Why it matters
If your credit is bad enough, you may
not be able to get an auto loan at all. If you
do get a loan, it might not be at a very favorable
rate, making the car you want unaffordable.
Sounds like a bad deal, right? But,
for subprime borrowers, an auto loan can provide
more than just transportation. The loan can help
rebuild a shattered credit history.
The credit application, your credit history and the down payment are among the items auto lenders consider when providing financing to a car buyer.
These factors illustrate "the
three Cs" of lending: capacity, character
and collateral, says George Hrisoulis, vice president
of field operations at Auto Credit Express Inc.,
which runs subprime finance departments in new
franchise car dealerships in Michigan.
Lenders also look at the length of financing, as well as if the vehicle is appropriately financed, says Hrisoulis.
Lenders divide your credit history into two categories: situational and habitual credit. Situational credit involves a person who makes timely payments but is derailed by a catastrophe such as a divorce, illness or loss of job. Habitual credit is problem credit over many years.
A person with habitual credit may or may not get approved, Hrisoulis says. If approved, he or she might pay an interest rate as high as 20 percent to 25 percent.
What you can do
Three out of four consumers do not research financing options before purchasing a vehicle, according to Americans Well-Informed on Automobile Retailing Economics, or AWARE. So check out the vehicle and the loan before going to the dealership.
Experts suggest subprime car buyers buy older, serviceable cars until their budgets are back on track. Get the car inspected by a mechanic before you buy it.
Rosemary Shahan, president of Consumers for Auto Reliability and Safety, suggests visiting Cartalk.com to find a recommended mechanic in your area.
Get your free annual credit reports from the three major credit bureaus and fix any errors a few months before you anticipate shopping for a new car.
Also, get your credit score so you know where you stand. Most scoring models count multiple auto loan inquiries within a 14-day period as only one inquiry, says Maxine Sweet, Experian's vice president of public affairs.
Prior to purchasing the vehicle, factor the new expense into your budget. If possible, you might want to have someone co-sign for you.
Of course, if you're the one being asked to co-sign, you want to be careful.
Review the auto loan rates,
and check out financing terms from multiple sources.
The lower the APR, which is the cost
of credit for one year expressed as a percentage, the better.
Some lenders will lower the interest if you make automated payments directly from your checking account or increase the down payment, according to the Credit Union National Association.
The APR isn't influenced only by your
credit history though, says Lynne Strang, vice
president of communications for the American Financial
Services Association. Other considerations include
current finance rates, competition, market conditions
and special offers.
Getting preapproved for an auto loan can help in the negotiation. This direct
financing can be obtained from a finance company,
bank or credit union.
Some consumer advocates say it's better to get financing from a bank or credit union because they offer lower rates than car dealerships and allow you to control the price negotiation. In any case, plan thoroughly for your financing before you start your car shopping.
Some experts say car dealerships
provide more resources because of their relationships
with banks and finance companies.
And if you do get
financing through the dealership, Joseph Ridout,
consumer services manager of Consumer Action,
advises that you negotiate the price first.