Category Archives: financing

Trading Car With Bad Credit – Explained

Can I trade my car if I have bad credit?

trade car bad creditIt’s like the answer to a lot of other questions, it depends.

It depends on how bad your credit is, what dealer you want to use, where you’ll look for financing, and the status of the existing loan on your trade vehicle.

Let’s take a look at how it might work.

Scenario

I need a new car,  and have a car to trade, but my credit is not good. How does it work?

In this case, it’s good that you have a  vehicle to trade because it can be used as a down payment on a new vehicle loan — assuming you are not “upside down” and have some equity to use as trade credit.

Continue reading Trading Car With Bad Credit – Explained

Can I trade my car for a cheaper car?

Can I lower my car payments by trading for a less expensive car — trade down?

trade for cheapere carYes — maybe.

But whether it’s a good thing to do will depend on your particular circumstances. Let’s take a look.

If you want to trade your car for a cheaper car, it probably means you are finding it difficult to afford payments on the car you now have. Or you simply want to trade down to have a little extra money each month by lowering your payments.

Let’s look at the two different possible situations, one of which will probably match your own situation.

Situation #1

You are “upside down” on your current loan. That is, you currently owe more on your loan than your car is worth as a trade-in vehicle. You can determine how upside down you are by first asking your bank or loan company to give you your loan payoff balance. Then compare that amount to the actual trade-in value of your car (see www.kbb.com and www.nadaguides.com). The difference in the two amounts will tell you how much you are behind in your loan (“negative equity”).

Continue reading Can I trade my car for a cheaper car?

How Does Car Financing Work?

Car Financing Explained

car financing explainedIf you can’t pay cash when you buy your new or used car, you will need a loan, commonly known as “financing.”

Auto financing can come from a number of sources — banks, credit unions, online loan companies, finance companies associated with car manufacturers, or even from certain types of used-car dealers.

f you are buying a brand new car from a new-car dealer, he arranges your loan for you (if you haven’t already arranged one for yourself) with his “captive” finance company. A “captive” finance company is one that is owned by a car manufacturer and used by dealers who sell that manufacturer’s vehicles. Examples would be Ford Credit, Honda Financial Services, and Porsche Financial Services.

If you car buying a used car from a dealer, he may have a number of finance sources that he works with to arrange customer car loans. These may include local banks, large national banks, or national finance companies.

Continue reading How Does Car Financing Work?

How to Buy Car With No Down Payment

 How to Buy a Car With Zero Money Down

zero down car loanWe often hear the questions, “How can I buy a car with zero down payment?”, ” Is it possible to get a car with no money down?”, or “How much down payment will I have to make for this car?”

There are a number of ways to acquire a new or used car without making a down payment, or making a minimal down payment. Let’s take a look.

New car without down payment

Most new-car purchases require a down payment but here are four cases where it is possible to escape that requirement:

1. You get a highly discounted purchase price such that the loan-to-value (LTV) ratio is 100% or less — that is, the loan you need is equal to, or less than, the value of the vehicle. Most loan companies set a new car’s value at sticker price. So, when you negotiate a lower price, you reduce the requirement for a down payment — assuming your credit score, income, and income-to-debt ratio are acceptable.

Continue reading How to Buy Car With No Down Payment

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.

Continue reading Car Loans and Financing Explained

Dealer Wants Car Back – Legal or Not?

Can a Dealer Take Back a Car After Papers Are Signed? Is it Legal?

dealer wants car backThe short answer to the above questions are Yes and Yes.

It’s a fairly common situation.

You buy a car from a dealer who arranges a loan, you sign the papers, possibly make a down payment and/or trade an old vehicle, and you drive away — thinking the deal is done.

Not quite.

You may have received the impression from the dealer that your loan was approved, which is presumably why you were allowed to drive away in your new car.

However, most dealers don’t provide or approve loans (except for buy-here-pay-here used car dealers). They use outside banks or finance companies. One of the papers you signed was a loan application, not a loan approval or grant.

Continue reading Dealer Wants Car Back – Legal or Not?

Bad Credit Car Loan – Options

Buying a car with bad creditHaving bad credit can cause difficulties when buying a new or used car if you need a loan.

However, most people with a low credit score have options that will allow them to get the car they want.

About your credit history and why it is important

Just to be clear, anyone who has ever had a loan, mortgage, or credit card has a credit history file. That file is a detailed report of every loan or account a person has had. It shows account details, credit amount, current status and balance, and payment history. If there have been late payments, missed payments, repossessions, bankruptcies, or foreclosures, those are also in the file. Negative information in the file can remain there for up to 10 years.

When you apply for an auto loan, the lender (dealer, finance company, bank, or credit union) will check your credit history to determine your credit worthiness — which is a measure of how likely, or unlikely, you are to keep your promise to repay your loan — based on your past performance.

However, car dealers and finance institutions don’t take the trouble to read your detailed credit report. Instead, they look at your credit score, which is a numerical rating that summarizes your entire credit history.

Continue reading Bad Credit Car Loan – Options

Is Leasing a Car a Bad Idea?

Does leasing a car make sense?

used car or lease new carMaybe.

If you compare monthly payments for leasing versus borrowing for a brand new car, you’ll find that lease payments are about half those of a loan for a term of 3 years.

But what if you are considering a used car, not a brand new one?

First, only brand new cars are leased, not used. However, if payments are only half that for a brand new car loan, it means that you could lease a brand new car for about the same payments as for a loan on a used car that costs half as much as brand new.

