Credit Auto Advisor

So far, most of my posts have been all about the practical side of auto loan financing, but many people go looking for information like this because they have bad credit and need to buy a car. Maybe you are one of those people? If so, it can be a very stressful and emotionally difficult time. Maybe you need a car right away to get to and from work, you’re not sure who to trust, and you feel pressured.

If that’s your situation, here are some tips for dealing with the difficult situation, while still making sure you don’t get sucked into a bad deal:

Take your time. Do not just go to the first car dealership that offers “financing for anyone” and drive off with a car an hour later without even being sure about what kind of a deal you’ve gotten into. Instead, visit several places and don’t rush. You probably do not need a car today.

Ask for help. Maybe you have a friend or neighbor who would give you a ride to the grocery store for a few weeks while you are getting your financial situation straightened out and figuring out what you need to do about your car situation. Maybe a relative could give you a loan so you can purchase a modest, older used car without usurious interest rates.

Read the contract. Before you sign or agree to anything, read the contract. Take your time reading it. Pull out your calculator and figure out what the interest rate is, what the term of the loan is, how much you will be paying per month, how long you will be paying it, and what is the total amount you will pay over the life of the loan.

Save up if you need to. If your credit is an absolute wreck, it might be better to spend a few months taking the bus to work, and be totally inconvenienced, and even ask friends and family for help, so you can save up a few thousand dollars to pay cash for an older used car rather than getting yourself in hock to an auto loan company for years where you will end up paying thousands more than the amount of the loan.

Work on making your credit better. Once you’ve been through a situation where you need a car but you have bad credit, it will no doubt be a blow to your self-esteem. You might feel down or hopeless or like you’re irresponsible. The fact is, you can’t do anything about the past, but you can work on the future. You’d be surprised at how quickly you can start turning your credit score around just by paying your bills on time, getting a little bit of credit (even a secured credit card) and using it regularly and responsibly. (That means paying your bill in full each month.) You’ll be amazed at how much better you will feel as you work on turning your situation around.

If you do all of these things, you’re a lot less likely to find yourself with an oppressive car loan, scraping by just to make your payments, because you thought you needed a car now. Good luck!

Let’s say you went out and bought a new car without doing your research first, and you let yourself get sucked into taking out a loan that you later discovered did not have the best terms. What can you do?

Fortunately for you, it is possible to refinance an auto loan. Most people know about refinancing a house, but many people have never heard of refinancing a car. So, we’ll cover the basics here. Here are some steps to take:

1. If you’re thinking about refinancing your auto loan, the first thing you should do is get out all of the paperwork from your current loan and look at it carefully. What is your APR? If you were to stick with your current lender, how many months would you be paying on the loan? What is the total amount you’d pay?
2. Think about what you’d like in a new loan. Do you want a lower APR? Lower monthly payments? Higher monthly payments over a shorter period of time, so you pay less overall? Get out your calculator and figure out what would fit in with your household budget. (And don’t forget to factor in the cost of car insurance, maintenance and repairs.)
3. Brush up on the auto loan lingo. Take a look at our glossary of auto credit terms to refresh your memory and learn any terms you don’t know.
4. Find out what your credit score – also known as a FICO score – looks like. You can get your credit score from any of the three major credit bureaus (your score will vary slightly from bureau to bureau.) A FICO score is a number, typically between 300 and 850 (though most consumers’ scores probably fall in the 500 to 800 range) that sums up your credit worthiness for lenders. You should be aware that you probably need a score of at least 720 to qualify for the best rates on a loan. If you have a score below that number, you might want to look into easy ways to raise your score before you go shopping for a new auto loan. (For example, you might be able to raise your score just by paying down the balance on one of your credit cards.) If there’s nothing easy you can do to increase your score, it’s still worth looking into refinancing – especially if a car dealer convinced you to take an especially bad financing deal or if your credit score was worse when you bought the car.
5. Do some research at sites such as Bankrate.com, and find out what the current going rates are for car loans. If you have a credit score of at least 720, you should qualify for the current going rates, and there is no reason for you to be paying more. If your credit score is lower, you will probably have to pay more, depending on how low your score is, but you still might be able to get a better deal than what you’re currently paying. Some dealers convince people with bad credit to sign on for loans at outrageous rates of 20 percent to 25 percent. Knocking even a few percentage points off of that could save you hundreds or thousands of dollars over the life of the loan.
6. Start contacting lenders. You can go to your credit union, your bank or go through a website such as LendingTree.com. Apply for a new loan. When you are approved, your new lender will pay off your car with your former lender, and you will have a new loan, possibly with lower monthly payments, that will save you lots of money.

