Avoid the #1 mistake that car buyers make

The No. 1 mistake that car buyers make — no matter whether they’re buying new or used — is so simple to avoid. I want to identify it for you and tell you how to work around it so you can save big bucks.

Avoid this #1 most common error of auto shoppers

You might have spent hours researching a potential car purchase thoroughly, but did you do the same when it came to getting your loan? One of the biggest mistakes people make when buying a car is to not arrange financing before they walk into a car dealership.

The Boston Globe reports that 80% of car purchases are financed at the dealership. Dealers are entitled to make money on a loan if you don’t do your homework and get prequalified elsewhere.

Credit unions offer interest rates on car loans that can be 2.5 percentage points lower than other lenders. You may also want to check online lenders. Even your auto insurer may be able to give you a competitive interest rate. As a last resort, I even recommend that you go to a traditional bank.

If you’re buying a new car, be sure to see my new car buying guide. If you’re buying used, then you’ll want to read my used car buying guide.

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How auto dealers make their money

The real money in car dealerships is made in the F& I (finance and insurance) department, where the F& I man (or woman) sells extended warranties and writes car loans.

When you fill out a credit application at a dealership, the dealer goes out to wholesale the money for you. They might get money at 4 percent, but they could write the loan at up to 7 percent or even higher — especially if they con you into thinking you have bad credit. The younger you are, the likelier it is that you’ll be conned into thinking you aren’t good for the money and they are heroes to get a loan for you!

When you are financing a car, I want you to be sure you never finance for longer that 42 months. Anything longer than that and you risk being ‘upside down’ in your car — owing more on the vehicle than what it is worth.

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Used cars becoming more of a deal

There is a steady increase in the number of used vehicles for sale. We went through a period that was unprecedented where new cars were a better deal than gently used cars. But that era has closed and the historical norm of a 3 or 4 year old used car being a real deal has returned.

Now that trend is only going to intensify thanks to big waves of vehicles coming off lease. Three and 4 year old cars are a real deal again. Put it this way: You can buy an entry level new car for the same money as a 4-year old luxury car. The latter is actually a better deal because it has already depreciated out, while the new car will have a lot of loss is value due to depreciation over the first couple years of ownership.

The number of vehicles being leased now is close to a third of the whole auto market pie. So those cars when they come back after a lease will flood the market through 2016, providing a steadily improving opportunity for you to buy used instead of new.

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