Stated another way, since an average car loses half its value in 3 years, you could lease a brand new car for about the same payments as for a loan on a 3 year old used car.

Therefore, if you are thinking of buying a relatively new used car, leasing could provide you a way to drive a much newer car for the same money.

Of course, if your budget doesn’t allow a relatively new car, then leasing may not be the answer for you.

Are there other things to consider if I choose to lease?

Yes.

First, leasing is not a way to own a car, even after the lease has been completed. However, most leases offer a purchase option at lease-end that allows you to buy the car for the part of the original value that you haven’t already paid during the lease.

Furthermore, leasing requires that you only drive a “normal” number of miles — about 10,000 miles a year — and that you keep the car in good condition. Any unusual wear or damage must be repaired prior to returning the vehicle at the end of the lease.

You also don’t have the same level of flexibility with a lease. Although ending a lease early is possible, it can be very expensive. Leasing is best for people with a stable lifestyle and who will not want out of their lease before its normal end.

If you want to learn more about leasing, go to LeaseGuide.com.

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Negative Equity Car Deal – How to Make it Work For You

What is Negative Equity ?

upside down car loan - negative equityWhen you get a car loan and agree to pay it off over, say, 5 years there can be times during that loan in which you owe more than the car is worth. It’s called being “upside down” or “under water.”

If you wanted to sell or trade your car during this time of negative equity, you would need extra money to pay off your loan because the value of your car doesn’t cover the full amount you owe.

This situation can happen for a number of reasons:

  • You paid too much for the car initially, which means your loan can be “upside down” from the very beginning
  • You agreed to a very long-term loan that doesn’t get paid off as fast as the car depreciates in value
  • You have a very high interest loan, possibly due to bad credit, which creates payments that pay down your balance very slowly
  • You made little or no down payment and the value of your car depreciated at a faster rate than the rate at which you pay off your loan
  • You purchased a car make/model that loses its value faster than similar cars of other brands
  • Your car becomes damaged or not well maintained, which decreases its value
  • You drive an unusually large number of miles each year, which creates a “high-mileage” vehicle with high loss of value

Who is most likely to have a negative equity car loan?

People who are most likely to find themselves in a negative equity situation are inexperienced young people who have limited income and less-than-great credit.

Inexperience temps these buyers to purchase more car than they can afford, with insufficient down payment and a high interest rate. They also opt for a much-too-long loan term as a way to create affordable monthly payments.

The result is almost certainly to be an upside down loan situation.

What can you do if you have negative equity and want to sell or trade?

Sell or trade? The two situations are different if negative equity is involved.

If you sell your car, the money must be used to pay off your loan. If that amount is not sufficient to fully cover the loan, you must come up with the difference in cash. Your loan company will not allow you to continue paying on the loan.

If you trade your car, you may have some other options.

If the amount of your negative equity is relatively small — less than 10% of the value of the new car — a dealer may be able to “roll” the amount into the new loan. It increases the monthly payment amount on the new car, and likely puts you right back into another upside down situation — not a good habit to get into.

The ideal way to resolve negative equity is to simply have the cash to pay it off.  When trading, this means adding the cash to your down payment for your new loan.

Leasing is another option that can work for some people with negative equity

Since leasing provides much lower monthly payments than buying with a typical loan, rolling negative equity from a loan into a new lease can soften the impact.

However, this strategy will only work if the amount of negative equity is not too great.  Furthermore, only brand new cars are leased, which means you might have affordability issues.

For more details on leasing, see LeaseGuide.com.

Are there other problems with negative equity?

Yes.

If your car is stolen or is totally destroyed in an accident, your insurance (or the insurance of the at-fault party) only pays current replacement value, not the amount you owe on your loan.

If you are upside down when this happens, your insurance settlement, minus your deductible, doesn’t fully pay off your loan — which means you must arrange for the difference on your own. This can often be a financially devastating situation if you have a great amount of negative equity.

When does negative equity not matter?

So it seems negative is only a problem if you will want to sell or trade before your loan is paid off — or if your car is stolen or totaled.

If you keep your car and complete your loan, it’s not a problem. In fact this is the easiest and least expensive way to get out of a negative equity situation.

How to avoid negative equity and its problems

  • Make sure you don’t over-pay for your car
  • Never take a loan that is more than the purchase value of your car
  • Make as large a down payment as possible on your car loan
  • Shop for the lowest interest rate loan at banks and credit unions
  • Avoid very long length loans of 72 months or more (60 months max on used cars)
  • Repair damages and keep your car in good condition

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Actual Car Loan Interest Rate

The annual interest percentage rate (APR) you pay on a car loan can be deceiving.  Because of the way in which loan payments are calculated, the actual interest rate, as a percentage of the loan amount, is higher for loans longer than 12 months. The exact rate depends on the APR and the length of the loan, but does not depend on the loan amount. See for yourself with this calculator.

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For example, say you have a car loan for 60 months at 12% APR, which might be the case if you have poor credit.  You can see from the calculator that the actual amount of interest you pay is about a third of your loan amount.

This means that for every three dollars you pay on your car loan, you pay another dollar for interest.  This is money you never get back.

To minimize the total interest you pay on a car loan, do the following:

  1. Borrow as little as possible
  2. Make as large a down payment as possible
  3. Choose the shortest loan term as possible
  4. Lower your APR interest rate by improving your credit and shopping for better rates online and at local banks and credit unions