Car Loans and Financing Explained

How and where to get a used-car loan

how to get car financing and loansThere are a number of options available to used-car buyers in need of financing:

Dealer Loan – If you buy your car from a dealer, he will arrange your financing with a bank or loan company that he works with. Dealers don’t provide loans and financing themselves, it’s always done through a bank or finance company — except for “buy-here-pay-here” dealers that we’ll discuss below. See our article, How Does Car Financing Work.

Bank or Credit Union Loan – You can arrange your own auto financing with your own bank, credit union, or an online loan company. If you are buying your car from an individual (“private-party”), this is the way you will get a loan. It’s best to make application to your financing source before you buy so that you’ll know exactly how much money you are able to borrow.

Online Auto Loan – You can also finance your car purchase – from dealer or individual – with a loan from an online auto loan company such as Auto Credit Express.

Rates from these companies are very competitive and the application process is fast and easy. You’ll know almost instantly how you qualify and how much you’ll be able to borrow. If you are approved, they simply send you a check for your car purchase.

Home-Equity Loan – If you have equity in your home, you can borrow against it to purchase a car. You also get tax benefits as the interest is deductible. However, if there’s any chance you won’t be able to make payments in the future, you risk losing your home.

Loan from Friend or Relative – Many first-time car buyers finance this way. If you are still a minor or don’t have an established credit history, consider borrowing from friends or relatives. It won’t help build your credit history for the future, but it is a good way to get good cheap financing.

About your credit rating

Your credit history will most definitely affect your ability to get a loan and will affect the rate that you pay. The low rates that you see advertised by banks, credit unions, and loan companies are those that are only available to those with the best credit “scores.” Credit scores of 680 or higher are usually required to obtain the best rates. People with lower scores can expect to pay higher rates, or even be turned down, depending on just how bad the score is.

If you don’t know your credit score, you should

Get your Experian Credit Report FREE at  Check your detailed credit report for mistakes and outdated information which can pull down your score.

What if I have bad credit?

If you already know you have a poor credit score, your ability to get a car loan will be restricted, especially now, in the current credit crisis. If your score is not too bad (in the 600’s), you can get a loan from banks or loan companies but might have to pay a higher interest rate and/or make a larger down payment. It pays to shop around because rates and requirements vary considerably. Some online lenders such as CarsDirect and Auto Credit Express offer competitive loans to people with poor credit.

If you credit score is terrible (below 600), you have even fewer options. You might not be able to be able to get a conventional loan without a qualified co-signer. A co-signer is someone who is willing to take responsibility for your loan if you stop making payments or become consistently late with payments. A co-signer is not a co-borrower or co-owner of your car. The loan is still only in your name and if you make on-time payments, it’s a great way to build a good credit score for the next time you need a loan.

For more information, see the following article: Can I Get a Car Loan With Bad Credit?

Buy-here-pay-here car dealers

For people with extremely bad credit or no credit at all, there exists a class of used car dealers known as “buy-here-pay-here” (BHPH) dealers. They can be recognized by signs advertising their business: “We finance anyone”, “No credit, no problem”, or “Bad credit car loans.” They do their own financing (don’t use banks) and don’t check customers’ credit. You may be able to find local BHPH dealers in your area but be aware that the cars are often overpriced and their loan interest rates are extremely high.

Can I sell my old car if I’m still paying on a loan? If I’m upside down?

Yes, but you must get enough money from the sale of your car to fully pay off your loan, to get the “clear” title, to sign over to the new owner. This is not a problem if you can sell your car for the amount of the loan, or more. However, in the case where your car is not worth as much as you still owe, you are “upside down” and might have problems raising the additional cash you need after selling your car to fully pay off your loan. Your bank or loan company will not let your continue to make payments.

Can I transfer a loan on my current car to a new car?

No. It would be nice but it doesn’t work that way. You must pay off one loan, after selling or trading your old car, and get a new loan for the new car. Loans are specifically tied to a specific car and VIN number, which can’t be changed.

How can I get out of my current car loan to buy a cheaper car?

If you can’t afford your current car and its monthly payments, you have number of options, including refinancing, that depend on the current market value of the car — how much its worth if you sell it or trade it — and how much you still owe on your loan. If you are heavily upside down — owe a lot more than you car is worth — you might find that buying a cheaper car is not cheaper at all.