Car Negotiation Coach

According to the IRS, if you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. And commuting to your regular workplace is not considered business travel. 

What car expenses can you deduct?

The IRS gives you two options to deduct the business use of your car:

1. Deduct car expenses using the standard mileage rate. The standard business mileage rate for 2010 is 50 cents per mile. This changes from year to year (and sometimes mid-year like in 2008) so be sure to check the IRS mileage rates.  On top of the standard mileage rate, you can deduct tolls and parking. 
2. Deduct car expenses using actual expenses.   Actual vehicle expenses include lease payments, gas, oil, depreciation, license and registration fees, insurance, repairs, tolls, and parking. 

Lease payments can serve as one of your biggest tax deductions.  In my opinion, if you can deduct business use lease payments, that is the only time that leasing makes good financial sense.  Here’s more to help you determine whether to buy or lease a car.

And in order to qualify for either option you must also keep detailed records of your business use of the car in a mileage log showing the date, business purposes, and number of miles driven.  Keep in mind the second option is considerably more difficult to document.  And just because it is more challenging does not necessarily mean you’ll end up with a larger deduction.  Before deciding, try to estimate your annual savings under both options or check with a tax professional.

For more details on deducting car expenses refer to the IRS website. 

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Many people, when they have credit cards that offer rewards, want to put everything on their cards. This way, they reason, they can rack up the reward points faster. After all, $200 to $500 every month on your credit card starts to add up significantly over time. However, just because you can put your car payment on a credit card doesn’t mean you should.

First Things First: Will The Finance Company Even Let You?

Before you get excited about putting your car payment on a credit card, you will need to make sure the car finance company will let you. Some finance companies don’t have a problem with you using your credit card to make payments; as long as they get their money, they are happy.

Other companies, though, are not so sanguine. Some lenders view it as too much of a risk. What if you reach your credit limit and the attempt to collect the money is denied? Call your auto lender and find out what the policy is, and then find out the process. You may need to pay an extra fee, or jump through some hoops in order to pay your car loan with a credit card. Take these items into consideration as you make your final decision.

Using Your Credit Card to Pay On Your Car Loan

If you are allowed to use a credit card to make your car payment, you need to make sure that the transition happens smoothly. You may need to cancel an automatic debit from your checking account, and set up the new payment plan. Be sure that you have at least two weeks before your next payment is due to make these arrangements. To be safe, you can start the process as soon as your latest payment clears.

When you do make car payment with your credit card, it is important to avoid carrying a balance. The rewards you get for using your card for payments will be overset by high interest charges. Plus, if you carry a balance, you are getting hit with interest twice. You pay interest on your car loan, and you will pay a second (higher) interest fee when you carry the payment from month to month on your credit card.

You will also have to incorporate the fact that you are adding a car payment to your credit card. If you use your credit card for other spending in order to get the rewards, make sure you have plenty of room on your card for the car payment. If you don’t you might find a mess as the transaction is denied – and be charged a fee. Or, you could end up with a hefty over the limit fee from the credit card issuer if the transaction does go through.

In the end, you might find that making your car payment with a credit card is more trouble than it’s worth. However, if you are disciplined, and have a solid plan, it can actually be a way to boost your rewards.

Miranda writes for a variety of personal finance web sites, including the AllBusiness Personal Finance Corner and Credit, Eh, a blog about Canadian credit cards and personal finance.

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In previous posts I’ve talked about what to bring when buying a car. And as I always mention, the most important item to bring with you to the Finance Office is a pre-negotiated deal for the price of the car. 

But once you arrive, there is still some negotiation to be done.  To truly get the best deal you have to negotiate more than car price.  You also have to be prepared to get the best deal on financing and add-ons (if you decide to get any).  The Finance Office is a huge profit center for car dealerships, so you must be ready to negotiate in order to keep some of the dealer’s profit in your own pocket.

Must have items to close at the dealership

1. Expectation that the deal is not done.  Don’t let down your guard yet, the negotiation dance is not over.  Many people walk into the Finance Office after they settle on price and assume the paperwork is just a formality.  However, there’s still plenty of money to be saved or lost on a deal. 

2. Your trade-in. If you have the energy and inclination to sell your car privately you’ll likely get more money than at the dealership.  However, consider selling to the dealership if the amount is close to what you could get selling on your own.  One of the key benefits of selling your trade-in to the dealership is the tax savings.  Most states allow you to deduct the amount you receive for your car from the sales price of the new car for tax calculations.  

