In a car loan market that features a wide variety of finance companies, most car buyers still use dealership financing. Convenience is the number one motivator for people to make the financing arrangements at the same location where they bought their car. Some financial experts and consumer advocates, however, advise against using dealer financing as it comes with higher interest rate, and opens the door on a flood of unnecessary fees, and options. There are still some holdouts on the virtues of dealership auto financing and there may be times when getting a car loan through the dealership can be advantageous.
Dealer financing doesn’t work in the same manner as car loan from a bank, credit union, or finance company. The money for dealer financing doesn’t come directly from the dealership. Instead, car dealerships partner with a number of banks and finance companies, and pass a loan application to these institutions for one of them to pick it up. The bank that accepts the application quotes an interest rate to the dealership, and the dealership’s finance & insurance department quotes a higher rate to the applicant.
Why the two rates? The rate quoted by the bank that picks up the loan is known as the buy rate, and the rate quoted to the customer is called the contract rate. From this rate, the dealership’s finance & insurance, or F&I manager draws a commission, since it’s the salesperson that reaps the commission from the sale of the car. Usually, the higher rate is one, or two percent higher than the buy rate. In some cases, however, the F&I manager gets a little grabby and shoots for a contract rate four or five percent higher. It’ the right of the customer to know what the buy rate is, and negotiate with the F&I manager to reach a price both can live with. F&I managers won’t go for a zero percent increase – they have to eat too.
Fee stacking and payment packing are two areas where the customer has to careful. All dealerships charge a document fee just like any other lender. These fees cover the actual labor in setting up the loan, and shouldn’t be any higher than $200. Additionally, the F&I manager may add other fees that seem inexplicable. If the customer thinks a fee is unwarranted, that person should pin the F&I manager down on the charge, he or she should ask that it be removed from the agreement. If the F&I manager won’t budge, it might be time for the customer to bag the deal all together, and go to another dealership. The tune may change when the sale is about to go down the tubes.
The upside to dealer financing, apart from the convenience, is that dealerships have access to manufacturer backed financing incentives which can easily offset the increased interest rates. These incentives are usually associated with certain car models, and trim lines. They can take the form of reduced interest rates, cash back rebates, and cash towards a down payment. Depending on the time of year, these incentives can make dealer financing an viable option for many consumers – even those with bad credit.
Not directly related to dealer financing, the consumer can apply for a car loan directly from the manufacturer. These loans work like any other car loan with the added bonus of having discounts and incentives aimed at certain car models. Manufacturers have established their own financing arms to better control the sales of their cars. If a certain model has low sales numbers, incentives are attached to the financing arrangements to get them out the door. Manufacture financing also frees the consumer from the shenanigans that can occur at the dealership’s F&I department, removing a layer of stress from the whole process. All car loans are finalized at the closest dealership to the buyer that carries the car he, or she, has purchased. It’s only a bit more complicated than ordering a product from a catalog.
The consumer always has to be a smart shopper, especially where tens of thousands of dollars are concerned. The first dealership the consumer goes to for a car purchase may not have the best choices in cars and financing. That’s why each consumer must shop around. The internet makes this doubly easy since most dealerships feature their best deals on their websites. Leaning on convenience might cost more money, but learning a little about dealer financing can make dealer financing a reasonable alternative.
If you’re thinking about buying a used car to save some money, or stay in line with your budget, you may be wondering about the quality of the vehicles you’re interested in buying. This is common concern for most used car buyers, as there is always a question about what has happened to the car while it was in someone else’s hands. With average used car pricings standing a $15,000, affordability probably won’t be an issue if you’re able to get used car financing. In most cases, a Certified Pre-Owned vehicle comes with few worries, but prices are almost always over $10,000. This may force you to look around for used cars that aren’t certified leaving you to wonder what kind of guarantees you can get that your used car purchase will be worth the money.
Certified Pre-owned (CPO) cars are sold through factory authorized dealerships, that is, dealerships that are partnered with a particular auto maker. The relationship between dealership and factory resembles that of any franchise where the store must adhere to certain standards of conduct in order to retain their franchise status. This idea trickles down to CPO vehicle sales. A manufacturer sets the standards for certification which include minimum standards of performance, reliability, and appearance. These vehicles are tested, serviced, cleaned and detailed to the point where they look as close to new as a used car can get. These vehicles often come with manufacturer backed warranties which rival those of cars that have just come off the line. Few worries come with these cars, but they are more expensive than your average use car.
