Really bad credit auto loans
Have really bad credit? Consider a form of auto dealer financing called buy-here-pay-here financing. For these auto loans you skip the lender altogether applying to the dealer for your auto loan. Not suprisingly this form of car dealer financing is for used car loans. Here are a couple of things to keep in mind with buy here pay here financing:
- Shop dealers. Buy-here-pay-here dealers are easily found by looking for signs out front that say “We Finance” or “Easy Credit”. Bad credit car loan rates vary widely, so shop at least three buy-here-pay-here dealers for the best combination of both car and auto loan. (For an alternative to used car dealers, read about car-buying-services here.)
- Have your downpayment ready. Auto dealers will commonly ask for up to 1/2 of the purchase price of the car as a down payment. Not surprisingly this just about offsets the dealer's investment in the car. Click here for more on working with used car dealers.
The Auto Loan “Acquisition Fee” or “Bank Fee”
Q: I was purchasing a used vehicle from the dealership. Before signing, I reviewed the conditional sales contract and found that they were charging me a $2,800 "acquisition fee"? What is this? What is a reasonable amount?
A: An “acquisition fee” or “bank fee” is the amount the lender requires the dealer or borrower pay to fund an auto loan. Sound odd? These fees are most common in auto loans for subprime borrowers. (Read more about your credit score here.) The problem comes when these fees are not disclosed and capitalized or built into the loan or lease where they go unnoticed.
Theoretically, this non-interest, fee compensation is introduced by the lender to take what they perceive as being abnormal risk on a subprime auto loan. For example, you have a 550 credit score with a recent repossession. You go to a dealer who finds you a car. He shops your loan application but can’t find willing lenders, but he has a relationship with a lender who only lends to people with 600+ FICO scores AND has a maximum interest rate of 15.5%. The dealer convinces the lender to underwrite your loan (buy the loan from the dealer), but the lender requires more upside for his perceived risk. That upside comes in the form of acquisition fee income. (Read more about working with used car dealers here.)
How it works and how to reduce or eliminate it...
Repair your auto credit
Q: I live in New Jersey and have bad credit. How do I repair my credit over time?
A: Here are a few links:
- Our consumer credit guide gives you an overview of how to check your credit, what goes into the score, etc.
- Our New Jersey car loans page gives you an overview of how the process works at a dealership in New Jersey.
- Our auto loan calculator will help you 1. determine how much you can afford, 2. estimate your interest rate and 3. evaluate the terms a dealer may offer.
- Finally, check out www.MyFico.com. These are the guys behind the FICO score. The “Learn” tab is particularly helpful.
Can I assign my auto loan?
Q: I am currently financing my vehicle but I want to sell it to someone who wants to take over the payments. How can I go about doing so?
A: Take a look at your loan or lease contract and look for an "assignment" clause. Many are assignable subject to the approval of the lessor or lender. Others may have an outright prohibition of assignment.
While I'd contact the lender / lessor in both cases, if assignments are allowed, they'll need the buyer's financial information and permission to run their credit report. In fact, the lender / lessor will probably run a full loan application.
The thing you should know is that, particularly for leases, the assignor may have some residual financial responsibility in the case of an assignment. That is, the assignor’s name may still appear as a co-borrower. So, make sure you check this out before going too far down the road with your lender / lessor.
The alternative, of course, is to have the borrower apply for an auto loan through SmarCarCredit., get approved on their own, buy the car from you satisfying the existing obligation.
Minimum Monthly Income
Q: What do I do if I don’t quality for a loan based on minimum monthly income?
A: While it varies by your state of residence, minimum monthly incomes for lenders typically run from $1,500 to $1,800. Lenders have these and other minimums to maintain loan profitability. As people making less than $1,500 per month can’t afford to borrow much money, the lender's costs of underwriting and administering the loan exceed their expected revenue from loan interest and fees. What can you do if you don't meet the minimums?
- Try dealer financing. Dealers often have monthly income minimums at the lower ($1,500) end of the range. This is particularly true of dealers who offer their own financing read more about auto dealer financing here.