3. Knowledge of your credit score (and what interest rate you’re likely to qualify for).  Auto financing is a big part of your negotiations and you should find out in advance what are the best finance terms you can hope to receive.  Knowing your credit score will allow you to look online and see what interest rates should be available to you. 
4. A pre-approved letter or check.  In order to negotiate finance terms, you’ll need some leverage.  Get pre-approved online and you’ll be able to take a blank check or letter with you to the dealership to pay for your car.  Ask the Finance Manger to beat your outside financing terms, and if he can’t then just use the outside lender’s check.
5. A “no-can-do” attitude.  In the Finance Office you’ll be pressured into buying a variety of dealer add-ons and extras that you don’t really need.  Don’t feel bad turning down options like VIN etching, rust proofing, paint sealant etc.  These are all useless moneymakers for the dealership.  Be prepared to say no and resist a smooth sales pitch.
6. An extended warranty offer from outside the dealership (if you want one at all that is).  An extended warranty is essentially a maintenance contract for your car.  Some can be worth the expense and most are not.  If you do want a warranty, shop around online before going to the dealership.  Warranties are marked up with considerable profit for the dealership.  If you do find an outside warranty, bring the terms with you and ask the dealership if they can give you a better offer.  Again, if they can’t, feel free to buy your warranty elsewhere.
7. Your own insurance policy.  Like everything else, dealerships make money selling you insurance policies but there is no reason to purchase one through the dealership.  You don’t have to change insurance when you buy a new car, but it’s a good time to shop around and get competitive rates.  Check Esurance, Geico, and Allstate to see if they offer lower rates than your current provider.  If they do, give your current provider a chance to beat or match the best policy you find. 

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Wagering on your Credit Score

Ever played credit card roulette where everyone throws a credit card on the table at the end of a meal?  The waitress get to picks one lucky sucker who has to pick-up the whole tab and everyone else gets to breathe a deep sigh of relief.  If you’re the kinda sicko that enjoys that game, you may also like Credit Score Roulette.

My best friend and I are nutty about personal finance and we both take our credit scores very seriously (as everyone should).  We also love to gamble.  So about ten years ago we decided to make the annual routine of checking our credit scores a little more interesting.   Each year we make a wager that whoever has the lowest credit score has to pay for dinner and drinks at the restaurant of the winner’s choice.  We check our scores on the same day and share the result at the same time.  Aside from the obvious prize, we both want to win because we pride ourselves on a good score and we’re super-competitive.

… so competitive in fact, that we took it a step further and bet on our wives’ credit scores.  We didn’t tell them at first and when they later found out, one of them wasn’t too happy to learn she was the reason her husband had picked up a big tab .  So we’ve since shifted focus back to ourselves…..at least until our kids are old enough to start developing their own credit.

Surrendering the Bet

Last year we had a development that caused us to temporarily put our game on hold.  After reviewing my credit report, I found that I had been the victim of identity theft.  Someone had fraudulently opened a couple utility accounts in my name.  After several dozen phone calls, faxes, a credit freeze, and way too many hours… I was able to get the matter resolved.  The resolution process was a nightmare, but discovering the issue is all the more reason to check credit regularly.  My score has bounced back, but had I not caught it, I would have been in for a nasty surprise had I tried to use my credit to buy a car or refinance my house.  And in case you were wondering, my friend was kind enough to waive last year’s dinner due to extenuating circumstances.

Anyway, you already know why it’s so critical to know your credit score.  But maybe Credit Score Roulette will give you that extra little competitive inspiration to improve your score.  Even if you lose, it’s still great fun to take your friend(s) out on the town.

And if you’re wondering how to get your score for free (all those advertisements do come with a catch), here’s a simple trick I learned…

How to get your credit score for free (seriously free)

First off, you can absolutely get your credit report for free once a year from each of the three credit bureaus or from annualcreditreport.com.  However, they will not provide you with your credit score for free. And you really ought to be checking both your report AND your score. 

One easy way to do this is to get the MyFICO free credit score when you sign up for a free trial of Score Watch®.  And then immediately cancel the Score Watch®….unless of course you determine that you want Score Watch®.  I’m neither for or against it, it’s just not something I’ve decided to pay for myself.

After you sign up, make sure you print your credit report out BEFORE cancelling since you won’t have access afterwards.  Cancelling is fairly painless and only takes a minute or two.