A used car that is not certified can be found on a factory authorized dealership lot. These tend to be older cars (five years, or more) with more miles on them (over 70,000). In some cases, they are cars not manufactured by the company partnered with the dealership. All car lots have a used car inventory which acquired through trade-in deals. These cars are fixed up, cleaned and detailed, so they look appealing to the used car shopper, but they come with few guarantees. If there’s a major mechanical failure with the car, you’re out of luck unless you have some sort of agreement with the dealership.
Legal requirements for selling used cars are fairly loose. Federal law sets minimum highway safety standards before a car can be sold, and these standards are about as minimal as they can get. Many states have “lemon laws” which address any fraud in the sale of vehicle from car dealerships. These laws are not applicable to private, or auction, sales, and you take your biggest chances if you go down these routes. Whoever you buy your used car from, if it’s not certified by any particular manufacturer, you need to learn the vehicles history. This can be done with resources such as CarFax, AutoCheck, or CarHistory. By checking the vehicle history, you can see if the car was involved in an accident, or if the VIN (Vehicle Identification Number) matches the car you’re about to buy.
Just because you’re buying a basic used car, you don’t have to leave yourself vulnerable to the problems of picking a lemon. Some dealerships do offer warranties, but they aren’t free. There’s a thriving business in aftermarket warranties which have fees based on the level of coverage, the length of time and mileage the warranty covers. Most aftermarket warranties are sold for a nominal price, usually under $200. But, not all warranties live up to the promises made by the sales people. It’s your responsibility to read the warranty before you buy. If the warranty coverage is unsatisfactory, tell the salesperson, and work out an equitable agreement. If they won’t budge, take your business elsewhere.
A used car purchase involves a large sum of money. It doesn’t equal the cost of a new car, but getting stuck with a low quality car after you’ve already put a few thousand dollars down on the purchase. Even though you saved thousands off the purchase of new car, having a lemon in your hands will still put a strain on your budget and heap a load of stress on your shoulders. Take the time to shop around. Be ready to bargain by learning the current market value of the cars you’re interested in. Kelly Blue Book, Consumer Reports, NADAGuides, and Edmunds are all good places to start in your education in used cars. It’s better to learn your lessons beforehand than learn a painful lesson after you buy.
All cars have a price tag on them like any product. But unlike most products, most people don’t pay the sticker price of the car. Instead, an arcane dance ensues between car shopper and salesperson to come to some sort of agreement over a final sale price. This same dance does not go on over a bottle of milk, or a loaf of bread. If you tried this at your local supermarket, the sales staff might have you hauled off to the nearest psych-ward. The problem with car pricing is that it’s not a black and white issue. There are many factors in how a car’s sticker price ends up in the window.
The sticker price is not the MSRP. The MSRP, Manufacturer’s Suggested Retail Price, is exactly what it says it is – a price point set by the manufacturer based on the cost to build the car, and a carefully calculated profit margin. It is not a hard value the seller must use. The sticker price is based on the dealership’s profit calculations, the demand for a particular car model, and local economic conditions. A car lot in an affluent area may be able to add a significant profit margin to its inventory, while a car lot with a high middle class demographic may cut profits a little closer to the bone. With this kind of fluidity in pricing it’s no wonder haggling has become part of the game.
Then there’s the invoice price. This is the price the dealership pays for a car – well, not exactly. It is the actual price the manufacturer charges its partner dealerships when the dealership takes delivery on its inventory. But, this price is heavily augmented by other factors that ensure good business relations between the manufacturer and it’s partners which lead to a car dealership being able to sell a car below factory invoice.
If you’ve ever wondered why a dealership can sell a car below its cost, you’re not alone. The manufacturer pays its partners a certain amount of money to keep their dealerships fluid. This can help save a dealership from bankruptcy should there be a sudden drop in business which can happen over the course of a single fiscal quarter. This money is referred to as the dealer hold back and is forbidden territory to the car shopper who wants to dicker over prices. This is the life blood of a car dealership which is specifically allocated to keep the lights on, the showroom doors open, and the employees paid.
Dealerships also receive factory incentives to sell more cars. This money is often advanced to dealerships during sales events, or when their dealerships meet certain target numbers on specific car models. These are designed to be passed on to the customer to encourage them to buy cars that may not be moving according to projected numbers. Incentives can take the form of cash back rebates, or low interest rate financing. As marketing tools, incentives have a certain amount of success in getting the customer to feel that they have come away from the sale feeling good about the deal they’ve just struck.
