If you are seeking financing for
a new or used car, you have many options for financing even if you have a poor
financial history. However, late payments and other credit problems signal
lenders that you are a risky customer, which will increase the interest rates
on loans available to you. There are differences between lenders—so find the
best deal by shopping around.
About Auto Loans
Car loans can be
obtained from a variety of sources: credit unions, banks, online direct
lenders, loan brokers and auto finance companies. Manufacturer-related auto financing
companies are prohibited by law from selling loans directly to borrowers, so
their loans usually are transacted at auto showrooms and are known as dealer
financing.
Dealers advertise special loans that seem too attractive to pass up. However,
only people with the best credit can qualify for “zero percent” financing and
other attractive dealership loans.
Interest rates for loans for people with so-so credit can be 60% higher than
the rates available to people with excellent credit. People with poor credit
may be asked to pay a rate that is two to four times higher.
The time you can take to pay back a car loan varies—usually you can choose
terms of 36 months (three years), 48 months (four years) or 60 months (five
years). You can lower your monthly payments by taking a longer loan period.
However, the longer the loan period the higher the total interest you will pay
over the life of the loan. Check the weekly interest rate roundup on Bankrate.com to find
national averages on auto loan rates.
|
DID YOU KNOW? Free online calculators can help you decide how to get the best
deal on auto financing. Go to Bankrate.com and click on Automobiles—then
scroll down to Calculators. Principal Financial Services (www.principal.com/calculators/auto.htm)
also has a good selection of interactive calculators on its site. |
Get Pre-approved
It’s a good idea to get
pre-approved for a loan before looking for a car. This allows you to compare
the rates you found with what the dealer might offer. At the very least, you
should check your credit score and get quotes from online lenders before venturing
into a dealership. (E-Loan.com
provides free credit scores and individualized interest rate quotes online.)
A negative item on your credit report may cause a dealer to raise the interest
rate of a loan even after you’ve signed a contract for the car.
When you are pre-approved, many lenders give you a blank check to take to the
dealership when you shop. The check has a price limit and an expiration date.
Dealers like to complete a transaction the same day and may give you a lower
price if you can close the deal immediately.
If you don’t get pre-approved and you don’t want dealer financing, ask the
salesperson for a purchase order that you can take to the bank or credit union
to apply for a loan. You will have to wait for your loan to be approved before
you can buy the car.
|
DID YOU KNOW? You can get your credit score for free at E-Loan (www.e-loan.com). The
three major credit reporting agencies—Equifax, Experian
and Trans Union—charge $12.95. In most cases, people with a credit score of
680 or above are considered prime borrowers. Those with scores below 550 may
have trouble getting a loan at all. |
The Mark Up
Game
Most auto finance companies that work with dealers let the dealers
mark up the interest rate the company will charge by several percentage points.
To explain the difference between the quoted rate and any advertised rates,
salespeople tell customers they don’t qualify for the lower rates. This extra
finance charge tacked on by dealers is called a “yield-spread premium” and it’s pure profit that is split between the dealer and the
lender.
The mark up is not illegal, but it is unfair because it’s hidden. To make the
practice even worse, recent studies have found that especially high mark ups
are charged to African American and Latino customers. The best way to avoid a
dealer mark up is to determine your credit and what loan rates you would
qualify for with an online lender or with your bank or credit union before
visiting dealerships, which will put you in a strong position to negotiate the
best deal.
Choose the Right Car
If you are going to
finance a vehicle, look for one that will retain its value over time. You can
find historical information on specific models online at Kelley Blue Book (www.kbb.org) or in
Consumer Reports magazine at the library.
Auto insurers don’t publish the fact, but they have a rating system to
determine how much it will cost you to insure different makes and models. Since
you will be required to carry expensive collision insurance coverage on your
financed vehicle, contact your insurance company in advance to ask about
differences in premiums for the cars you are considering.
Buy or Lease?
Leasing rarely makes as
much financial sense as buying a car, especially a good used vehicle. Leasing
is like a long-term rental, but car leases come with strict rules about how
many miles you can drive and keeping the car in excellent condition.
