Basic knowledge of car finance
Obtaining car finance is one of the easiest areas for car buyers to use. Most of the profits of some dealers come from car finance rather than car sales. If you hear a car buyer boast about bargaining on a new car, they have likely been ripped off in car finance.
Many consumers believe that they can only get car financing through dealers, which is a huge mistake. You should arrange car financing before going to the dealer. The key is to buy your loan from multiple lenders and sources.
Several places provide auto financings, such as banks, exclusive financial companies, dealers, credit cooperatives, and online lending institutions. They all have one thing in common: they want your business. As long as you spend time shopping and comparing, they will provide competitive prices.
A credit score is very important
If you have good credit, it's easy to get a loan with a high interest rate. This means that when you apply for a car loan, your credit score is the most important cost factor.
In a typical 60 month loan, people with a low credit score can pay up to $8500 more than people with good credit. It is important to maximize your credit score by checking and correcting errors (research shows that nearly 80% of credit reports have at least one error).
The credit score is usually between 300 and 850. Your credit score must be at least 710 to enjoy the best interest rate. If your credit score is below 640, it is considered a subprime loan and you will pay a higher interest rate (more than 9%). If your score is less than 550, you will not even qualify for a car loan.
Credit cooperatives
Credit cooperative is a non-profit, member-owned "bank", whose goal is to provide loans and other financial services to members at a reasonable interest rate.
In short, credit unions are the best friends of auto borrowers. They are the least deceptive and often the cheapest source of auto financing.
In the past, joining a Credit Union meant that you had to be part of a company or organization to be eligible for membership. Nowadays, there are countless credit cooperatives, and the only qualification required is that you must live in the local geographical area.
Dealers, banks, and other sources
The main thing you need to know about financing through dealers is that dealers are just intermediaries. They only arrange car financing.
They have relationships with several banks and other lenders, and they will try to get you a loan that will give them the maximum Commission, not the best deal for you.
That's why it's so important to buy your loan from several sources before visiting the dealer. The key is to let them try to beat your lowest price. If you don't compare stores, that's how they use you.
In addition to obtaining loan interest rates from credit unions, you should also obtain quotations from online aggregators that sell your loans to several independent financial companies. Here are two methods I recommend.
Bad credit or negative assets
Those with bad credit face the greatest risk of being ripped off in car loans. Most people are eager to get a car, and many dealers profit exclusively from such customers.
In the current economic situation, it is very difficult to obtain bad credit loans. Most loan institutions will require you to have a stable job and residence for at least two years. They will also ask you to pay a large deposit.
The best way to get a bad credit loan is to find a co-signer. This person agrees to pay for the car in case you don't. This is usually a parent or close relative.
If you end up with a high-interest car loan, you can always try refinancing in a year or two. After paying on time, your credit score should improve and qualify for higher interest rates.
Negative assets
If your assets are negative (your liabilities are higher than the current value of your car), the best way is to continue to repay until the car is paid off.
If you really need a new car, you should pay off your negative assets when you sell or trade in. If you don't have that much money, you really shouldn't consider buying a new car from the beginning.
A big mistake is to "roll" negative assets into a new car loan. You will only dig yourself into a deeper hole, eventually leading to arrears and credit damage.
Auto financing fraud
Due to the chaotic nature of auto finance, there are several scams you need to be careful of. The most common is the "package payment" scam. This means that the dealer increases your monthly car payment by adding additional services you have never agreed to, such as extended warranty and paint/fabric protection.