Episode 65 is an interview Mr. Mark Clayborne of www.startupcreditrepairbusiness.com and author of an www.amazon.com bestselling book on personal credit repair “Hidden Credit Repair Secrets”. Mark Clayborne has established himself as an authority in the personal credit repair industry and now helps entrepreneurs get started in the business of credit repair as well. In this interview we discuss Fico scores, paying bills, credit utilization, the high cost of bad credit and authorized users among many other valuable and informative details. Mark Clayborne’s business model is all about how to get your personal credit on the right track.
It’s Spring, the sun is shining and so are the new cars. It’s Car buying season, again. Maybe you don’t know this, but every season is car buying season. But the Spring is special because of 2 things, Tax Refunds and Sunshine. After being locked in doors all winter and quick injection of discretionary cash, buyers are ready. And so are the dealers, they’ve been waiting for you.
So when you go into the dealer to check out that new whip, that new ride… here’s some things to consider. The first few questions to size you up will be
“Are you ready to buy today?”
“If I can make this work are you ready to take the car today?”
“Do you have the down payment?”
“How much can you put down?”
“Are you willing to make a deal right now?”
“Can you give me $100 or $500 down right now to show you’re serious?”
“If you’re willing to take this today I can make you a deal like….”
And yes, they are serious. No matter what your situation, now matter what, they are dead serious. So if you’re looking to buy, you better be serious too. Dealer salesmen are ruthless, think on your feet types and can probably get you to buy an army tank and you wouldn’t even notice it until you get pulled over. Point being that they can get you interested in something you didn’t come to buy and worse, can’t afford to keep. That’s not their problem, they’ve solved their problem and that is to get you out of the door with a car anyway they can.
It is believed that most people will by up to 11 cars in their lifetime, except my brother Raul, he will buy 35 cars by in his lifetime, because- well he’s car crazy. So, how many car purchases will it be before you really get a grasp of the entire transaction? A little over 80% of people finance their car by taking a loan from some bank or financial institution. Most personal finance gurus and some financial advisors will tell you to only buy what you can afford, buy what you can pay with cash or can easily afford monthly. While it may not be as much car as you want, you won’t have the heavy burden of paying off a monthly nut. And, this is good advice in my opinion. However, the majority of people will not follow this simply because once they get in that “buying zone” and can qualify to get even close to the car they’d like, they go for it and that’s how the world goes round. Sometimes throwing caution to the wind, agreeing to exorbitant car notes and interest rates. Why? One deep seated reason is because emotions are involved, and much like love, things become very complicated in the decision making process once emotions get involved. Then there’s the association with expensive things and a feeling of “richness”. People begin to envision all sorts of favored adorations of themselves by others and their ego is well fed. Well, it may take a little better advice than “you’re going to save money” for the most of us to get past this ego booster once we’re in the zone. Yep, the ego at work making you work harder.
So for when you’re in the “Zone” and blinded by the “favored adorations” of your friends, colleagues and even your own ego (yeah, that feeling you get looking at the reflection of yourself driving in that big store window while stopped at a streetlight, that’s your ego you’re looking at.) here’s some info to help and keep mindful of.
Timing: When to Buy!
Generally, the best time to buy cars is the end of any given month, quarter or year. The bitter end, I mean like… the last one or two days of the month type of bitter end. The dealers have quotas to meet and you have a high chance of find a dealer in your area that needs that sale and they will go as far as to sell for below cost to make the deal. They make up the difference in bonuses from the manufacturer on just moving the units alone for the cycle, so don’t go feeling sorry for them. They make their money trust me they do.
Keep Value and in Mind…
Cars lose value very quickly. No matter what car it is, it will lose value. Some will lose value faster than others, but whether it is a Kia or a Bentley, once you buy it the clock is ticking and the value is in free fall. With this in mind, how much you put down on a loan and how much you pay monthly will make a huge difference. Typically, unless you step up the payments by paying and extra payment or so during each year of the loan you may become what’s known as “Upside Down” or “Underwater”. This means you owe more on your car than it is worth at some given time during the loan. Many people have this issue and don’t know it. It’s not always bad, but when it is, the only thing to correct this is paying your way out as fast as possible. Doubled up payments, lump sums, or you know that tax check… yeah, paying off some of the ever increasing net negative in your car to stop the bleeding.
Here’s how the “Upside Down” happens:
You (borrower), take purchase a car that is $25,000 and put down a nice $5000
You take a loan for the remaining balance of let’s say $23,200, given $3,200 in taxes, prep, and made up fees such as destination, delivery and registration. The interest rate is 5% and the term (length of the loan) is 60 months (5 years) leaving you with a payment of over $400, all of which isn’t going to pay off the car. Keep in mind interest is taken from each payment.
Due to what’s known as amortization of the loan and the interest rate, some of each payment is paid to interest. So the entire payment isn’t going toward paying off the vehicle. If the payments aren’t paying off the vehicle as fast as the value of the car is dropping, you end up owing more than its value within a couple of years. To get a good general understanding of amortization check out the loan calculator at Bankrate.com and put in your specific loan details.
It is very easy to end up “Upside Down” by the third or fourth year due to four factors:
Car value and cost at beginning (which directly relates to loan amount), and the residual value. This will be the value of the car once it is paid off. Oftentimes people complain that by the time the car is paid off, it isn’t worth anything. That will depend heavily on the deal and the next three things.