- Get a co-signer. My mother co-signed my first auto loan. A co-signer is almost always a parent or legal guardian. They substitute their credit for yours meaning that if can’t, the lender will expect them to make payment.
- Get a secondary source of income. While most lenders will qualify you based on your primary income source, many will consider secondary income when making a loan decision. The longer you’ve had that secondary income source the more likely they will include it in your monthly income calculation.
- Make a larger down payment. This brings down the loan balance. Holding interest rate and loan term constant, if your borrow less your payment will go down. The lower your auto loan payment relative to your gross monthly income, the greater the likelihood you will get funded.
Another thing that wasn’t around when we started out but that you may want to consider is Prosper located at www.prosper.com. While we can’t vouch for the site’s success in funding auto purchases, but it could be worth a try.
What are typical bad credit car loan interest rates?
Q: I have a bad credit – What rate will I have to pay for a bad credit car loan?
A: Bad credit car loan rates typically run between 12% and 18%. It varies based on who you are buying the car from, the length of the loan, your credit rating and your state of residence (among other factors).
Do you handle private party auto loans?
Q: Can you find me an auto loan for a private party purchase where there is an existing lien holder on the title?
A: Yes. For private party auto loans just select "Private Party" from the first (loan type) drop-down list. We will route your profile straight to used car lenders who specialize in private party auto loans. Our local private party auto lenders usually get back w/in 24-hours. Our national auto lenders may take a bit longer.
As for the existing lien holder, a private party auto loan is made to you based on your credit and, to a lesser extent, the collateral (the car). If you are approved, they will want to know the name, address of the existing auto lien holder. While each lender handles it differently, all lenders are concerned about “perfecting title’ in private part car loans. You lender will most likely either:
- Payoff the current auto lien holder directly paying you the difference between the amount owed on that lien and the amount of the loan they are making you.
- Write you a check for the entire amount. You can either deposit that check paying the private party or sign the check over to the private party. In either instance, as the bank has made you a loan for the car, you need to ensure the other lien holder is paid off as that lien holder has to sign over the title before it is can be transferred.
Note: Keep in mind that private party auto loans often carry higher interest rates than used car loans for dealer purchases. While there are a variety of reasons, one of the most significant is that lenders vet their dealer partners to ensure they feel comfortable that they are selling cars in a manner consistent with the lenders quality expectations.
How much will a lender approve me for?
Start with the basic math calculating your budget, your payment, your expected interest rate to get to your maximum loan amount. We recommend you use our auto loan calculator. Now you’re going to have to modify that number based on requirements of the specific lender. Consider the common auto loan stipulations below:
- Age of the car. While this typically affects the interest rate, it may also affect the maximum loan amount. One of our lenders, for example, will loan up to $20,000 on ’96 – ’98 vehicles but up to $75,000 on ’99 or newer vehicles. The cars mileage may also come into play here. If the car you are considering has more than 100,000 miles, your financing options decrease as few lenders are willing to lend on cars with high miles. (Read more about on researching cars online.)
- Your credit score. Maximum advance. 760+ FICO scores they will lend up to 125% of MSRP or KBB Retail including tax, license, service contracts, gap, etc. For 610 – 659 FICO scores they will lend up to 100% of MSRP or KBB Retail. Have a low credit score? Read more about bad credit auto loans.
- Your gross monthly income (GMI). Getting an auto loan with GMI is below $1,500 is tough. Some of our Credit Unions partners go down to $1,400. (Read more about your car credit options.) Some dealers will also finance auto loans for borrowers with less than $1,500. Commonly called “Buy Here Pay Here” financing, this is where the dealer carries your promissory note. Click here for more on Buy-Here-Pay-Here financing. . At $1,800 / month most banks and dealers will move on to other areas of the application e.g., the type of collateral, etc. Above $2,000 / month options open up.
Is a car buying service better than a dealer?
