Key financing questions you should ask

By Bankrate.com

Here are some questions that you must ask when discussing financing. Write them down or print them out before going to the dealer. Make sure you get answers to these questions that you fully understand. If anything is vague or confusing, walk away and come back after you've had time to think about it. If the sales or finance person makes a claim you think is too good to be true, have them write it on the finance contract and get a manager to sign off.

1. What's the interest rate I'm really paying? The APR (annual percentage rate) is the best way to know what interest you are paying. It is the actual interest rate you pay annually on the unpaid balance of the loan. The rate you are offered will to a large extent depend on your credit score, a number that dealers get from your credit report.

2. Are there any possible penalties in my loan? Does paying the loan off early entail penalties? Are there any other possible extra charges that could occur during the term of my loan? Are there "hidden charges'' that effectively are penalties?

3. What is the precise (down to the penny) price I'm paying for the vehicle?

4. What is the total amount (be exact) being financed?

5. What's the dollar amount I'm paying for the credit (finance charge)?

6. What's the exact amount of each payment?

7. What is the total number of payments?

8. Is this deal contingent on getting subsequent approval of the financing from a third party? Some dealers will send you out the door with a car then call a day or two later to say they couldn't get you financed at the rate they quoted, but they have found a lender who will cover the loan at a higher payment. Don't fall for this. Make sure you know who the lender is and that the deal is sealed before leaving the lot. If there's any question, tell the dealer you'll come back and get the car when everything is settled.

9. What about credit insurance? Your lender may offer, or even demand, credit insurance. First, find out exactly what it will cost you. If you have an existing insurance policy that covers the same thing, make a thorough comparison. It's not required by federal law, and check your state's requirement (through the office of your attorney general or insurance commissioner) if your lender requires it. It's very rare that any do. But if you must pay, make sure it is included in the cost of your credit and see where it is reflected in the APR you are paying

12 Secrets Your Car Insurer Won't Tell You

Knowing how the industry works can save you a lot of money and grief. Here are the secrets behind the premiums, and how you can save after an accident.

By MSN Money staff

Getting a good deal on auto insurance is hard enough. Keeping your premiums from rising? That can feel like playing a game where the rule maker refuses to tell you the rules.

Here are a dozen ways the industry works, with tips to help you save:

If you have good credit, you'll pay less. Almost all insurers -- including the top five -- pull your credit report. Why? Studies have shown a direct correlation between your credit score and the likelihood that you will file a claim. Insurers also know that if you pay your bills in a timely fashion and have had the same credit accounts for a long time, you're more stable than someone who pays late and frequently opens and closes accounts. They use this information to create your "insurance risk score," which is one factor that determines your auto-insurance rate.
Tip: Your insurance-risk score is not available to you, but it may be similar to your credit score. If you have unusual credit activity, wait a month for it to return to normal before buying auto insurance. If your credit history is shaky, clean it up as soon as you can.

Your car model affects your premium. You won't get these numbers from your insurer; in fact, you may not be able to get them at all. But the auto insurers do have a rating system for every car make and model. Most use a system devised by the Insurance Services Office, which starts with the cost of the vehicle and then factors in safety and theft data. Cars are given a rating from 1 to 27, and the higher the number, the higher your premium.
Pay in full to avoid installment fees. "Fractional premium" fees are usually charged when you pay your annual premium in installments rather all at once. Payments usually are offered on a six-month, quarterly or monthly basis, but almost every insurance company charges an administrative fee for breaking up the payments. The more you break it down, the more those fees add up.
Tip: Ask about fees for paying in installments. If the fees are small enough, it may be worth it. Remember that insurance companies can cancel your policy for late payment, many times with minimal notification, so make sure you won't miss an installment. If you can pay the premium up front, it may simplify the process and save you a few dollars.

That Pearl Jam CD in your car isn't covered. Stolen or damaged personal items like compact discs aren't covered by your auto insurance.

Tip: You can file a claim on your home insurance. Most home-insurance policies will cover smaller, less expensive items such as compact discs. However, if you carry expensive items such as computer equipment, ask about a rider to your home-insurance policy. It's wise to take photos or video of any expensive personal items before they go missing.

