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AUTO LOANS

1. What effect will shopping for an auto loan have on my credit?

Answer: Shopping for the best deal on an auto loan will generally have little to no impact on your credit score(s). The benefit of shopping will far outweigh any impact on your credit. In some cases, applying for multiple loans over a long period of time can lower your credit score(s). Generally any requests or "inquiries" by these lenders for your credit score(s) that took place within a time span ranging from 14 days to 45 days will only count as a single inquiry, depending on the credit scoring model used. You can minimize any negative impact to your credit by doing all of your shopping in a short amount of time. You could save hundreds or even thousands of dollars by shopping for the best rate and terms on a loan.

For example, let's say you are looking around for an auto loan and you authorize five lenders to check your credit score(s) within a 14 day time span. All those inquiries should count as one inquiry. If you shop for a mortgage loan at the same time you are shopping for an auto loan, the shopping you do for those two loans should count as two separate inquiries.

And don't worry about all those promotional offers for credit cards impacting your credit score(s). These promotional offers do not affect your credit score(s).

2. What is a buy rate for an auto loan?

Answer: A buy rate is the interest rate that a potential lender quotes to your dealer when you apply for dealer-arranged financing. Your dealer may offer you an interest rate that is higher than the buy rate. The rate the dealer offers you is called the "contract rate." Sometimes the lender pays the dealer a fee for arranging the financing that is based on the difference between these two rates. Dealers may have discretion to charge you more than the buy rate, so you may be able to negotiate that interest rate.

3. Why might I need a co-signer in order to get vehicle financing?

Answer: A lender cannot require you to have a co-signer if you qualify on your own. If you are told that you need a co-signer for a loan, it means that the lender will not offer you the loan based solely on your own income and credit record. The lender wants another person to also promise to pay the loan. This is what a co-signer does. A co-signer is a person who is obligated to pay back the loan just as you, the borrower, are obligated to pay. A co-signer could be your spouse, a parent, or a friend. The lender cannot require your spouse to be a co-signer unless you are both applying for the loan. Having a co-signer on your loan can be a benefit to both you and your lender. Co-signing gives your lender additional assurance that the loan will be repaid. You may get a better interest rate with a co-signer.

There are risks for the co-signer. The co-signer is also obligated on the loan. If you do not repay your loan, your co-signer will be liable for repayment even if the co-signer never drove your vehicle. In addition, if you pay late or default on the loan, both your credit and your co-signer's could be negatively affected.

4. How does a lender decide what interest rate to offer me on an auto loan?

Answer:An auto lender will typically consider several main factors:

*Your credit score and credit history *Your income and debts *The amount of the loan *The length of time you'll be paying back the loan, called the "loan term" or "term of the loan" *The amount of your down payment as a percentage of the value of the vehicle *The type of vehicle and whether you are purchasing a new or used vehicle.

5. What are manufacturer incentives?

Answer: Manufacturer incentives are special deals, like 0% financing or cash rebates that you may have seen advertised for new vehicles. Often, they are offered only for certain models.

Manufacturers offer these deals many times when they are having campaigns to sell certain models, or because they have a large inventory that they want to sell more quickly.

If you are interested in these types of offers, read the fine print to see if you qualify. Sometimes promotional interest rates are limited to people with high credit scores or to loans of a shorter duration.

6. What is a co-signer?

Answer:A co-signer is another person who also takes full responsibility to pay back the loan. Often a co-signer will be a family member. The co-signer is obligated to pay any missed payments and even the full amount of the loan if the borrower doesn't pay. The co-signer's credit also can be harmed if the borrower is late making payments. Having a co-signer on your loan gives your lender additional assurance that the loan will be repaid.

7. What is the difference between dealer-arranged and bank financing?

Answer:With bank or other lender financing, you go directly to a bank, credit union, or other lender, and apply for a loan. These lenders can "preapprove" you. If they are willing to make an auto loan to you, the lender will quote you an interest rate, loan term (number of months), and maximum loan amount based on factors such as your credit score(s), the terms of the transaction, and the type of vehicle. This lender will then give you a quote or a conditional commitment letter before you go to the dealership. The bank, credit union or other lender offers certain terms, and those terms are negotiable.

With dealer-arranged financing, the dealer collects information from you and forwards that information to one or more prospective auto lenders. If the lender(s) chooses to finance your loan, they may authorize or quote an interest rate to the dealer to finance the loan, referred to as the "buy rate." The interest rate that you negotiate with the dealer may be higher than the "buy rate" because it may include an amount that compensates the dealer for handling the financing. Dealers may have discretion to charge you more than the buy rate they receive from a lender, so you may be able to negotiate the interest rate the dealer quotes to you. Ask or negotiate for a loan with better terms.

Be sure to compare the financing offered through the dealership with the rate and terms of any pre-approval you received from a bank, credit union, or other lender. Choose the option that best fits your budget. After the auto purchase is finalized, the dealer-arranged loan may then be sold to the lender, who has already indicated a willingness to extend the credit. That lender may own your loan and collect the monthly payments, or transfer those responsibilities and rights to other companies.

Some types of dealerships finance auto loans "in-house" to borrowers with no credit or poor credit. At "Buy Here Pay Here" dealerships, you might see signs with messages like "No Credit, No Problem!" The interest rate on loans from these dealerships can be much higher than loans from a bank, credit union, or other type of lender. You may want to consider whether the cost of the loan outweighs the benefit of buying the vehicle. Even if you have poor or no credit, it may be worth it to see if there is a bank, credit union, or another dealer that is willing to make a loan to you. Another feature of this type of dealership is that your monthly payment is to the dealership. Some Buy Here Pay Here dealerships and some other lenders that lend to people with no credit or poor credit put devices in their vehicles that help them repossess or disable the vehicle if you miss a payment.