A number of SmartCarCredit dealers follow a Car Buying Service model. These auto dealers invest less in the car lot and more in technologies that allow them to scan online classified ads (AutoTrader.com, Cars.com, etc.), wholesaler inventories, dealer inventories, and dealer-only auto auctions. (Read more about researching car prices online.) As with any type of auto dealer, there benefits and limitations of working with Car Buying Services. Key Car Buying Service Benefits include:
- Selection. Walk onto a dealer’s lot and he’s going to sell you what he’s got in inventory. Whether he took it as a trade in, bought it from a wholesaler or bought it at auction, he’s got an investment in those vehicles. The challenge comes when the car dealer doesn’t have what you want. (Read more about working with car dealers.) While the average used car dealer may have 30 and 40 cars on the lot and the average franchise may have 5 times that, finding the make, model, body style, engine, color, miles and options you want is a challenge. Auto buying services reduce the selection gap as they pull from literally thousands of cars available at wholesale. While the same may be true of auto loans, we suggest you get multiple auto loan quotes.
- Price. The car buying service saves money by not having to invest in vehicle inventory including “carrying” and transportation costs. Further, the car buying service may also save on the car lot. While many states require retail dealers maintain an office and a lot, the display space is often minimal saving the car buying service the investment in land. The net effect for consumers: you should be able to save money over “bricks and mortar” auto dealers.
Do auto loan inquiries hurt my credit?
Don’t take our word for it. According to Fair Isaac’s (the people behind the FICO score) myfico.com site, most credit scores are not affected by multiple auto or mortgage loan credit inquiries within a short period of time. It seems, these types of inquiries are commonly treated as a single inquiry and will have little impact on the credit score. MyFico Facts & Falacies.
Do a couple of companies own all the dealerships?
In the market for a new car? It is more an more likely that you’ll buy from a dealer group. The AIADA’s Automotive News newsletter reports that the largest auto retailers are growing their share of the new vehicle market. Of the 100 largest groups by retail unit sales:
- 18 reported average sales per dealership of more than 2,000 new retail vehicles. That’s up from 13 groups a decade ago.
- 16 averaged $100 million or more in revenue per dealership last year. That's up from seven a decade ago.
- Two groups, Penske Automotive and Dave Smith Auto Group reported selling more than 5,000 new cars and trucks per dealership in 2006.
Read more about
working with used car dealers.)
Read more about navigating the dealership F&I office.)
How can I get the best bad credit car loan rate?
People with good credit rarely have a problem getting great auto loan rates. (Read more about auto credit.). Further, when a lender or manufacturer advertises auto loan interest rates, they promote the lowest one… the one only available to their best customers. But, what about the rest of us? If over 60% of Americans are considered non-prime, how do we estimate rates for our bad credit auto loans?
To estimate your bad credit car loan rate, know that at least six factors come into play. Two of them are beyond your control. The other four are not. Further, they are critical to getting a good rate on auto loans for bad credit. (Go straight to step 2 of our auto loan calculator.)
Under your control: Control these factors and you control the rate on your bad credit car loan!
- The car you buy. New auto loan rates are often 1-2% lower than used auto loan rates from the same dealer. For example, while a national lender recently advertised 36-month new car loan rates of 6.0%. Its used car loan rates were 20% higher at 7.3%. While a new car doesn’t fit into everyone’s budget, buying one may lower your interest rate.
- Who you buy from. Our survey of used car loan rates for people with good credit showed that buying a car from a licensed dealer carried an average 7.3%. Buying the same car from a private party would incur a used car loan rate of 8.3%, a 13% increase. Why? Lenders want to know the loan collateral (the car) is in good shape. If you buy from a private party, the loan rate may include charges to inspect the car.
- The loan term. Car loan interest rates generally increase with the length of the loan. Recent 3-year loan rates were 12% lower than 6-year loan rates. Therefore, good or bad credit, the shorter the term the lower the rate.
How do I calculate important auto loan terms?
Enter “auto loan calculator”, “auto payment calculator” or any other calculator term into a major search engine and you’ll get hundreds of results. Clicking through the options it’s easy to conclude that you have what you need to handle any auto loan. You’re probably right. The challenge that many new and used car buyers face is not the mechanics of the auto loan calculation, it’s what calculations to make and in what sequence.