How to cancel MyFICO Score Watch® (you won’t need to call)

1. Click “Support” on the top right (next to “My Account”) when signed in.
2. Click on the link that says “How do I cancel my Free Score Trial?”
3. Click the link that says, “The easiest way to cancel is to send a request by clicking here”.
4. Choose “I would like to cancel my product subscription” and “Score Watch® – Free Trial”.  Then click “Next”.
5. Enter your name and email (you can leave order# blank if you don’t have it).
6. In the comments, type “Please cancel my Score Watch® subscription effective immediately.”
7. Send your request and you should receive a confirmation within 24 hours.

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Not surprisingly, many people don’t understand all the reasons why you might buy versus lease a car. If your parents always got cars one way, there’s a good chance you’ll do the same without considering both choices.

But there are compelling arguments for each option. Not everyone is in the same boat and there are several questions you should ask before making a decision.

Car Buying Tip: Before you even consider a loan or lease, you should negotiate the purchase price of a car.  In order to get the best deal, discussions about a loan or a lease should be postponed until the car price is settled.     

Is a car lease right for you?

In most cases, the monthly payments on a car lease will be lower than a car loan.  But there are a number of other features you need to take into account when considering if a lease is the right option.

Leasing a car may be right for you if you answer yes to one or more of these questions:

• Do you usually upgrade your cars every three or four years?
• Do you own a business which can make the payments?
• Do you drive less than 15,000 miles a year?
• Do you always want to be covered by a manufacturer’s warranty?
• Would you like to spend less for car payments in the short term?
• Do you want to try a vehicle for a while before buying it outright?

Alternatively, car leasing probably isn’t a good option if you answer yes to one or more of these questions:

• Do you rarely buy a new car and typically keep vehicles for longer than five years?
• Do you look for ways to maximize the value of every dollar you spend?
• Do you drive over than 15,000 miles each year?
• Are you able to repay a car loan in full over the next five years?

How does a car lease work?

When you lease a vehicle you never actually own the car.  Leasing is much like renting – you pay a proportion of the value to the owner for the use of their car, and give it back at the end of the agreed term. Leasing is popular with people who cannot afford to buy an expensive car outright, but are willing to make lower payments to drive the car for a few years and give it back at the end of the term.

If you use your car for work or you run your own business, then you may be able to make deductions on your taxes for car payments and some maintenance costs.

Even though leasing a car means you are paying more in the long run, it does enable you to free up funds in your budget in the short term while providing you and your family with a new, reliable, and comfortable drive.

What are the pros and cons for buying or leasing a car?

The decision to buy or lease a new car comes down to the type of person you are, and what is important to you. However, considering the pros and cons for both leasing and buying a car will allow you to make an informed decision with both your heart and your head.

Car Payment Calculators: Enter your own numbers into a loan or lease payment calculator to see how much you’ll spend.

If you’re looking for the most economical option in the long run, car buying is probably the best option.  A key advantage is that after the loan term ends, the vehicle belongs to you.  You can avoid many car payments by keeping cars for a long time.

However, if you can treat your car as a business expense or like to have the new model every few years, then leasing might be a better option for you.

This article was written by personal finance writer Timothy Ng from Sydney, Australia. He is genuinely passionate about helping people compare credit cards and helping them through researching to find the best low interest rate credit card.  

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If you’re looking to save money when buying a car, consider not purchasing gap car insurance (also called gap protection).  Many websites (and of course the Finance Department at a car dealership) will try to scare you into thinking it’s a necessity, but I try to provide a more objective opinion. 

Salesmen will tell you that the moment you drive off the lot your insurance is probably inadequate to cover you in the event of a total loss.  But don’t let the let this frighten you into spending money without considering whether you really need to.  

What is GAP insurance?

When you buy a new car, it depreciates quickly within the first few years.  During this time, it’s possible to owe more on your car loan than the value of the car.  This is called being upside down in a loan.  There is a negative “insurance gap” between the amount you owe and your vehicle’s worth.

If your car is stolen or totaled in an accident while you are upside down, it’s possible that your insurance payout may not cover the balance left on your loan.  Remember, insurance payouts are based on the car value, they have nothing to do with your loan.  That’s where GAP insurance comes in.  GAP insurance will pay you the shortfall, meaning the difference between the actual cash value of the vehicle and the current outstanding balance on your loan.

Why should you consider skipping the GAP insurance?

Like all insurance, car gap insurance is a premium you pay to hedge against future risk.  You’ll spend a few hundred bucks now to protect yourself from the possibility of owing a thousand or two later.  But like all insurance, you have to assess whether avoiding risk is worth the premium. 

