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First things first: check your credit.Because of the highly competitive nature of the industry, almost anyone can get an auto loan. Even so, it's a good idea to get a copy of your credit report before you go to the auto dealer to discuss a new car. Since there are several types of auto loans, knowing your credit score can help you choose the best option.
There are three major credit reporting agencies, Equifax, TransUnion and Experian. You can obtain a credit report by contacting the agencies individually and paying a nominal fee. Alternatively, a 2003 law called the Fair and Accurate Credit Transactions Act offers Americans one free credit report from each agency each year. Plus, certain cases warrant additional free reports---such as suspected fraud or being turned down for credit.
The Fair Isaac Corp. takes information from your credit report and rates your creditworthiness with what it calls a FICO credit score. Your FICO credit score is based on five major factors: past payment history, current amount of debt, how long you've had credit, how much credit you've applied for in recent months and the types of credit you have.
According to information published by the Consumer Federation of America, "In the eyes of most lenders, FICO credit scores above 700 are very good and a sign of good financial health. FICO scores below 600 indicate high risk to lenders and could lead lenders to charge you much higher rates or turn down your credit application." -
Understanding your credit is the key.For those with lower credit scores, "buy here, pay here" loans are an option. This is a loan that is financed directly through the dealership. While this is a viable option for people who don't have other choices, be prepared to pay an extremely high interest rate. In most cases, these loans are set up on monthly re-payment plans, but in cases of extremely low credit scores, weekly payments may be required. These lenders are known to repossess vehicles for even a single missed or delayed payment, so you must be very careful to keep up with payments.
A subprime loan is generally a better option for those with lower credit scores because these loans are offered through a bank or credit union. While the interest rates are still very high and the terms strict, a subprime loan offers you more flexibility during negotiation. This can save a bit on interest and help you to work the loan payments around your pay periods.
If you're having trouble making your payments, consider an auto loan refinancing program offered by many lenders. In a refinancing, the lender takes the remaining balance for your current loan and rolls it into a new loan. And, while your payments will continue for an additional five years in most cases (depending on the term of the loan), the monthly payment amount can be cut by almost half. Stretching out the loan for a longer period might increase the total amount you pay over the life of the loan, however.
If you have good credit, the standard auto loan is usually your best bet. Shop around and find the best rate available to you---lenders are happy to deal with people deemed creditworthy. Having a reasonable down payment might increase your ability to strike a good deal. -
If you belong to a credit union, you are likely to be able to get a lower interest rate from the credit union than from a traditional bank.
Online lenders have lower overhead rates, which allow them to offer lower interest rates to their customers in some cases. But take caution when applying for loans online. Be sure to research the company and make sure it is legitimate. Check with the Better Business Bureau to be safe.
Don't let the dealer arrange the financing if you can avoid it. If the dealer arranges financing ask to see the letter of approval from the lender. This way, the dealer can't inflate the interest rate to increase his profit.
Always read the entire contract. Don't accept terms that include an early payoff penalty---this means that if you are able to pay the loan off before it's due, you'll have to pay an additional premium in order to do so. Don't allow a dealer to rush you to sign on the bottom line---bring your calculator and understand what you're signing. If you're not comfortable interpreting a contract, bring along a knowledgeable friend or family member to help.