The complexity in the pricing of cars is the result of the price points of cars. These are expensive pieces of property that are heavily regulated and taxed. Cars have to meet minimum safety standards set by the Federal and state governments as well as meet fuel consumption and environmental standards. The nature of a car purchase almost guarantees that you will seek financing in order to make that purchase practical which adds a further layer of regulation. A sale that has as much involved in it, as a car sale, requires a more intricate price structure than most other products. This ain’t no loaf of bread you’re buying.
This is why you need to no something about the car you’re trying to buy. You don’t have to become an expert auto mechanic, you just need to look up a little information about your car, and some facts about financing. The information available to you is no more difficult to access than anything else on the web. Kelly Blue Book, Edmunds, Consumer Reports, even the NADAGuides, can be accessed at anytime from anyplace…even your smart phone. Expertise isn’t necessary in order to get a nice car at a good price; just a little useful knowledge.
As Summer approaches, dealerships are starting to launch their Summer driving campaigns. These include bombing the airwaves with ads about great specials, and staging sales events on their lots. Though their sales events are littered with balloons, free food, and clowns, it’s important to step away from the entertainment side of things and concentrate on the real purpose for your trip – saving money on a car purchase.
Summer marks the close of the model year for most manufacturers. At this point in time dealerships begin the push to meet target numbers for the manufacturers that supply their inventories, and to clear space on their lots to make room for the new stock coming in. While prices get cut, there are also advertized incentives, reduced rates on car financing, even price cuts on option packages. These sales are meant to move product as quickly as possible which puts some ammo in your bargaining arsenal.
Dealerships rarely have a single Summer event. They often have a series of monthly or biweekly sales to clear inventory so, you have some choices to make as to when to visit your local car lots. Competition is the rule of the game, even between two dealerships that work for the same manufacturer. They all have target goals to meet in order to get money, in the form of incentives and bonuses, from their respective manufacturers. Your target is whoever is selling the car you want at the lowest price.
Just because a car has been reduced in price, doesn’t mean there isn’t some room to negotiate on the final sales price. All dealerships operate at a certain profit margin, and while no car salesperson is going to sell a car at a loss, there is room to maneuver. On the price of new cars, salespeople are trying to work as closely as possible to the MSRP, Manufacturer’s Suggested Retail Price. This is the high point of their profit margin. Remember that the ‘S’ stands for suggested and it’s from this point you do you negotiating.
Between this price and what the dealership makes, there can be a couple of thousands of dollars in the wind before you hit the dealership’s hold back point. From this amount of money, the dealership draws the funds to pay employees, keep the lights on, and the doors open. This is forbidden territory and it’s a line you will never cross. It’s the invoice price of a car you should be aiming for which is substantially lower than the MSRP. Edmunds has a system of calculating the invoice price of a car since it’s very difficult for even the most savvy car buyer to figure that out alone. Be comfortable with knocking some dough off the sticker price, but don’t get greedy.
While there are a number of financing offers available from the dealership during a sales event, getting the car loan first is still your best bet for getting a better interest rate on your car loan. Whether your credit is good, average, or bad, you’ll have the best chance at getting an APR that’s 2% to 5% lower than what the car dealership will offer you. This is due to the fact that you’re getting your loan from the source rather than through a middleman. The dealership does not provide funding for the car loan itself. Instead it gets the financing through one of several partner banks, or finance companies.
The interest rate that a dealership will quote to you will be a few percentage points higher than the rate offered by the bank that picks up the loan. The bank offers the dealership a buy rate on the loan. The dealership’s Finance & Insurance, or F&I, manager quotes a contract rate to you drawing a profit from the difference between the two rates. There are some instances where the dealership might be your only hope of financing, but with the current state of consumer credit score averages, more lending companies are making subprime auto loans available to a wider range of clients.
If you’re in the market for a new, or newer car, you’re about to head into a good time of year to make the purchase with the possibility of saving a few hundred dollars. Though you may just blow off the car ads on TV, or line the cat box with their sales pages, take a little time to read through their offers – and their disclaimers. A little care and research can point you to a good deal on a car to replace your old beater with a car that’s more likely to get you to and from work, and carry you on your vacation without wondering if it’ll fall apart along the way. Sales ads aren’t just for decoration, they do contain some nice bargains which can make your Summer a little sunnier.
