Car Financing Guide
1. Car Loan Basics
Getting a car loan is one area car buyers tend to get taken advantage of the most. Some dealers make the bulk of their profits through financing - not vehicle sales! If you hear a car buyer bragging about negotiating a great price on a new car, chances are they got ripped off on the financing.
Many consumers assume they can only get a car loan through a dealership. This is a huge mistake! You should always have car financing arranged BEFORE going to a dealership. The key is to shop your loan to multiple lenders and sources.
There are several places that offer vehicle financing such as banks, captive finance companies, dealerships, credit unions, and online lenders. All of them have one thing in common: They WANT your business and will offer competitive rates as long as you take the time to shop and compare.
If you do nothing else, just make sure to follow my step-by-step guide to getting the best loan rates.
2. Credit Score: Very Important!
- What is a Credit Score?
- How to Obtain Your Free Credit Score
- How to Obtain Your Free Credit Report
- 5 Factors that Affect Your Credit Score
- Best Ways to Improve Your Credit Score
- Amounts You Can Borrow Based on Credit Score
- Credit Scores That Qualify for the Lowest Rates
- Fixing Your Credit Score Can Save You $8,500
- Can Checking Your Credit Lower Your Score?
- What Lenders Look for Other Than Credit Score
- How to Fix Errors in Your Credit Report
Getting a great rate on a loan is easy if you have excellent credit. That means your credit score is the most important cost factor when taking out a car loan..
On a typical 60 month loan, someone with a low credit score could pay up to $8,500 more than someone with good credit. It's important to maximize your credit score by checking and fixing any errors (studies have shown nearly 80% of credit reports have at least 1 error).
Credit scores typically range between 300 to 850. You will need a credit score of at least 710 to qualify for the very best rates. If your credit score is below 640, it's considered sub-prime and you'll be paying a much higher rate of interest (over 9%). It becomes difficult to even qualify for a car loan if your score is below 550.
3. Credit Unions: They're Awesome!
Credit unions are not-for-profit, member-owned "banks" with the goal of providing loans and other financial services to its members at reasonable rates.
Simply put, credit unions are a car borrower's best friend. They are the least deceptive and oftentimes cheapest source of auto financing.
In the past, joining a credit union meant you had to be part of a company or organization to qualify as a member. These days, there are countless credit unions with the sole eligibility requirement being that you live within a local geographic area. You'd be a fool not to shop your car loan to at least a couple of credit unions.
A free resource that lets you search for credit unions in your area.
4. Dealers, Banks, and Other Sources
The main thing you need to understand about financing through a dealer is this: dealers are simply middlemen, they only ARRANGE the car financing.
They have relationships with several banks and other lenders, and will try to get you into a loan that offers them the biggest commission, rather than the best deal for you.
This is why it's so important to shop your loan to several sources BEFORE visiting the dealership. The key is to get them to try to beat your lowest rate. If you don't comparison shop, this is how they can take advantage of you.
In addition to getting loan rates from credit unions, you should also get quotes from online aggregators which shop your loan to several independant finance companies. Below are the two I recommend.
Shops your car loan to multiple lenders to get you the best rates. Especially good if you don't have perfect credit.
Keep in mind: Getting online rate quotes are only one step in the process. Use these rate quotes to shop and compare other lenders including your local bank and the following 3 major direct auto loan providers:
5. Bad Credit or Negative Equity Problems
- What Lenders Look for From Borrowers
- Top Reasons for Being Rejected by a Lender
- How to Get a Car Loan with Bad Credit
- What to do if You Have Negative Equity
- How Dealers Screw People With Bad Credit
- How Lenders Treat Sub-Prime Borrowers
- Should You Use a Credit Repair Service?
- How to Qualify for Low Finance Rates
Those with bad credit are at greatest risk of getting ripped off when it comes to car loans. Most are desperate to get a car and many dealers specialize in profiting from this type of customer.
Getting a loan with bad credit is difficult, especially in this economy. Most lenders will require you to have at least 2 years of steady employment and residence. They will also require you to come up with a large down payment.
The best way to get a loan with bad credit is to get a co-signer. This person agrees to make the car payments in case you fail to do so. This is usually a parent or close relative.
If you end up getting a car loan at a very high interest rate, you can always try refinancing in a year or two. Having made payments on time, your credit score should improve and qualify you for better rates.
If you have negative equity (owing more than what your car is currently worth), the best thing to do is to simply keep making payments until the car is paid off.
If you really need a new car, you should pay off the negative equity whenever you sell or trade-in the car. If you don't have the cash to do so, you really shouldn't be looking to get a new car in the first place.
A big mistake is to "roll over" the negative equity into a new car loan. You'll just end up digging yourself into a deeper hole which will eventually lead to a default on payment and ruined credit.
6. Car Financing Scams
Due to the confusing nature of auto financing, there are several scams you need to watch out for.
The most common is the "packed payment" scam. This is when a dealer increases your monthly car payment by including add-ons you never agreed to - such as extended warranties and paint/fabric protection.
Here is a list of the top 7 car financing scams you need to watch out for. They include spot delivery scams, bad credit score scams, finance markups, and fake fees.