Getting a car loan: What it takes
Car buyers can make better deals on a car if they shop for loans beforehand. (December 10, 2012)
Almost 90 percent of cars aren't bought by consumers at all; they're purchased by banks. Only about 10 percent of buyers pay cash outright. The rest either borrow or lease a car from the real owner: a bank, an automaker's finance arm or a credit union. Shopping for a loan isn't as fun as shopping for the car itself, but it's not as difficult as securing a mortgage, either. We recommend that you shop around for a loan before you go to a dealership. Before you can shop for a loan, though, you'll need to determine a few things.
Determine What Car You Can Afford
It might seem difficult to make this determination before test-driving a bunch of cars, but it's best to steer clear of the sales floor until you've done your research. Affordability isn't just about the car's price; it's about the cost of financing, insuring, fueling and maintaining it. Unfortunately, you can't start with those costs, because they vary from car to car. You have to start somewhere, though, and it's OK if you don't know exactly what car to buy. If you're like most shoppers, you have an idea of the type you want and how much car you're likely to get for the amount you've got to spend. Be sure to include one-time charges like taxes, title and license fees, and the destination charge when you're figuring out how much you can spend, as well as factoring in continuing costs such as insurance and gas.
Shop for Loans Before Going to the Dealership
If you're buying a new car, the financing with the best interest rate might come from the automaker, available only through the dealer. Zero percent financing and other seemingly too-good-to-be-true offers come from so-called "captive" finance companies like GM's GMAC and Toyota Financial Services. Often they're not too good to be true (though the best terms are limited to specific models, loan periods and buyers with the best credit ratings). Dealers don't always have the best deals, though, and when they're not operating through a captive finance company they get a commission for setting up a loan with a bank you could go to directly. After you've negotiated the car's purchase price, the only way to know if the deal you're presented with is a good one is for you to have shopped around beforehand. You may not be able to shop rates from the captive lenders before actually buying a car, but you can find out what kind of rates are available at banks and credit unions.
Know Your Credit Rating
To know what kind of rate to expect, and to head off any obstacles you may encounter, you'll need to know your credit rating. Any lender will look it up as soon as you sit down with them to negotiate a loan. The rating takes into account how long you've had credit, how diligently you pay bills, how much of your available credit you've used, and your mix of revolving credit -- such as credit cards -- and more desirable debt, like a mortgage and previous car loans.
The rating is in the form of a score between 300 and 850, with higher numbers reflecting a better credit history. Whereas lenders for years had been liberal in their lending practices, the pendulum has swung the other direction recently, so the cutoff points for different credit tiers -- and the corresponding loan rates -- are higher than they had been. Still, the cutoff points can vary from one lender to the next, so comparison shopping is essential. Finding your credit score is simple, and free once a year, so check Your Credit Rating to see how.
Prepare to Open Your Books
Though the credit rating takes into account much of your credit history, a loan application will ask for more. The basics include your full name, address, date of birth and Social Security number. Expect to be asked for information on your current employer or employers, your income, and how long you've held your job. Assume that any lender will confirm all information with your employer. The application might also ask for your monthly gross income, meaning your income before any taxes or deductions are taken out.
Even if you fill out an online "short form," it's sure to lead to a more detailed one. The higher-risk you appear to be to lenders, the more information they're likely to request. The most detailed application will ask about your assets and expenses, including bank account numbers and if you've filed for bankruptcy within the past seven years. Whether you own or rent your home also plays a part in your eligibility. You may be asked your monthly rent or mortgage payment, and possibly for an estimate of your monthly expenses.
Thanks to the Equal Credit Opportunity Act, lenders are prohibited from discriminating based on marriage status, but you might be asked anyway, as a way of uncovering obligations, such as alimony.
An application should request authorization to obtain a credit report and to confirm any information you submit. Make sure you know if there's an application fee ahead of time, especially if you're experimenting on the web.
Preparing ahead of time doesn't just make the process faster and simpler, it ensures that you'll get the best possible loan and helps prevent complications. Surprises that can be remedied, such as an erroneous credit rating, are best found by you when you have time to correct them, not after you've committed to a more expensive loan because you didn't know better.
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