A standard car loan is 48 months. This number is arrived at based on the average amount of depreciation of new cars, and the average lifespan of used cars. It’s not predicated on a car dying at the end of a 48-month loan’s term, but is based on the car being worth more than the balance owed on it during the course of the loan. Within the first year of a car loan, there is a brief period of time where the car will have negative equity in it. However, as the balance is reduced through each monthly payment, the owner finds him, or herself having a car that’s worth more than what’s owed on it – an ideal position to be in. The situation changes when the car loan comes with an extended term of 60 months or more.
According to AutoNews, the number of consumers opting for 60+ month loans has increased since April 2012 with the biggest increase occurring among 72-month and 84-month auto loans. The primary factor for the growing trend in extended term car loans is consumers searching for a low monthly payment. However, hanging all their hopes for affordability on the monthly payment can lead to financial misery by the time the loan comes to a close. If all goes perfectly in the life of the car, there are few worries as the consumer will get some trade-in value when it comes time to replace the car. But, how often do things go perfect in the life of a car?
One of the key problems with an extended term, new car loan is that it’s an investment in an asset that’s guaranteed to go down in value. A new car loses 20% of its value the moment it’s driven off the dealership’s lot. The car continues to depreciate by a minimum of 10% for each year of ownership. The term of a car loan is a race to pay off the car before it’s no longer worth paying for. Each mile the car is driven is another mile where the car can be damaged or destroyed in an accident, or lost due to theft. An extended term car loan is an invitation to disaster ready to strip away every bit of value the car may have. Of all disasters in the world of car ownership, being underwater is the worst.
Being underwater is the common term for having negative equity in a car. A car that is the victim of a major mechanical breakdown, or a serious car collision is virtually worthless. If this happens when there is an outstanding balance on the loan, the lien holder may demand that the owner pay off the entire balance. This may sound dire, but the most common solution for this problem is to roll the remaining balance into the next car loan. This means paying interest on the new balance and the remainder of the previous balance. If the borrower has had a drop in his, or her, credit rating, the new loan will be made at a higher interest rate – more money flushed down the drain.
Many dealerships will steer the customer’s attention to the down payment in order to keep up car sales. Through the monthly payment, a good salesperson can make the customer think a car is affordable when it really isn’t. In the midst of a recession, many consumers will seek to create an artificial sense of affordability by pushing down those monthly payments with an extended term car loan, when the most important aspect of a debt should be to dispose of it as quickly as possible. When it comes to affordability, the consumer is better off buying a car that costs less in order to make monthly payments smaller. Comforting one’s self with a low monthly payment when an extended term auto loan will add thousands of dollars, and tons of risk to their burdens will make the new car experience less of a joy and more a nightmare.
New car loans and bad credit don’t really go together. A car doesn’t always until perfect economic times to break down. In fact, it seems that a car will give up the ghost at the worst possible times, when money’s short, and debt has piled up. With new car prices averaging $28,000, the costs of new car loans for bad credit borrowers is very high as interest rates for bad credit car loans can climb into double digits. While many lenders have loosened up their standards for approving loans, they haven’t reduced interest rates on their car loans. Similarly, car dealership financing has fairly loose standards for approving car loans, but they have higher than average interest rates across the board.
With bad credit, you must place a great deal of consideration toward the limits your budget places on your purchase. While your income has no bearing on your credit rating, it must be large enough to cover the costs of monthly loan payments, tax and registration, insurance premiums, and interest. Getting approved for a new car loan, your lender may require proof that your income can, indeed, meet the financial burden of the loan including the higher interest costs your bad credit brings to a loan.
Banks and finance companies divide borrowers into one of four groups that are less complex than those used in advertising. Instead of good, or perfect credit, borrowers at this level are referred to as prime borrower. People with average credit are known in that industry as non-prime. There is often a divide in credit advertisements between poor and bad credit yet, the industry identifies both groups as sub-prime if they don’t measure up to non-prime standards. Below that is the deep sub-prime category where those borrowers effectively have no credit.