- Problem 1: Prime and sub-prime borrowers have different needs
Prime borrowers often start by selecting the car they want. They then shop for auto loans auto loans based largely on who offers the lowest interest rate. Sub prime and non prime borrowers seeking “bad credit auto loans” often start by looking for auto lenders such as banks, credit union or auto finance companies to fund them. That company may approve them based on a specific monthly auto loan payment that they can afford. They then take the terms provided by the lender and shop for a car. (Read more about auto loans for bad credit.)
- Problem 2: Most people don’t know what they don’t know
While there are the two basic types of calculators, there are a also a dizzying array of specialty calculators to address every possible need. What people really need is a basic tool that will walk them step by step through the calculations for finding the perfect auto loan.
The SmartCarCredit.com Ultimate Auto Loan Calculator
The SmartCarCredit.com auto loan calculator is based on the simple premise: There is a right way to run the numbers on an auto loan. Further, that the sequence of calculations is as important as the calculations themselves...
Where can I get auto financing?
Auto finance topped 1/2 a trillion dollars in 2007 split between new car loans and used car loans. Not surprisingly given a market of this size, the average consumer has a range of auto finance options each with specific benefits. Consider your alternatives including:
- Banks. Capital One Auto Finance, Citi Auto Finance, Chase Auto Finance, HSBC Auto Finance and Wells Fargo Auto Finance are all large auto lenders representing about 10% of the market. They commonly lend to the higher credit tiers (A, A-, B+, etc.). So, if you have good credit or an existing banking relationship, you may qualify for low auto loan rates.
- Captive Finance Companies. The auto finance arms of most major auto manufacturers, these companies specialize in auto loans and leases. As you might expect, they do the bulk of their business in new car finance.
- Credit Unions. AS there are over 5,000 credit unions in the United States, chances are there's one in your neighborhood. Historically credit unions provided auto finance only to their members. Many now have open membership AND are expanding to lower credit tiers including bad credit auto loans.
- Auto Finance Companies. These non-bank lenders are commonly called acceptance corporations. They willingly finance autos for lower credit tier customers. Credit Acceptance Corporation (CAC) and North American Acceptance Corporation are two of many auto finance companies.
- Car Dealers. Most car dealers have between five and twenty auto lending partners. As a result, they can be a great source of auto finance. Further, some auto dealers either finance cars themselves (called "Buy Here Pay Here" lots) or have relationships with small local lenders. As a result, they can be a good source of bad credit auto loans.
What's the key to winning in the F&I office?
While most F&I managers are honest people, they are motivated to make money for the dealership (and themselves). To get the best car loan, follow a couple of key points getting the most from your trip to the F&I office.
- Unbundle. F&I managers work with car loan amount, down payment, trade-in, interest rate, payments and terms all day, every day. If he / she presents you with a complete package ready to sign, do the same thing you would do if someone handed you a suitcase start unpacking.
- Nail down the price. The price should have been agreed on the lot or in the showroom, so ask to the purchase price in writing. If it has changed since you agreed to it, consider heading to another dealership.
- Sell your trade-in. Research your car's KBB or Black Book value before heading to the dealer. If the dealer is unwilling to give you fair value, be prepared to take your trade-in elsewhere. Listing a used car on AutoTrader or Ebay is easier than you think.
- Shore up the financing. You’ve agreed the price of the car and the value of the trade-in. Now move on to the car financing. Ask the F&I manager to walk you through the down payment, interest rate, loan term, fees and monthly payment.
- Slow down. Most buyers spend about two hours and fifteen minutes in the dealership they choose to buy from. Further, they may visit two or three dealerships in a day. If you are feeling tired, slow things down by asking for a thorough explanation. If you're tired, take a break. Don't be the person who wishes he/she had walked away from a multi-year commitment but didn't.
- Double check. Ok the price is set, the trade-in is done, and the car loan is arranged, before signing on the dotted line review each document. The car purchase and loan contracts are legally binding. Ensure that you have agreed to every term.