Bad drivers will pay You'll pay for your bad driving. The industry standard is to increase your premium by 40% of the insurer's base rate after your first at-fault accident. For example, if the company's base rate is $400, your premium will go up by $160. Not all auto insurers play by this rule, though, and some may increase your individual rate by 40%. Regardless of what formula they use, in the majority of cases, your rates will go up.

Tip: Some insurance companies have a "forgive the first accident" policy. The qualifying variables are wide-ranging, so ask your company if it has a forgiveness policy and how to qualify.

You'll pay for your friend's bad driving, too. If your friend borrows your car and crashes it, you'll have to file a claim with your insurance company. You'll have to pay any deductible that applies, and your rates will probably go up as a result of your claim.

Tip: If your friend didn't have permission to take your car, in most cases you won't be held liable for the damage. But if your friend is uninsured and causes damage that exceeds your policy limits, the injured party can come after you for medical and property-damage expenses. Best bet? Don't lend out your car.

The value of your "totaled" car may surprise you. Auto-insurance companies don't use the standard Kelley Blue Book or National Association of Automobile Dealers value. Instead, each company has its own proprietary list of car values, and most have specialized software for valuing cars in each region. They take into consideration the car's mileage and pre-accident condition.

The insurance company may also ask local dealers what they'd charge for a similar replacement car. However, the insurer will consider quotes from suburban towns as reasonable estimates, even if you live in the city. You might have to drive several hours to reach the cheapest dealer, just to save the insurance company money. And they might be quoted a better deal than you could get if you walked onto the lot.

Tip: If you disagree with your insurance company's value determination, there are several things you can do:
Next time, get "gap" insurance. It will pay the difference between what an insurer will cover and what you owe, which can be several thousand dollars.

If you have maintenance records that show you've had the oil changed every 3,000 miles and you've had the car checked routinely by a mechanic, present copies to the insurance company to show the car was in good condition. If you've been paying premiums on any special parts or upgrades, make sure those are included in the insurance company's evaluation.

Get price quotes on replacement cars from three dealers within a reasonable driving distance and submit these to your insurance company. Ask the insurance company for a list of dealers within a specific distance who can sell you an equivalent car for the value the company is claiming.

If you still aren't satisfied, you can step up the process and go to mediation or arbitration. Mediation involves presenting your case to a neutral party for help in reaching a compromise; arbitration is a binding decision. You can also, of course, take the issue to court.

Check into "diminished value." Say your car has been in an accident, but repaired. Is it worth less than the exact same car that hasn't been in an accident? It's a hot topic, but some say yes. In 14 states, you're allowed to file a claim with your insurance company for that lost value.

Tip: Thirty-six states and Washington, D.C., allow insurance companies to exclude payments for diminished value, so if you live in one of those states, you won't get to claim the loss. But in Florida, Georgia, Hawaii, Kansas, Louisiana, Maine, Maryland, Massachusetts, North Carolina, South Dakota, Texas, Virginia, Washington and West Virginia, you have a chance of getting a diminished-value payment. If you weren't at fault in the accident, you often can make a successful case against the insurance company of the driver who was at fault.


You may not owe sales tax on your replacement car. Twenty-eight states require auto insurers to pay for the sales tax when you replace your totaled vehicle with a new or used car: Alaska, Arizona, Arkansas, California, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Kansas, Kentucky, Maryland, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New York, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Vermont, Washington, West Virginia and Wisconsin.

Tip: Make the request; don't expect the insurer to offer to pay upfront. Even in states that do not require sales-tax reimbursement, you should request it. Many auto insurers will not deny the request because the policy requires that they make you "whole," returning you to where you were before the accident at no cost to you.
-Accident value of your car. If the insurance company values your car at $10,000, and you purchase a new car for $20,000, the tax will be calculated on $10,000.

Odds and ends

Hit by an uninsured motorist? Try to "stack." Stacking uninsured/underinsured motorist (UM/UIM) coverages means collecting from more than one auto-insurance policy that you hold. Most states forbid this practice, but 19 states allow it or don't address it.

Tip: Check the language of your policy to see if stacking is allowed.

There are two scenarios for stacking: First, if you have multiple cars on your policy with UM/UIM coverage on each, you can collect the limit of your UM/UIM coverage under as many vehicles as necessary to cover full payment for damages. Second, if you have more than one policy with UM/UIM coverage, even if they're from two different insurers, you can make a claim under each policy until all your damages are recovered.

