This Weeks Top 5 on Money and Credit

Over the past few days we've read about ways to cut spending and to protect ourselves from getting scammed. Here are a five posts that I particularly enjoyed this week.

JLP on AllFinancialMatterrs tells us to watch out for financial planners and their fees in a post titled Planners and Fees .

Kyle posted a link to a cool video called How to Avoid Getting Ripped Off By A Mechanic that talks about the 5 things that you need to know.

A post on The Mad Money Analyst tells us to be wary of store branded credit cards, that these types of cards can get people in trouble if their not careful.

Have you been getting a lot of e-cards lately? Hope that you haven't been reading them all! Vinoo Thomas tells us more about the dangers of reading these over at McAfee Avert Labs Blog.

Don't waste your money on ID Theft Insurance! Read this excellent post at My Money Blog about ways that you can self insure against ID Theft.

More Car Expenses? Money saving tips!

Car expenses. A necessary evil? A car can be a huge drain on your budget when its not properly maintained. And sometimes, even with proper maintenance, it can catch you by surprise.

Here are a couple of ways to ease the money pain when it comes to owning and operating your wheels.

• If you can car pool, or if there is public transportation, leave the car in the garage. Don't drive the kids to school if they can ride the bus. You'll save money on gas and reduce wear and tear.
• Combine your trips. Instead of running to the store to get ice cream, and then later dropping the kid off at their friends house, make one trip instead of two. Takes a little planning, but you can do it! Arrange car pools with other parents to run the kids from place to place.
• Find the lowest gas price in town (or even outside of town if that's what it takes) and fill up your gas tank. In the long run, it can be less expensive if you keep your gas tank full instead of hovering around empty because if you're close to empty, you're going to need to buy the gas no matter how much it costs!
• Have your ride services regularly. Check you tire pressure, oil and other fluid levels weekly. Follow the manufacturers suggest maintenance schedule (see your owners manual).
• Shop around for insurance! It can be a pain to check every year, but it can save you a lot of money. Insurance premiums can creep up on you if you don't pay attention.
• You can save a bunch of money if you can learn to do your own maintenance like oil changes, filters, spark plugs, etc.
• If you think that your car is acting strange, get it looked at before it gets real strange and expensive! Don't procrastinate! Minor issues can result in major repairs if not addressed sooner than later.
• Check around for a lower car loan rate. Yes, you can refinance a car loan. No, you're not stuck with the high rate that the dealer gave you! Another lender would be happy to give you a better deal. Check around!
• Don't take the car to the dealer for things like brakes, oil changes and mufflers. Specialty shops are no where near as expensive as the dealership. Shop around for price. You'll be surprised....
• Know your mechanic. Ask people that you work with or who are in your circle (like church or other community groups) who they recommend for a mechanic. Why? You don't want someone who is going to recommend unnecessary repairs or who's work is shoddy...

Dealer Financing, Good or Bad?

The convenience of letting the car dealer handle your financing can be very expensive. In our world of immediate gratification, this price might be something you're willing to pay. But, you should consider the alternatives and the cost.

The ability for the average consumer to get invoice pricing information and wholesale used car values has put a huge dent in the dealers ability to make a profit on the car. Now dealers use other channels to create profit. One of the the biggest profit centers in the dealership is the Finance and Insurance Department (F & I Dept.).

Making a big profit on the financing is easy for the dealer if you're an uninformed buyer. But, because you're reading this, you can count yourself as one of the lucky few. Now you're going to be in the know, and you will be an informed buyer. Knowledge is power!

So, how does the dealer make a profit in the Finance and Insurance Department? They start off by making a deal with an indirect lender. This lender could be your local bank, or one of any number of national lenders. It's likely that the car dealer has a couple of lenders that they have this deal with, and the deal is mutually rewarding. The lender doesn't have to market directly to you nor do they need to employ a loan officer to talk with you about your financing, thereby cutting way down on their costs. Instead, the Finance and Insurance Manger who is an employee of the dealership (and who incidentally is paid on commission!) is working for the lender, filling the marketing role by promoting the bank to you, and fulfilling the loan officer role by helping to complete a loan application and forwarding it to an underwriter. Sweet deal for the lender.

So far, we've talked about how this deal rewards the lender. How does it reward the dealer? Makes them tons of money, that's how! You see, part of the deal with the bank is that the dealer gets a special interest rate known as the 'buy rate', which they are allowed to increase or 'mark up' by 300 basis points or more. This means that if the dealer 'buy rate' is 5%, they can (and will!) charge you (the 'street rate') 8% or more for the loan! When they do this, they get to keep the difference in finance profit. This can be a lot of money when you're talking about a big loan. Let's look at some numbers:

$28,000 Loan amount @ 3% interest rate (the difference between the 'buy rate' and 'street rate') over 60 mos = $2187.00 dealer finance profit. Not bad for an hours work in the F & I Department, eh?

Let's look at the difference between a 5% (the buy rate) and an 8% (street rate) payment for a $28,000 loan over 60 months. The 5% rate has a monthly payment that is $39 less than the 8% rate. Look at it this way; you can make $39 per month for the next five years simply by spending an hour today shopping for a good car loan rate before taking the dealer financing!

Shop around for a car loan BEFORE you go to the dealer! Get a low rate loan commitment from your bank or credit union before you go car shopping. Then, after you've found your car, let the F & I Department make a firm rate offer to you. If it's more than what your bank or credit union has offered, you have a couple of choices. Negotiate a better rate. Will they give you a lower rate if you have shopped? Almost guaranteed! Even if they can't mark up the rate even a whisker, they will still get the 'retention' pay. This is a flat fee paid to the dealer, normally around $150, just for taking the application and handling the paperwork. Of course, you can forgo the negotiation and just get your loan from the bank or your credit union.


Be sure to vist The Mint Blog to read more awesome articles like this one in the upcoming 108th Carnival of Personal Finance!