Welcome back!!
If you missed the first part of this series, 5 personal finance terms in plain English, you can click the link below to catch up!
5 Personal Finance Terms In Plain English
Soooooooo, last time we named terms that you will normally find when dealing with homeownership.
This blog post will focus on personal finance terms normally heard when dealing with car buying. I mentioned that personal finance terms can be confusing and I especially think it is true when it comes to terms associated with car buying.
Car salespeople want to sell cars. They are not concerned with what it costs you personally to buy that car.
Dealers will finance you right there at the dealership. They will let you keep the car overnight. They will even sell you gap insurance. All so they can make the sell.
YOUR RESPONSIBILITY is to make sure that you actually understand what YOU are getting yourself into.
So here we go:
Definitions are taken from the book Personal Finance by E. Thomas Garman and Raymond E. Forgue.
1. MSRP. This term stands for manufacturer’s suggested retail price. It “is the retail price set by the manufacturer and posted on the federally required side window sticker. The dealership wants you to pay full MSRP plus any miscellaneous charges”.
The key letter in MSRP is S which stands for suggested. If someone makes a suggestion, that means they want you to consider something. It is not written in stone and that is not the final say.
So, you should always dispute the dealer’s suggestion for the price of the car.
Then there is the dealer’s invoice price. At the very least, you should start negotiating the price of a car with the dealer invoice price. But even the dealer invoice price has additional charges added on to make more money for the dealer.
I would suggest doing some homework to look into all of this before you ever step foot onto a car lot to “look” at cars. And if you need additional help, read the post below first.
How To Buy A Car You Can Afford
One other thing to ask about at the dealership is rebates. You may be entitled to a manufacturer or dealer rebate. And this simply means that they are willing to pay you to buy their brand of car and not the other person’s brand.
2. Interest. Interest is the charge for borrowing money. When dealing with cars you will normally hear annual percentage rate or APR versus interest rate.
It’s in your best interest to arrange your own financing and get your own APR from your bank. The dealership is in business to make money. And one of the ways they do that is through the interest rate they charge you if you finance with them.
As an example, a dealer may give you $3,000 off the price of the car but charge you a higher interest rate and make up the difference for themselves. So be sure to watch out for this!!
3. Upside down. When you take out a longer loan to purchase a car, such as 60 months versus 48 months, the value of the vehicle may be less than you owe for half or more of those years–this is what it means to be “upside down” in a car.
And when you are upside down in a car, the car has negative equity, and this means you owe more on the car than what it is currently worth.
Then if your car has negative equity and you default on the loan or sell the vehicle, you will have to make up the difference in the price.
And if you trade the vehicle into a dealer and finance a new car, the negative equity will be rolled over into the price of the new car.
Who wants to volunteer to sign up for that? I know I do not. I guess the point here is to buy what you can actually afford. Don’t fall for the dealership’s fancy math, do your own.
4. Lease. A lease on a car or any other product means that you are, in effect, renting the product while the ownership title remains with the lease grantor.
Basically, when you lease, you are just renting for a very long time. And not only are you renting for a very long time, you also have a million rules to follow!
You have a certain amount of miles per year, you have rules about the wear and tear of the car, there are penalties for returning the car early, and you have to pay upfront money to even get the lease in the first place.
Hmmmmmm, do you really want to go through all of that hassle just to drive a more expensive car, that you can’t really afford, because you want lower monthly payments?
And I know some people will say they lease because they want to change their cars every few years and all of those notions.
But I can’t help but wonder, is that the real reason you are leasing? Or are you just in over your head and have no other choice but to lease this car because you can’t really afford the payments if you buy it outright?
See, this is the point when you really should start asking yourself some much deeper questions about this car purchase.
Personally, I would be asking myself is it worth it? What are my real priorities? Does this car mean that much to me that I am willing to put up with all of this?
Something to think about…
5. Balloon payment. A large payment due at the end of a term for an item, i.e. a car lease or a home. If you get a car loan with a balloon payment at the end you may make smaller monthly payments, but your final payment could be a very large amount.
If you get to the point where you have to make the balloon payment and you can not afford to do so, then you may have to refinance that portion of the loan again.
So now you have been paying on a loan for 48 months, then you have to refinance the balloon payment for another 24 or 36 months! Really??? Does anyone want to sign up for this?
Please be careful, do your homework, run your numbers, read before you sign, and look out for words like “balloon payment”!
I hope you enjoyed this blog post!