You can wait to add your teenager to your policy until he or she is licensed. You are not required to add your teenager to your policy just because he or she has reached driving age. In most cases, you can wait until he or she has a license -- or, if you're in a high-risk insurance pool, a permit.

Tip: Don't forget to tell your insurance company that you have a licensed teen. If you have to file a claim on his or her behalf, your insurance company is entitled to charge you back premiums from the date your teen received a license.

You must officially cancel your insurance policy when you switch insurers. Your policy most likely states that you can cancel your coverage at any time by notifying the company in writing of the date of termination. However, most people assume that if they decide to terminate the policy at the end of the coverage period, all they have to do is ignore the bill. The insurance companies don't see it that way. They will send you another bill for the next premium payment, and when you don't pay it, the company will cancel you for nonpayment. That goes on your credit record.
Tip: Call your insurance agent or the company and let him know you are canceling your policy. Give a specific date, or you may end up uninsured for a period of time. The company will send you a cancellation request. Most often, the form is already filled out and all it requires is your signature. Make sure you read it to check for errors.

You may have to prove to your former insurance company that you have new coverage. And if you've financed your car through a dealership, update the dealer on your new insurance information, because purchase contracts often require proof of coverage.

Updated April 18, 2007

Another Financial Score That Can Hurt You -Debt to Income Ratio

We all know about credit scores, but there's another figure lenders watch: the debt-to-income ratio. It's a good indicator of your financial well-being.
by Erin Peterson for Bankrate.com.
By now you know your three-digit credit, or FICO, score is a very important number in your financial life, but did you know there's also a two-digit number that can be just as significant?
It's your debt-to-income ratio, and it can shed a light on, and help you better understand, your true financial picture.
The good news is, getting this number doesn't cost you a penny, and it can be calculated in just a few minutes at your kitchen table.
So, if you think getting insight into your financial life requires sifting through your retirement investments, reading through every fund prospectus and tallying your expenses to the penny, think again.
It's true that nitty-gritty details can make a difference, but you can get a fairly accurate understanding of your financial picture by spending just a minute or two calculating your debt-to-income, or DTI, ratio. By knowing the ratio -- and how to improve it -- you can increase your chances of getting a better mortgage, a better car loan and even better credit card rates.
Start with a list - Your debt-to-income ratio is exactly what it sounds like: the amount of debt you have in the form of mortgages, car loans, student loans and credit card debt, as compared to your overall income.
To calculate your overall DTI ratio, sometimes known as a back-end ratio, add up all of your monthly debt obligations -- often called recurring debt. Include your mortgage (principal, interest, taxes and insurance) and home equity loan payments, car loans, student loans, your minimum monthly payments on any credit card debt, and any other loans that you might have. Do not include expenses such as groceries, utilities and gas. Take this total and divide it by your gross monthly income from all sources. If you're not good at long division or don't have a calculator handy, go to Bankrate's calculator section to use our debt-to-income ratio calculator.
Some lenders will exclude the mortgage payment from this equation, but they lower the acceptable ratio for receiving a loan. The concept is the same: It measures your debt load in comparison to your income.
Let's say you and your spouse together earn $83,000 per year, or $6,916 per month. Your total mortgage payment is $1,350, your car loans total $365, your minimum credit card payments are $250, and your student loans add up to $300. That equals a recurring debt of $2,265 a month. Divide the $2,265 by $6,916 and you'll find your DTI is 32.75%.
In general, you'll want to keep that number below 36% -- a threshold that loan officers and credit card issuers often use as a factor when they determine how much they're willing to lend you. "If you go higher than 36%, you are on a slippery slope," says Diane McCurdy, a certified financial planner and the author of "How Much Is Enough?" Lenders might give you money, she adds, "but they'll give you higher interest rates, and if anything goes awry, they'll sock it to you."