Of course, these categories are based on the credit scoring systems FICO, VantageScore, ScorePower, and PLUS. Each of these systems have different score ranges and apply the four basic credit standards to those ranges. In spite of the variations, their scores are fairly close allowing lenders to make accurate judgment calls on your credit when all scores are compared. Your scores are available for your use from the credit reporting bureaus, Equifax, TransUnion, and Experian, for a nominal fee. It’s important that you order your scores from all three companies in order to get the best picture of your credit health – your lender will look at all three too.
There is a wide variance on the amount of interest you can be charged for car loans with bad credit depending on local, and state laws. Bad credit auto loan rates are usually set within a maximum allowable percentage rate over the national prime lending rate. From this point, each lender will set bad credit loan rates based on company policy and local economic conditions. If the local consumer population has a high number of bad credit borrowers, company policy will call for relaxing approval standards and upping interest rates to cover the risk. If any given credit demographic is large enough, it won’t be ignored by the lending industry.
While car dealerships do have higher than average interest rates, you can beat them to the punch and dodge the high-pressure sales tactics that go on at the dealership’s Finance & Insurance manager. The auto makers have established their own financing companies which offer, via the internet, car loans that include programs for people with bad credit. In some cases, the interest rates they offer are lower than if you financed directly through one of their authorized dealerships. However, their car loans tend to be associated with specific car models which can be a plus if you’re interested in one of those models. Additionally, many auto makers apply special incentives and discounts on certain cars, including Certified Pre-owned, or CPO, models.
New car loans for bad credit borrowers are expensive – there’s no getting around that, and you must use all the resources available to save money wherever you can. Prepare your budget to deal with the additional costs your bad credit will bring including that very high interest rate. Shop for a car loan when you’re sure your income is capable of supporting the monthly payments. Do your research on lenders and their policies toward bad credit borrowers, and put as much effort in shopping for the lender as you would your car. Remember, getting approved for a bad credit car loan is the easy part, paying it off is where things get tough.
For a few years, auto loan approvals have been relatively easy to get in spite of a borrower having bad credit. The profusion of banks, and finance companies, that advertise bad credit auto loans have flooded the web along with a large number of online loan brokers. But, just because a lender advertises bad credit auto loans, doesn’t mean that loans they offer are any great bargain. If a bad credit borrower can get a car loan at all that’s, at the very least, a step in the right direction, in a manner of speaking.
According to a March 3rd article in Business Week, average interest rates have fallen attracting new borrower with less than perfect credit. This does not mean that a consumer with bad credit will get a low interest rate; it simply means the consumer can get an auto loan for bad credit with lower rates than were available a few years ago. This may not sound like much of a bonus, but there is a big cash difference between an auto loan for 18.5% APR, and one for 16.25% APR. A bad credit borrower needs to grab at any savings that he, or she can get, and an affordable APR, or annual percentage rate is the next big hurdle to cross once the loan has been approved.
With bad credit, high interest rates are a part of the burden a consumer must bear as a result of previous mistakes with credit. This is compounded by a poor economy as many co
nsumer scramble to make ends meet, sometimes using credit to fill the void left by higher prices and falling wages. As debt mounts, the likelihood of accruing late, or missed, payments grows. Even when a consumer makes all of his, or her payments on time, having a large number of outstanding balances is enough to push credit scores down.
Though credit scores are not the be-all, and end-all, of credit approval, they give the lender an insight as to the risk a borrower poses for failing to pay off a loan. If the lender is in a position to acquire more detailed information on a borrower, it can examine the borrower’s annual credit report, and how much debt the borrower has versus how much money he, or she makes. An annual credit report is a detailed listing of a consumer’s financial activity that doesn’t involve cash. Information is recorded and passed on by banks, credit car companies, and collection agencies, to credit reporting bureaus who take that information and boil it down to three digit expressions. These are where credit scores come from.
Likewise, a consumer’s Debt-to-income ratio plays an important role in credit approval. No lender wants to sit at the end of a long line of creditors. If the consumer has debts that are well within his, or her means of paying them from month to month, auto loan approval will be easier to get. A tight reign on how the consumer uses credit will keep that person on track for loan approval, as opposed to someone who whips out the plastic every time he, or she walks into a coffee shop, fast food joint, or convenience store.
While it’s true that an auto loan can act as a means of rebuilding credit, the average bad credit borrower is more likely to improve his, or her credit scores through a few simple steps to get above water. The most important step is to put off a car loan until it is absolutely necessary. The consumer should squeeze every mile he, or she can get out of the old car before borrowing money to buy a new one. Paying off existing credit balances as quickly as possible do more to improve credit than entering into a new auto loan can. Even in a recession, anyone can improve their credit by simply eliminating things from the household budget that just aren’t necessary. The big pay off in the end is ability to get an auto loan as a good credit customer.
