Car Loans

How and where to borrow money for a car loan. Find the best rates and terms.

Although this web site is primarily about car leasing, many of our readers tell us that they have decided, instead, to buy with a loan. They want to know if we have tips and advice that might help them. Hence, this article, just for them.

Car loans are generally better understood than leasing, but there's much room for information and advice, particularly for inexperienced car buyers.

A car buyer's first encounter with loan payments typically comes from car salespeople who ask, "What kind of monthly payment are you looking for?" This is certainly a legitimate question but if you don't know how payments relate to vehicle price, interest rates, and loan terms, you are subject to paying too much, or even getting cheated. You may want to read our article, "Don't be A Payment Buyer."

Why do you need a car loan?
There are really only two reasons for needing a car loan:

You don't have the cash needed to purchase the car you want.
You have the cash, but you have better uses for it, such as for investments, paying off bills, or saving for emergencies.

If you are in the first category – don't have the cash – make sure you've taken a serious look at your finances to understand what you can afford.

Many car buyers, particularly new ones, overestimate their ability to pay and buy more car than they can afford. They often overlook the other expenses of owning and driving an automobile: insurance, gas, oil, routine maintenance, taxes, tags, tires, and repairs. These often overlooked costs can easily exceed monthly loan costs.

How is your credit?
Your credit history is the most important determinant of what you'll pay for a loan, or even if you can get approved. It also affects what you pay for car insurance (see Cheap Auto Insurance).

“ What you pay for your car loan or lease directly depends on your FICO credit score ”

When you apply for a loan or lease, your car dealer and finance company will request a credit history report and credit score from one or more of the three major credit reporting agencies: Equifax , Experian , and TransUnion.

The credit report details your past and present credit card accounts, loans, mortgages, car loans, and leases. It shows whether or not you've missed payments, made late payments, to whom, how often, and by how much. Bankruptcies and repossessions also show up. It details balances on all outstanding accounts, credit limits, and shows how many inquiries have been made recently by lenders.

Since car dealers and finance companies don't have time to read through credit histories, they also ask for your FICO Score , which is a single number that summarizes your entire credit history. Your credit score is a measure of your credit worthiness and can range from 300 to 850. The median for consumers in the U.S. is about 720. A score above 700 is considered "prime" and will get you the best rates. If you're below about 640, you're considered "sub-prime" and you may have problems.

It's necessary that you know your credit history and credit score, especially if you have poor credit. Often, the problem may be a simple mistake or a couple of missed payments that can be easily explained. A bad credit report can be repaired.

The best source of credit history reports and scores is from the Fair Isaac Corp , the company that is behind the scores from major reporting companies. Because each credit reporting agency has slightly different data, your score from each agency is different, sometimes by a substantial amount. By getting multiple scores, you can immediately determine if one of the agencies has errors in their data about you.

What if you have bad credit?
Dealers and their associated finance companies don't typically approve customers who have serious credit problems. Most conventional lenders such as CapitalOne, Chase, Wells Fargo, and manufacturer's finance companies refer bad-credit loan requests to a "sub-prime" lender. One such lender is up2drive.com , that offers direct loans to credit challenged borrowers.

Another solution is to buy your car from a buy-here-pay-here car dealer who handles his own loans and does not check credit. You can expect to pay a higher interest rate but if it is the only way to get a loan, it might be the right solution under the circumstances. Although there are local dealers, one such national dealer is Drivetime.com .

If you are in Canada, we recommend AutoCredit.ca. This company specializes in arranging fast car loans at competitive rates, whether the customer has good credit, bad credit, or is in need of a second chance loan.

Where to get your loan?
Most car buyers accept loans offered through the dealer from whom they buy. However, that may not be the best deal.

Dealers don't directly provide loans. They have relationships with banks, credit unions, and carmaker's finance companies (GMAC, American Honda, Ford Motor Credit, etc.) who handle customers' loans. All loan requests through dealers must be approved by the associated finance company. Even though dealers often run a credit report, it's only preliminary and is not a final approval.

It's not necessary to finance your car through your dealer. Dealer loan rates are not always the best. You can shop for your own loans, and get pre-approved so that you're ready with a check when you decide to buy. One of the fastest and easiest ways to get pre-approved at good rates is online, on the Internet.

up2drive.com is a good company for online loans. The application process is free, easy, and fast. There is no obligation to accept their loan if you don't like it. They work with people with credit problems or no credit. You'll learn how much you can borrow and at what rate right online.

How much loan?
People who are "payment buyers" often don't consider what makes a low monthly car payment. Certainly, the price of the car affects payment amount but interest rate and loan term (length of loan) are other major factors. Dealers can offer low monthly payments by spreading payments over a long period of time, as much as 84 months (7 years).

Such long-term loans generally are not good. First, interest rates are higher on long-term loans, meaning that total finance cost can be as much as the cost of the automobile. Second, long-term loans almost always mean that you'll be upside down on your loan nearly to the end. What is the problem?

Being upside down means you owe more on a car loan than the vehicle is worth. If you tire of the car and decide to sell or trade, you'll owe extra cash to pay off your loan. Furthermore, if your car is totaled in an accident or stolen, your insurance only pays what the car is worth, not what you owe on your loan. You would have to come up with cash to pay off the loan. Buying GAP insurance would help this situation.

Summary
Look at alternatives to dealer-provided car loans. You may find better deals at banks or online financing companies such as up2drive.com (or AutoCredit.ca in Canada). Know your credit score so that you won't be surprised by being turned down or getting high rates, and get the shortest term loan you can afford. Finally, make your payments on time to protect your credit history.

Find cheap used cars online at UsedCars.com and Drivetime.com .

For more, see LeaseGuide.com