Leasing costs you more in the long run, because at the end of the lease you
don’t own the car, but it still attracts many car shoppers because on the same
car monthly leasing fees are lower than monthly financing payments.
When the lease term expires, you can return it, buy the car from the dealership
for an additional sum or trade it in on a new leased model.
Lease agreements usually allow you to drive 12,000 to 15,000 miles per year.
For additional miles, you’ll pay between 10¢ to 25¢ per mile.
|
DID YOU KNOW? Lenders may look more favorably on your loan application if you
can prove you have lived in the same place and worked for the same employer
for 6 months to a year and you can verify your income with two or more
consecutive pay stubs. |
Rebates
Rebates are widely advertised price reductions offered during slow
sales periods or on overstocked models. Often, however, dealers will offer you
the option of low cost financing instead. If you get outside financing, you may
be able to get both the rebate and a low interest rate. To make it easy to
determine the better deal, use one of the many free online calculators. To find
them, search on the Internet for “auto financing calculators.”
Dealer Incentives
On some models, dealers
may offer incentives that are not advertised to the public. Dealer incentives
are passed on to the dealer by manufacturers. Dealers don’t have to pass the
savings on to the customer and sometimes salespeople are not even aware of
them. Ask to speak to the sales manager about dealer incentive programs. It can
help you negotiate a better deal if you know that the dealership often will
adjust its profit margin to make a sale. Check auto magazines and web sites
such as Edmunds.com
for information on incentive programs.
|
Know What to Ask ·
total price for the vehicle. ·
available "dealer incentive" discounts. ·
total amount you will pay over the life of your loan. ·
annual interest rate. ·
monthly loan payments. ·
number of months until the loan is paid off. ·
early pay off fees that could cost you more if you decide to
refinance your car loan. ·
cash down payment. ·
trade-in credit for your old car. ·
additional fees like delivery or title transfer. ·
sales tax. |
Check Your Credit
Your credit is the
biggest factor in determining whether you will be approved for a car loan and
what the interest rate will be. If you have a poor credit rating, you’ll be
asked to pay a higher than average annual percentage rate (APR) to finance your
loan.
Don’t go shopping for a car loan or a car until you’ve ordered a copy of your
credit report. Errors on credit reports are common and by checking your report
ahead of time, you’ll be able to contest inaccurate information. It can take
time to dispute mistakes on your credit report.
If you know what’s on your credit report, you’ll be prepared to deal with
unscrupulous dealers who may claim that your credit is poor in order to justify
a higher interest rate.
You can get your credit report (about $9 each) from one or all of the three
major credit reporting companies:
· Experian: 888-397-3742, www.experian.com
· Equifax: 800-685-1111, www.equifax.com
· TransUnion: 800-888-4213, www.transunion.com
Your credit can be affected by how often you have moved, how steady and how
verifiable your employment history is and how many credit applications you have
filled out recently. If you’ve never had a car loan before, or if your current
debt is high despite a good credit rating, you may be quoted higher rates.
|
DID YOU KNOW? |
Refinancing Your Loan
Just because you’re
paying 16% on your car loan doesn’t mean there isn’t a better deal to be had.
Most car loans can be refinanced without a lot of added costs and you might be
surprised at your savings from a new loan. Before you try to refinance your
loan, ask if your current loan has a penalty for early pay off. When shopping
for a new loan, ask about hidden fees or processing charges before you apply. You
will be required to pay a title transfer fee because during refinancing you
will replace the name of your new lender for your old one on your car’s title.
Consumer Action
www.consumer-action.org
(415) 777-9635
TTY:
523 W. Sixth Street, Suite 1105
(213) 624-8327
Consumer Action provides advice and referral on consumer issues. Leave a
message anytime and a counselor will call you back. Chinese, English and
Spanish are spoken. You can e-mail Consumer Action (hotline@consumer-action.org)
or visit its web site (www.consumer-action.org).
This publication was created by Consumer Action in partnership with Bank of
America
© 2003 Consumer Action