The average national auto loan rate, according to the financial site BankRate, is 4.04% for a 48-month new car loan. While this is the average prime auto loan rate, that is the rate for people with good credit, most new car loans for people with non-prime, or subprime credit will face interest rates a few points higher than prime. The rate increases for average and bad credit car loans–which are calculated based on your risk as a borrower as revealed in your credit scores, and annual credit report.
How banks and finance companies set there interest rates are fairly straightforward. The nation’s Federal Reserve sets the federal fund rate, an interest rate at which banks, savings and loan associations, and credit unions actively trade balances held at the Federal Reserve bank. This rate serves as a benchmark for all financial institutions to set their interest rates which are further modified by federal, state and local regulations, corporate policies toward borrowers, and local economics.
The borrower’s influence on a car loan rate is based on the risk he, or she brings to the table. As a customer’s credit scores go down, interest rates go up, and depending on how far below prime a borrower’s credit rating is, can push interest rates higher to the point where an application will be denied. As the number of bad credit borrowers have been on the rise, many financing companies have relaxed some of their application standards to accommodate the bigger market.
How much a lender charges for interest on a bad credit auto loan is based on standards set by the company. Although there is a standardized method for calculating interest above prime, it’s up to the lender as to how much it will ultimately charge. The laws that regulate auto loans set maximums preventing any occurrence of usury, but interest rates can go quite high – nearly 30% in some states. Apart from the borrower’s credit scores, there are other things that he, or she can do to affect interest rates in his, or her favor.
The down payment is the borrower’s initial investment in the car loan. A payment of 20% of the total cost of the loan is considered standard. The total cost of the loan should not be confused with the price of car the borrower wishes to buy. The total cost of the loan includes interest, taxes, license and registration, financing costs, and insurance. This will add several hundreds of dollars to the price of the car, thousands in some cases. Posting a down payment greater than 20% of the total cost of the loan has the effect of reducing the interest rate as it’s an indicator of the borrower’s commitment to the investment.
A borrower who avoids a long term loan, that is, a loan that lasts 60-months, or more, will keep interest rates down. With extended term loans, there is a greater chance for default which drives banks and lenders to protect themselves form the increased level of risk. Disposing of the loan within a shorter term also saves money on the total amount of interest the borrower will have to pay. As the balanced goes down with each year of payments, interest collected on that remaining balance also shrinks. The difference between the interest paid in a 60-month car loan, and a 48-month car loan can mean thousands of dollars.
How much interest a borrower will be charged on a car is really an uncomplicated thing from the consumer perspective. Lower credit ratings mean higher interest, which should give the consumer a clear heads-up on when to get a loan, who to get a loan from, how much to post as a down payment, and the length of time that loan should take. Factoring in these things can drive an interest rate down by several points taking a great deal of pressure off the budget of a bad credit borrower. When it comes to a car loan, a consumer struggling with bad credit can steer that loan toward a more frugal direction.
For the vast majority of car shoppers, an auto loan is the most common way they purchase a car. Even consumers with enough cash to make buy a car in one lump sum, will opt for financing in order to keep those funds available for other uses. After the purchase is done, the loan is made, you may find yourself with a new batch of money troubles. Financial emergencies, unrelated to your auto loan, can crop up anytime, causing you to fall behind in all of your monthly payments. In this case, the temptation to get an easy line of credit to pay some bills can land you in deeper trouble.
Car title loans are sold as a service to help people pay off bills in times of financial trouble. These are short term loans, but what most consumers who sign on for one don’t know is that these are payday loans secured by their car. These loans are not subject to the same regulations as auto loans. Rather, they fall under the regulations that cover payday loans which are influenced by state law more heavily than federal law. Interest rates are, almost always, in triple digits with rates that can go almost as high as 300% in some locations.
Monthly payments on these loans can be very high, and if you used the title of your car before your auto loan is paid off, you still have to maintain those payments in addition to servicing the car title loan you took out to relieve your financial difficulties. This sort of loan is a nothing short of a trap which will cost you thousands of dollars, and your car. If you still owe on the balance of your auto loan, you will have to continue your monthly payments even after the car is repossessed by the payday lender. In some cases, the contract with the original lien holder on your car may require that you repay the remaining balance in full.
