Financing Your Car

Although a few people are in the position to pay cash for their vehicles, the vast majority of us finance at least a large portion of the purchase price. Interest rate, therefore, is of primary concern to most of us when we are buying a new or used vehicle. "What's my interest rate?" is sometimes a difficult question to answer right away, in that there are several factors that will determine a consumer's interest rate.

The main factor that will determine not only whether a person can obtain financing, but also the interest rate, is a person's credit history. The better that a person has demonstrated that he or she consistently makes on time payments, the more likely a lender is to offer that person their best rates. If a person has a history of late payments, collections, or bankruptcy, then the lender will consider that person to be a greater credit risk. Given a greater risk, the lender might not approve the loan, but if the loan is approved, the lender will charge a higher percentage interest rate in order to offset the risk of slow or non payment. People who have no derogatory information on their credit history, but have not yet established a sufficient history of repaying installment loans will also be considered a greater credit risk. Often, someone with no credit or with damaged credit can improve their chances of obtaining financing by having a co-signer who has strong credit. This is especially common in the case of a person buying their first vehicle, having a parent or grandparent co-signing. This is an excellent way for a first time borrower to establish credit, in that the loan is reported to the credit bureaus in both the name of the borrower and co-borrower. A few lenders will make an exception in requiring a co-signer if the buyer is a recent college graduate, click here to learn more.

Speaking of credit bureaus, among the lenders who finance automobile loans, most refer to either of two credit reporting bureaus, TransUnion and Equifax ( Get Your Equifax Credit Report Now! ), for the potential borrower's credit history and credit rating. The rating is expressed in a numeric score that will typically range from 350 to 850. Most lenders offer their best interest rates only to those customers scoring at the high end of that scale, from 725 and up, and only if the vehicle that is used as collateral for the loan meets the lender's guidelines for a particular program. For any situation where the borrower scores lower than the low 700's or if the vehicle, due to age or mileage, or the borrowed amount relative to book value, do not meet program guidelines, the interest rate may be adjusted accordingly. Just as a lender evaluates the credit worthiness of the borrower based upon credit history, the collateral value of the vehicle for which the money is being borrowed is also considered in making the decision as to whether the loan is a good risk for the lender.

Loans for new vehicles offer the lowest interest rates. In today's automotive retail market, the finance division of the major auto manufacturers will often offer incentives to buy their cars. Please evaluate these offers carefully, because these programs are often offered in conjunction with a cash rebate where the consumer can have one or the other, but not both. If this is the case, then the low interest rate, or the zero percent interest rate is effectively higher if the consumer relinquishes a cash rebate in order to obtain the low interest rate financing. It is always a good idea to compare an incentivized program such as this against taking the rebate and financing with a conventional lender.

With most lenders, late model used vehicles often qualify for rates that are the same or only slightly higher than new vehicles. The older the vehicle, interest rates rise and maximum loan term will be shorter. You can use the Loan Calculator on this site to see how shortening the loan term affects the payment. If a consumer is wanting to find a vehicle to fit within a certain payment budget, a late model program car that can be financed at a lower rate over a five year term, or perhaps a new car lease might be a better solution than buying an older higher mileage vehicle with no warranty.

In financing used vehicles, lenders use book values from N.A.D.A. to determine how much they will loan on a particular vehicle. What percentage of book value, and whether the N.A.D.A. retail or trade-in value is to be used in the calculation depends upon the lender and upon the credit worthiness of the borrower. For borrowers with strong credit, most lenders that specialize in vehicle loans will loan slightly more than the retail book value of a vehicle. There are limits, however, to extending the loan amount, and a cash down payment is always a good way to not only insure getting a more favorable lending rate, but also to establishing a positive equity position early in the term of the loan.

In many cases, the buyer is trading in a vehicle in which he has negative equity, i.e. the Actual Cash Value of the vehicle minus the loan payoff is a negative number. The relationship of selling price to book value becomes critical in these situations where the buyer needs to roll negative equity into the new loan. I will not attempt to address the financial wisdom of an individual doing this, but I will say that for many people, doing so is a matter of necessity due to problems with their current vehicle or changes in the family vehicle needs. Unfortunately, rolling negative equity is just a fact of life for a lot of people. In that case, it is best to find a vehicle that is selling as far below book value as possible, and it is best to have some cash for a down payment.

Some of the car buying "how to" websites on the internet tell consumers to never let a dealership arrange financing for them, but to do it on their own. That advice is absolutely absurd. The fact is that a large dealership with a progressive finance department will have access to many lenders that specialize in automotive finance. In most cases, when a customer comes into the dealership with financing arranged on their own, they can either find a loan for them at a lower rate, or we can arrange financing for them at the same lender at the same rate, and save the customer the hassle of chasing paper when they can be out enjoying their new car.

Not everyone can qualify for conventional vehicle financing. In many cases, people who cannot qualify for a loan elsewhere can finance in house. Read the Buy Here Pay Here article for more detail.

A lot of people who can pay cash or qualify at the best rate for vehicle financing, shouldn't. Read what I have to say about leasing before you decide.