So why is that number so important? It's all about proportion, says Laura Russell, a certified financial counselor with GreenPath Debt Solutions. "You can be making a lot of money every month, but if you've got the debt to match it, that can be a problem," she says. "It's important not to overextend yourself." The higher your number, the riskier it is for lenders to offer you loans -- and the more they'll make you pay for them.
Finding leverage - Though debt-to-income ratios don't have the kind of buzz that FICO scores do, they can play a key role in determining if you qualify for a loan and how much you can get. "Your debt-to-income ratio is one of the tools that banks will use to determine whether they'll lend you money for a mortgage, a car loan or a student loan," says Dave Hinnenkamp, the CEO of KDV Wealth Management.
While other factors, such as your FICO score and length of time in your home or job, will come into play into this equation, a good debt-to-income ratio can give you leverage to negotiate if other factors aren't in your favor. "The stronger you are financially, the more leverage you have when negotiating interest rates or loan amounts," says Hinnenkamp. "So there is an advantage to keeping that ratio low."
The DTI ratio is something lenders look at in addition to your credit score. Remember, your FICO score reflects only your payment history and does not have anything to do with your income. You can have a very high FICO score with very little income. Conversely, you can have very high income and a very low FICO score. That's why lenders use both.
To be sure you're on solid ground, McCurdy recommends trying to bring your overall DTI ratio to 30% or below. After all, you have plenty of other financial obligations, from groceries and utilities to restaurants and entertainment. "You never know when you're going to have an emergency," she says. "You don't want to get in trouble -- and potentially lose your home or car."
Cutting your ratio - Reducing your debt-to-income ratio can be challenging, since these financial obligations are, by definition, ongoing. But there are tactics you can use to start addressing the problem, says McCurdy. "Look at where your cash is going," she says. "Ask yourself where you can cut back."
- Find areas to cut costs. After you've looked at your budget and done some cost-cutting, take the money you've saved and put it into your highest-interest loans and debts -- most likely your credit cards.
- Double up on credit cards. McCurdy recommends at least doubling your minimum payment to start chipping away at your debt-to-income ratio. If credit cards aren't the problem, you can also pay more on any other loan, as long as there are no prepayment penalties.
- Stop charging. Once you've started making progress, make sure you don't rack up more credit card debt.
- Build an emergency fund. Have this money so you can replace your furnace or pay off a vacation without going back into credit card debt.
- Avoid major purchases. If you're teetering on the edge of problems, it might be wise to hold off on major purchases. "Don't overextend yourself with a new car loan or mortgage loan," Russell says.
- Consider getting help. If you still can't rein in your DTI ratio, you may need to get the help of a financial adviser who can help you consolidate loans and put you on the right track.
Another ratio
There's also a second, related ratio that's helpful if you want to judge whether you can afford to buy a certain house or if you want to know you can still afford to live in your existing home. Perhaps your income has dropped or expenses have changed significantly because of a new, higher interest rate, new tax increase or skyrocketing insurance costs. This figure is called the front-end ratio and you can calculate it by adding up the monthly mortgage principal, interest, taxes and insurance, and dividing it by your gross income. That number generally should be no more than 28%, says Russell. "You might see exceptions for a first-time homebuyer or someone with marginal credit, but in general, you don't want to go above that," she says.
Keeping your front-end and back-end ratios in check will help you stay financially stable. If you find yourself edging into dangerous territory, McCurdy recommends cutting back on spending for entertainment and restaurants, paying more than the minimum payment on your credit cards and tackling your highest-rate loans and credit card debts first.
Even if your numbers fit within the prescribed ratios, be sure that they make sense for you. "We're always being lured by advertising to buy these wonderful things," says McCurdy, "but just because you qualify for something doesn't mean you're managing your money well. If you take everything to the limit, you don't leave much room for error."

Avoiding Credit Hassles at the Dealership

by Phillip Reed

You fill out a credit application at a car dealership. You're led in to see the finance manager who happily announces, "Great news! I can finance you at 9.9 percent."You're tempted to say, "Sounds good. Let's do it." But then doubt sets in. Isn't the prime rate 6.5 percent now? How do I know this is the best rate I can get?So instead of readily agreeing, you say, "That rate sounds a bit high.""We base our interest rates on your credit score," he tells you.Naturally, you ask, "So what was my credit score?"

Now the tap-dancing begins. The finance manager tells you your credit is good — but not that good. There are a few little things on it ... But at the end of this shuffle he might say, "You know what? I just remembered there is this other bank where I think we can get you 9.1."Well, you've just saved yourself some money. But the rate still might not be as low as you can get. After all, if you don't know what your credit score is, you can't aggressively demand the best terms.