As mercenary as these loans are, they are still subject to federal financing laws. No matter where you live, a car title lender, or payday lender, must report the conditions of their loans in writing, before you sign the loan agreement. This includes informing you of the interest rates, the length of the loan period, when payments are due and what the late payment penalties are. Further, under the credit practices rule, lenders cannot use contract provisions that are deemed by Federal Law to be unfair, or unethical. If you believe you’ve been conned by one of these car title loan operations, there is help available.
Dealing with money troubles may be as simple as going to your own bank, or credit union, for a personal loan. In most instances, you may qualify for a personal loan from one of the dozens of reputable lending specialists advertising on the web. Not to be confused with payday loans, personal loans are regulated in similar fashion to auto loans. While interest rates can approach 30% in many areas, most have rates comparable to car loans. In addition, you won’t have to put your car title up as collateral. Most of these loans must be secured, but your car doesn’t have to be the asset, and payment structures are far more manageable than those of payday, or car title loans.
Desperate times should not push you into making financial decisions that will only make your problems worse. If you can’t ask your family for help, try your bank, credit union, or a lending specialist. It’s a fair bet that a reputable financial institution won’t be conducting business in a strip mall next door to a pawn shop. Like shopping for your car, shopping around for a professional lender is important to getting the right loan for your budget and your needs.
Struggling to make ends meet, and having to buy a car can result in you taking some pretty desperate measures; a problem compounded if you have bad credit. Falling into the subprime credit category means your car purchase will ultimately cost 31% more than if you had made the purchase with good credit. Because you’re in dire straights, financially, you may think your auto loan options are limited and have to take whatever deal comes along. But, how will it serve you to buy an unreliable car, over pay in interest, or take out a loan for an extended period of time? The fact of the matter is, you do have bad credit auto loan options available to you.
Financial circumstances may push you toward a cut-rate car dealership in order to pick up a car cheap. What you need to know about many of these operations is that they make their profits in high interest auto loans, and car repossessions. Known as Buy-Here/Pay-Here dealerships, these companies operate independently of any auto makers. They own their inventories outright and do all of their own financing rather than go through a partner bank. As a result, collections are done within the company. Much of the inventory of BH/PH dealerships has been bought, sold, repossessed, and resold.
BH/PH dealerships attract customers, like you, who are interested in making a car purchase that won’t strain an already fragile budget. Most of these dealerships do have cars at very low costs. But, the question on a car purchase is not how much it costs, but how long it will last before a major mechanical failure. If you were trying to save money by purchasing a $3000, and needs another $2000 in repairs a few months down the line will kill a budget that demanded financing for the original $3000. Will the BH/PH rush in to fix the car for nothing? Hardly. This will likely put you in a financial bind that will call for the dealership’s repossession of your vehicle.
This, however, is the worst case scenario, and you don’t have to be caught with your wallet hanging out. Not all BH/PH dealerships are sleazy operations, and you just need to pay attention to some details and ask the right questions before you sign on the dotted line. The appearance of the dealership and its inventory are important. Is it a dirty facility stocked with filthy cars? Do they have their own mechanics bay, or do they recommend servicing with a particular garage? What are their policies toward late payments and are their options, besides repossession, should something come up? Honest answers are the only thing you should expect from these people. Also, don’t be afraid to ask for a test drive, or have an independent mechanic inspect the vehicle.
On the upshot, the BH/PH dealership is not your final alternative. Many national finance companies are opening their doors to bad credit borrowers letting a steady income play a bigger part in their approval criteria. While there are no bargains to be had in interest rates, you’re more likely to get an APR that doesn’t border on usury. Minimum down payment requirements tend to be a little leaner through these finance companies and can vary depending on the size of the loan you’re about to request. In many cases, a bad credit auto loan approval can be had for an amount as high as $10,000 with an APR below 20%. That may not sound like a steal, but a BH/PH could hit you up for interest rates over 25% ̶ legally.
There’s nothing more important than taking the time to shop around for the right car and the right auto loan. Though your financial situation may preclude you from getting a new car, and your credit may not allow you to get the best loan rates, you’re not so bound by circumstances that you can’t get a reliable car to fit your budget. Study your options first, then pursue the right loan course. After all, there’s no sense in digging yourself into a deeper hole with a bad auto loan deal.