Want to maximize your success at finding an affordable car loan? Follow these easy steps.
Before heading into the dealership
- Nail down the car loan payments you can afford. Consider your cash on hand, your monthly after tax income and your monthly expenses. Cap your budget for auto-related payments at 15 or, at most, 20% of your income. Remember auto-related includes the car loan, the gas, the insurance and the maintenance (including warranty). This is the best way to ensure you can cover the car loan payment and all the other little expenses that will crop up over a four or five year loan. Calculate your car loan payment here.
- Set your maximum down payment. The down payment reduces the amount you borrow. While you can run it through the calculator, the vast majority of Americans will actually save money by paying more up front. Interest rates on car loans are often higher than what you would earn were you to invest the money. What’s more, car loan interest is paid with after tax dollars. Can you buy the car outright? If you’ve got cash up front, you can save thousands of dollars of car loan interest over the average five year loan. Calculate your principal and down payment amounts here.
- Value your trade-in. Nada Guides and KBB are good tools to use to value your trade in. They’ll take you step by step through the valuation. Make sure you select wholesale or dealer prices as dealers don’t take trade-ins at retail.
- Get multiple loan quotes from SmartCarCredit. SmartCarCredit helps you get your car car loan application in front of banks, credit unions, and auto finance companies. By working in partnership with car lenders and dealers across the country, SmartCarCredit matches your car loan application to the needs of these car loan providers quickly and easily. They contact you with car loan quotes for your consideration. Lenders have different car loan criteria and terms so make sure that you compare deals to get the best car loan.
When evaluating lenders and/or their car loan offers
- Know the Maximum Advance. This is the dollar amount the lender will give you to purchase your car and pay related expenses such as tax, license, service contract and GAP. The amount depends on the cost of the car and on your credit score. One California car lender we surveyed would extend you 125% of MSRP (manufacturer’s suggested retail price) if your credit score was 720 or above (prime). Below 660, you would only qualify for 100% of MSRP. (Read more about bad credit car loans.) Know how much you’ve been approved for. Don’t feel you have to spend it all. The less borrowed, the less repaid.
- Payment-to-Income (PTI). Lenders rarely approve car loans with greater than 20% payment to income ratios. Keep this in mind as you walk the car lot. If you like a car you see, divide the payment by your monthly gross income. If the number is north of 20%, keep walking.
- Debt-to-Income (DTI). Acceptable car loan debt to income ratios vary by lender and credit score, but a rule of thumb for installment loans car or otherwise is that you should keep it below 50%. That includes your house payments, auto payments, student loans, etc.
- Interest rate. Discussed more thoroughly elsewhere on this site, keep in mind that your car loan interest rate varies by, among other things, your credit score, the amount you borrow, the duration of the car loan and even the type of car you are buying, particularly if it is an older used car. New car loan rates are generally lower than rates associated with used cars. Calculate your car loan interest rate.
- Joint applicants. Commonly husband and wife, the higher of the two scores is typically used for “pricing” the loan e.g., determining what interest and fee classifications your loan falls under. Treatment of Co-Signers, commonly parent / child relationships, varies and often depends on the credit of the co-signer.
- Proof of Income. If your credit score falls below 700, expect to be asked for proof of income. While you may be asked for proof above 700, paradoxically, one of the benefits of having better credit is not needing to substantiate it to the same extent.
- Bankruptcies, Repossessions and Foreclosures. While bad credit car lenders willingly lend to consumers with discharged bankruptcies, borrowers with repossessions and foreclosures are often avoided. This may be because such repossessions indicate that the borrower has not only made bad decisions, but has not shown a willingness to try to resolve a bad credit situation. Read more about auto loans after bankruptcy.
- Minimum income. While it varies by lender and their target credit tier, few car lenders venture below $1,500 per month. As your income rises above $2,000 per month you will find that your borrowing options increase and your interest rates decrease significantly. While almost anyone with a job can qualify for some type of car loan, minimum income requirements increase and the car loan principle decreases if you have a bad credit rating.
When in the F&I office
The average F&I manager has more experience at structuring car loans than the average consumer. While the vast majority of F&I managers are honest, hardworking people, understand that they are motivated to make as much money as possible for the dealership (and themselves). Follow a couple of key points to ensure you get the best car loan possible.
- Unpack. The F&I manager deals with the interplay of car loan amount, down payment, trade-in, interest rate, payments and lterms 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 suitecase… start unpacking.
- Nail down the price. This should have been agreed on the lot or the showroom, but ask to see written proof of the purchase price. If it has changed since you agreed, take it as a sign to move on.
- Sell your trade-in. You’ve done your research. Make sure you get fair value. If the dealer is unwilling, be prepared to take your car 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 you can move on to the car financing. Ask the F&I manager to walk you through the down payment, the interest rate, the loan term, the fees and the 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 things don’t sound right, take a break. Many people wish that they had walked from the F&I office when they were prone to making mistakes.
- Double check. Ok you’ve hammered out the price, the trade-in and the car loan, before signing on the dotted line, check the car purchase and car loan contracts. As this is the legal document make sure you have agreed to every fee.
Ok, enough reading. Now you’re ready to start shopping for car loans. Prepare your budget and submit SmartCarCredit’s easy car loan application. We’ll get you headed in the right direction. Disclosure: We developed the content for SmartCarCredit™ while working with automotive industry clients. We hope you find it helpful in making informed decisions. While we believe the information to be accurate, we do not guarantee its accuracy.
|