The interest rate you pay on financing your new car is like so many other things at the dealership — open to negotiation. So how do you go about getting the best deal? And is it worth haggling over a few percentage points?

First things first: Yes, it is definitely worth trying to get the best interest rate possible. While one percentage point might not seem like much, applied to a five-year loan it can be significant. For example, on a $20,000 auto loan at 9 percent for five years, according to the Edmunds.com loan calculator you would pay $415.17 a month. But if you financed the $20,000 at 7 percent, you would only pay $396.02 a month — a savings of $1,149 over the five-year period. And because of the way car lease payments are calculated, they have a greater impact when leasing than when buying.Clearly, a low interest rate is important. To accomplish this, make sure your credit report is up-to-date and all black marks have been removed. Those things that can negatively affect your credit include the following:
· Late payments
· Non-payment of bills
· Bankruptcies
· Liens
· Repossessions
Any financial blemishes will lower your score with the most commonly used credit ratings agencies: Experian, Trans Union and Equifax. These companies generate a rating which, for most people, falls somewhere between 330 and 850, and are called "FICO scores" named after Fair, Isaac & Co. Over 800 is considered perfect. Below 800 may put you on a lower credit tier. In the 600s you find yourself in the "sub-prime" area and will pay inflated interest rates. Higher interest rates are justified by lenders who say there is a risk the person will default on the loan. (Visit the FICO Web site for a more complete description of how credit scores are interpreted.)

Auto dealers rely heavily on FICO scores in setting your interest rate when you buy a new or used vehicle. Therefore, it's in your best interest to know your credit score before you visit a dealership. Otherwise, it may come as an unpleasant surprise in the finance and insurance room when you set up your loan.It's a good idea to check your credit scores periodically. In some cases, people who have common names might find someone else's misdeeds on their record. Besides that, if your credit is sub-prime, you will be subject to a number of expensive — and unpleasant — practices.

Two extreme cases are referred to as spot deliveries and bogus insurance sales.A spot delivery occurs when a dealer looks at a customer's credit and sees that they will probably qualify for a car, but they don't have all the information to set up the loan. They allow the customer to take the car while they continue trying to get them qualified. In some cases, the customer is told to return to the dealership and a new contract is generated — at a higher interest rate.In other cases, a customer is told that their credit is weak and they can't buy the car unless they pop for an expensive extended warranty or additional insurance policy. This is a false requirement intended for dealer profit.

Consumers should also know about a practice used in the auto business called "dealer markup." Here's how it works. You go car shopping and agree to buy a vehicle for a certain price. You then tell the salesperson that you are either going to finance the car or lease it through the dealership. Before you go into the finance and insurance room to review the final documents, the finance manager begins shopping for a car loan on your behalf. She may find that you qualify for a 7 percent loan over five years.Now things get sticky. The finance manager calls you in and says, "Great news! I can give you this loan at 11 percent." Obviously, she has marked up the interest rate 4 percentage points. The difference between what the bank charges the dealer and what the dealer charges you is their profit.

Is this illegal? Absolutely not. Is it unfair? Well, it depends how you look at it. They've done you a service by arranging the loan. For their work, they are making a profit.However, you want to save as much money as possible. The easiest way to do this is to arrange your financing before you go to the dealership. Check with your credit union or bank (keep in mind that interest rates are slightly higher for used-car loans than new car loans). Auto loans will usually be one or two points above the prime rate, which fluctuates throughout the year.Once you have been approved for a car loan, it's easy to go to a dealership and negotiate only for the purchase price of your new car. You will be asked several times throughout the process how you plan to pay for the car. Give them a relieved smile and say, "I'm paying cash for the car." This doesn't mean you are going to give them $20,000 in cash. It means that the dealership will receive one lump-sum payment for the car.

There are times, however, when financing through a dealership makes sense. Sometimes, the manufacturer offers to loan money at exceptionally low interest rates such as 2.9 or even 0.9 percent. If you can qualify for these special programs, you should take advantage of them, though they often mean reduced payment periods such as 24 or 36 months.

Bottom line: Don't be held hostage by the dealer. Do yourself and your family a big favor — clean up your credit report before you begin the car shopping process. Next, nail down a low-interest loan from an independent lender such as your credit union or bank. Then, and only then, hit the car lot and start shopping.