For more tips, CarBuyingTips.com has an excellent article on car loan refinancing.

Before shopping for a car – and seeking financing to buy that vehicle – you should make yourself familiar with the lingo every car dealer or auto dealership finance manager knows. Here’s a glossary:

FICO score – Your FICO score is a number determined by your credit history and other factors, usually between 300 and 850, that lenders look at to determine how risky it is for them to lend money to you. The higher the score you have, the more likely the lender is to believe that you will make your payments on time – and that you will not be delinquent or default on the loan. There is much debate over what constitutes a good FICO score, but according to FICO (formerly Fair Isaac), the company that invented the score, an applicant with a score of 720 or higher can expect to get the best interest rates on an auto loan, while an applicant with a score of 659 or lower will likely pay much higher, probably double-digit, interest rates.

Pre-Approval – If you shop around and get approved for an auto loan ahead of time – through a credit union, bank or auto financing company – and you are accepted, you will get pre-approval for a certain amount, which is like a blank check you can take to the car dealership and fill out for as much as the amount for which you were pre-approved. If you are able to negotiate a good deal and the car costs less than you through it would, the loan will only be for the amount you actually pay the dealer. This offers the advantage of allowing you to shop for a better deal on financing separately from your car purchase and gives you the peace of mind of walking into the dealership knowing your financing is in place.

F&I Department – Almost every car dealership has a Finance & Insurance (F&I) Department, which is where you will fill out your car loan application if you have not gotten pre-approved by a credit union, bank or online auto financing company. You’ll have to provide your social security number, employment history and other pertinent details, and the dealer will then send your application to a number of lenders to see which one(s) would be willing to purchase your contract. It sometimes can be easier and quicker to get your financing through the F&I department at the dealership, but the price you pay can sometimes be a higher APR and the pressure to buy expensive add-ons.

Upside Down – Being “upside down” on your auto loan means you owe more than the car is worth – either because you paid too little on your down payment, you paid too much for the car or because the term of your loan is too long (which is becoming more of a problem as 60-month and longer loans become more common.) If the term of the loan is too long, the value of the car can depreciate faster than you pay, causing you to be upside down. This can be a serious problem if you total your car and the insurance company pays you for the value of the car, leaving you owing money on a non-working heap of metal. (See GAP insurance.)

GAP (Guaranteed Auto Protection) Insurance – A type of insurance the car dealer probably will try to sell to you, which pays for the “gap” between what your car is worth and what you owe if you should ever total your car while you’re “upside down” on the car loan. It’s a good idea to think carefully about whether you want to purchase this insurance or simply negotiate well on the price of your car and take a loan with reasonable terms so you avoid being “upside down” on your loan in the first place. If you do decide to purchase GAP insurance, it’s almost always better to buy it from your insurance agent than from a car dealer, who typically marks the price way up and collects a nice profit.

Promotional Financing – When you hear car dealers on TV loudly hawking special financing deals – such as “Zero percent APR for two years!” – they are advertising what’s known as promotional financing, offered by auto manufacturers as an incentive to get customers to dealerships to purchase their cars. These special deals usually are only available to what dealers refer to as “qualified customers” – typically customers with excellent FICO scores of at least 700, possibly higher. If you have less than stellar credit, do not count on being able to qualify for one of these deals.

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