Consider the cost of the insurance versus the amount of the payout and the likelihood that you will need it.  For example, if a gap policy costs $300 and your likely payout is $2000, you’re wagering 15% of the potential payout to cover your risk.  Do you think there’s a 1 in 7 chance of totaling your car?  If not, it’s probably a high premium to pay.   And keep in mind, regular car insurance covers the cost of repairs for a majority of accidents.  Your car must be completely totaled for gap insurance to even come into play. 

Not only that, but if you buy a gap insurance policy from the dealership you’ll probably pay more because they will include a profit margin for themselves.

Also, if your existing insurance policy covers “full replacement cost” or “fully financed amount”, then you do not need additional GAP coverage.

How to avoid needing GAP car insurance?

The real question should be how do you avoid becoming upside down in a car loan.  Here are a few tips:

• Borrow as little as possible.  Did you know it’s possible to finance more than the cost of the car?  This can happen if you roll over a balance from a previous loan or include tax, tag, warranties, and add-ons in your loan. Try to avoid this temptation and put up a reasonable down payment (if possible aim for at least 20%).
• Avoid longer loan terms.  A longer loan means you build equity more slowly (aim for 5 years or less).
• Get competitive financing online.  Using dealer financing or poor credit could both be reasons for a high interest rate.  You want more of your money to go towards principal, not interest.
• Avoid rolling negative equity from an old loan into your new loan by paying it off before buying.
• Don’t overpay for a vehicle.  The more you reduce the price of your new car, the easier it will be to pay it off.
• Consider cars with higher residual values when buying.  The faster a car depreciates, the more at risk you become. To see the five-year depreciation schedule for any new or used car, check out Edmunds’ True Cost to Own.)

If being upside down in a loan is unavoidable, consider whether you’re willing to accept a little risk.  If your car was totaled, could you survive for a few months sharing a car or replacing it with a cheaper car that allowed you to finish paying off your old loan? 

If you decide you still want to get GAP insurance, look around online at a place like esurance, rather than the dealership where the premiums will be marked up.

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One of my readers (Joe) had a great one-liner last week.  A dealer told him, “95% of people take our financing” and he responded, “I’m not a statistic”.  I love this statement!  I would argue that 95% of the public pays too much for a car and does not get the best possible financing.  Are you going to jump off a bridge just because everyone else does?

Here’s some crucial car buying advice to remember.  You’re not obligated to…

• buy a car where you test drive (unless the salesman can beat your best price)
• get financing from the dealership (unless the Finance Office can beat the best financing you find online)
• sell your trade-in to the dealership (unless you get a good offer)
• buy any unnecessary add-ons or extras

Remember, when you’re buying a car, your goals are very different from the car dealer’s.  While you want to buy a car at the lowest possible price with the best possible financing…the car dealer wants to sell a car at the highest possible price with the worst possible financing. 

When a car salesman tells you what everyone else is doing, that should mean very little to you.   Figure out what you want before even talking to a salesman.  Then get competitve quotes for car prices and financing and don’t become a statistic!

But enough about that, here’s some interesting news and posts from this week:

• After some statistics were released by Edmunds, there have been a couple great stories reviewing how it’s now possible to buy a new car cheaper than the same used model from GenXFinance, AutoMonster.ca and MarketWatch.
• Well Heeled has a very detailed comparison between buying new versus keeping an old car.
• Suzuki is giving out $250 prepaid debit cards if you DON’T buy one of their cars.
• More details on flying cars from ChinoHills.
• And lastly, I’ve been mentioned in posts on Babs FPF, Financially Poor, Tim’s WA University and monster Yakezie carnivals from Evan, Kevin, and the Saved Quarter.

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So you’ve learned how to buy a car at the best possible price and think that guarantees you a good deal.  Well think again!  Did you know that a majority of a car dealer’s profit comes from the Finance Office (or F&I Department)?  Dealerships want you to think the hard part is over and that it’s time to let your guard down.  But as you’re getting ready to sign for your new car, the Finance Manager will smoothly convince you that you need expensive add-ons and extras.

The image below shows how much the Finance Department really makes off everything they sell you.  Note: these high numbers aren’t even the total price you pay, they only represent dealer profit!

Average Car Dealer Profit for Add-on’s & Extras

But not to worry, you don’t really need most of these items.  Here’s a breakdown of what these items really cost the dealer and what you can do to save yourself money.

Breakdown of Add-ons & Extras in the F&I Dept.

Edits by: BFS

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