.

As the article mentions, part of your score is based on the time accounts have been open so "closing credit cards" is not necessarily a wise move. By closing the accounts I was stopping the clock from running on the length of time the accounts had been open.

Also, a more important factor that it mentions is "High card balances, low FICO score." Let's say I had $20,000 in available credit when all of the accounts were open, but I only had a balance of $2,000 on all of the accounts combined. That would mean I had 90% "available credit." However, if I close all of the accounts except for the one card that has the $2,000 balance but only has a $4,000 limit, I have essential reduced my "available credit" from 90% to 50% by closing the other accounts.

Having a high credit score can help you save money and gain a higher standing with companies you do business with on a daily basis. Companies want to attract and retain customers with high FICO scores, and they know that you have lots of choices when you shop. Don't be afraid to shop around for the best rates and services. Remember, money saved on expenses can go toward investments, retiring debt, or enjoying life (like vacation!!), and leveraging your FICO score is a great way to do just that.

Personal finance rants and discussions!

I am looking forward to having a forum to discuss my favorite topic...personal finance! My plan is to use this blog to post my personal experiences with personal finance issues (I will share both my successes and failures), and share information I've learned about the topic of personal finance.

I have worked in the financial services arena for over 15 years, and I spend much of my free time reading or researching various money related topics. I have used this knowledge to increase my FICO score, save money on expenses, learn how to successfully negotiate for favorable terms on big ticket items, grow my investment portfolio, etc. My plan is to discuss many of those topics here.

There are topics that I will discuss that you will agree with, and there are topics that you will probably think I'm way off base. That's ok. Everyone is different and everyone's situation is somewhat different. My hope is to present topics here that will make people think and possibly evaluate their personal situation.

The ultimate goal in personal finance is not that you get everything perfect. The most important thing is that you TAKE ACTION!

I talk to people all the time that have put off doing vital things like starting their 401k at work because they are unsure what investments they should choose. These are college educated people who procrastinate for years starting their 401k and pass up on free money (employer matching and tax deductions) because they are too afraid of making the wrong decision.

Other people complain about being sick and tired of living paycheck to paycheck, but they won't put forth the effort of doing a budget. They are unwilling to take control of their personal balance sheet. Ironically, many of these people have jobs that require them to budget and forecast on a monthly basis, but they seem unable or unwilling to do the same for themselves.

You've probably heard some of these same people, or maybe you are a personal finance procrastinator.

If you have any personal finance topics that you would like to see discussed on this blog, reply to this post or email me at averagejoeintexas@tx.rr.com.