Down payment. This should reduce the cost of the loan. BE CAREFUL here. Get the TOTAL price FIRST, then consider the down payment. On the flip side- Be careful NOT to FINANCE thing like FEES. Remember whatever you finance you end up paying more for it and paying it over the life of the loan. So try to only finance the price of the car. Putting down more does lower the cost, but it is tied to the interest rate.
Interest rate. This will primarily be tied to your credit rating, better your credit the better the rate offered to you. People with the worst credit make up the difference on the rate that people with good credit get. Great credit gets 2%, terrible credit gets 20%. Bank makes 11% on all loans on average. That’s why “Everybody” will qualify… good credit, bad credit no matter what. Don’t fall for the “You can refinance later at a better rate in a year or two.” This is nonsense. In a year or two the car will have less value and you will be stuck trying to finance a car the is worth less than you owe. You will be better off paying more aggressively than refinancing which only restarts the loan for another 5 years. Time is NOT on your side, the asset is going down in value over time, not up in value.
Length of the loan. 36 month and 48 month laons or becoming a thing of the past. The 60 month (5 year) is standard and the now 6 or 7 year loans are being offered to allow people to be able to afford the payments and get eh car they are eyeing. All this does is stretch out the payments. It does NOT make it more affordable, at all. Buyers simply pay more by paying less but longer! A strategy to make these terms and pay off the car early is the only one that will work here, ok, the only legal strategy. Just be mindful and try to focus on 4 to 5 years, if that can’t work then the price is just too damn high! Don’t offset it by stretching it out. This may cause serious financial pain later on.
Any change in any of these will impact overall loan cost. Typically if a car is too expensive, the dealer will attempt to work on one of these things to make it more affordable. Lower loan amount, higher down payment and lower interest rate are all favorable when trying to work out a better deal, however, increasing the length of the loan (term) isn’t helpful in the end and definitely contributes to being underwater.
A last but very, very important note on being “upside down” or “underwater” on your car loan has to do with your trade in. “Trade ins”, often once car buyers realize they are under water or quickly approaching the tipping point of such and make attempts to get from under this situation by trading in their vehicle with the sinking value. Keep in mind that any sunken “dead” money has to go somewhere! Dead money is the negative difference in value vs. the amount you owe, e.g. you owe $15,000 and the car is worth $12,000, you’re upside down by $3000. If you trade this car in, the dealer is going to assess the value and look at the amount outstanding and probably will offer you to “roll” over the “dead money”, take your new car and go. Problem here is, let’s say the new car is $25,000 and you roll over the “dead money” of $3,000 and the new car now costs $28,000 making you “upside down by $3,000 starting from day one compounding your loss. Why would you pay $3000 more than they are asking, well that’s just what happened.
Here’s one of a few workarounds: Find a car that has huge “Cash Back” or buyer incentives, discounts, end of year clearance cash rebates or such, this cash can help eat up the dead money and help bring you back to the actual price of the car. Sometimes they have trouble moving certain models and offer anywhere from $500 up to $3,500 cashback or some other deal. Only trouble here is finding these deals on the car you may want, which may not be much of a drawback at all depending on what you’re trading out of.
DO NOT MAKE A DEAL BEFORE DOING THIS…
Absolute MUST when at the dealership and your about to “pull the trigger”
How much is it once you add insurance to the cost?
Call the insurance company and get an insurance quote for the vehicle. Typically, you will need full coverage with comp and collision with a $500 deductible when you’re taking a loan for the vehicle. This cost may be a deal breaker by taking the monthly cost from let’s say $450 a month to $750 a month to have the car once you add insurance depending on your circumstances.
Be ready to play a little ball, hardball if necessary. They want to sell as much or even more than you want to buy. Remember this, the guy who is willing to walk away gets the best deal. So there’s likely to be some back and forth. The salesmen will take the deal to some manager (finance, sales or whatever) behind some desk or wall, then back to you, then back again as you hammer out a worthwhile deal. This is known as the higher authority gambit. You don’t really know the conversation they are having or if they are just slapping “high fives” to each other back there. Even the tables a bit, propose you need to call the wife/ husband/ girlfriend or significant other to get permission and the money. It’s the same higher authority game, wait until they’re all done playing the back and forth then start up your shenanigans. Just know, if you shave off even $500.00 after being there about 2 or so hours, you just made $250.00 per hour for that one move. You’ll need it for insurance, gas and oil changes so get what you can.
I prefer and suggest buying cars at dealerships, simply because they seem to have more flexibility in incentives for both themselves (by the manufacturer) and for the buyer, typically have better certified pre-owned programs and more banks to choose from that will compete for your loan. There are other good reasons people may like dealerships or used car lots, however, I’ve been able to get the best for my dollar this way.
Watch out for…
FEES: Title, Tags, Destination, Taxes, Registration, Dealer Cost, Prep, and… anything else the marketing department thinks of. This is where they make serious money on the deal. There is no product exchanged or service provided, just tacked on fees. Try asking the salesmen for a list of the fees upfront on the car you’re interested in BEFORE you write up the deal. Typically they can adjust these depending on how much you haggled with them, if you get these numbers upfront they won’t slip in “new” numbers on you.
Surely, there are many, many more details and things to consider on your quest to get that slick new whip. Keep these in mind and be ready to walk out and find another dealer if necessary, they are overstocked with cars and need you to buy. Have a good idea of your budget, and try your best to stick to it. Your monthly budget should include the cost of insurance, without considering registering in a cheaper state for cheaper insurance. Don’t discuss your budget with the salesman, he’s going to use it reason why you can afford something that you may not be able to. It’s a buyer market out there and you sit in the driver’s seat. Just let it be an affordable seat, those are the most comfy.