If you want a car loan, the good news is that you will
probably get it — even if your finances aren't in the best shape. But
that could be bad news, too.
If your money has been tight
lately, or if you haven't been on top of your bills, you might be
relieved to find that you are likely to qualify for a car loan — perhaps
one known as a "subprime" loan, or the type of loan offered to iffy
borrowers. But realize you need to be on your toes so you don't
overstretch on the size of the loan or interest rate, and don't get led
astray by a fast-talking salesman.
Some people assume that if they are offered a loan, it means the
lender figures the individual can handle it. But a bank's criteria is
different than an individual's, and too many lenders outside of banks
push loans they know individuals can't afford or will struggle to pay.
Lately,
there's been a boom in car lending for people who aren't well-equipped
to handle loans — often people with bad credit scores under 620. Taking
on a loan you can't afford could put you in a bind with other bills or,
worse, could mean you end up losing the car.
Government officials have been sounding the alarm on
subprime auto lending recently. The Federal Reserve Bank of New York has
noted that subprime auto lending is back to per-housing crisis levels —
when people were overdosing on debt before the Great Recession. Thomas
Curry, the comptroller of the currency, said in a recent speech that the
surge in risky auto loans "reminds me of what happened" in the runup to
the crisis. Richard Cord ray, director of the Consumer Financial Protection Bureau,
said people getting subprime loans "may be more vulnerable to predatory
practices." In other words, they might be sold on loans that will hurt
them. Before shopping for a car, get a copy of your FOCI credit score and
go to a bank — not the car lot — and ask about the size of loan and
interest payment you would qualify to get, said Philip Reed, Edmund
senior consumer advice editor. You can ask to be per-approved on a loan.
Once you've been per-approved, you will know the price you can pay for a
car and the monthly payments on a loan. With that information, you will
have negotiating power as you merely negotiate the price of the car,
not loans or monthly payments.
"Too many people — especially
subprime borrowers — are so desperate for a car they throw themselves at
the mercy of the car salesman," said Reed. With a loan per-approval,
you will control the discussion.
Realize that interest rates vary a lot.
If you have good credit, you are likely to be able to buy a car with an
interest rate of zero on a new car at a dealer or under 4 percent at a
bank, Reed said. Even with a fair credit score of 660, a person could
get 1.9 percent at a dealership. And a subprime borrower might get 7 to
12 percent from a legitimate dealer, he said.
Yet there are car lots that prey on desperate people, charging 20
percent or even 50 percent a year for subprime auto loans, Reed said. He
warns people not to accept a loan based on a monthly interest rate.
It's the annual rate, known as the APR, that matters. Stay away from
"Buy Here, Pay Here" lots where the interest rate can be 50 percent a
year and a strategy is to repossess your car, Reed said.
Know what you can afford.
Don't take a bank's word for what you can afford. Calculate it yourself
and adjust your desire for particular cars based on what you can afford
using this calculator.
Realize
when you buy a car that you will be paying for everything from
insurance to repairs, not just monthly payments. And notice how much you
will be spending on interest payments over the entire loan period.
Make the car deal before the loan deal.
When going to buy a car, cement the deal on the car price first without
ever talking about getting a loan or the size of monthly payments.
Salespeople will ask you what monthly payment you want. Don't go there.
If you need a low monthly payment, they might talk you into an expensive
car with a seven-year loan. Reed said your loan should be no longer
than three years on a used car or five for a new one. Any longer and you
might face high repair costs or the need to buy a new car while still
paying off the old one. And before agreeing on a price and a loan, ask
for a list of all fees. They vary greatly among dealers and lenders.
