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How Car Financing Works

Dealers always sell for cash

Car dealers are independent business people who have an authorized franchise with one or more car manufacturers. They do not work for the manufacturer; the manufacturer does not own the dealership.

Dealers buy cars from the manufacturer, usually with large "floor-plan" loans from a bank or finance company. The bank charges dealers interest on these loans. Dealers have to sell cars to pay off these loans with associated interest, as well as cover other expenses of running a business.

When a dealer sells or leases a car, he always receives cash, whether it's directly from the customer, or from a finance company or bank who has loaned a customer the money.

A common misconception is that dealers would rather get cash directly from a customer, bypassing the financing step. Some people mistakenly believe that dealers give cash customers a discount. This is not true. In fact, dealers typically get a commission or "finders fee" on car financing provided by banks or finance companies and therefore prefer that customers finance or lease.

Dealers don't finance car loans and leases

Dealers are not bankers. They do not directly finance cars they sell or lease. Instead, they have a preferred list of finance companies or banks that they work with to provide customers with financing. Most dealers use the car manufacturer's "captive" finance company. Customers can arrange their own financing if they choose.

Dealers do not finance car leases and loans. Dealers do not approve customers for leases or loans -- they "screen" customers' credit scores, but do not approve. Dealers do not process loans or take payments on loans. Dealers simply take customers' finance applications and pass them along to a finance company. Once financing has been arranged, the dealer is out of the picture.

Dealers pre-approve car financing

A dealer may do a cursory preliminary check of a customer's credit history using one of the three major credit reporting agencies. This NOT for loan or lease approval, but only to determine if the customer has such serious credit problems that it would not make sense to continue with the transaction.

Remember, the dealer is NOT the finance company — he cannot approve customers for loans or leases. The finance company or bank to which the dealer sends the lease or loan application will do their own check and look at not only credit history and payment history, but credit score, and debt-to-income ratio. This credit worthiness check is much more thorough than the simple check that the dealer may have done.

What you'll pay - your credit score

When a finance company or bank checks your credit score, you'll be classified in one of three categories. First, you could be rated a "prime" customer, or "A" tier. This means your FICO score is higher than about 680. You qualify for the best interest rate.

If your credit score is between 620 and 680, you are "near-prime" and will pay as much as 5% higher interest rate than someone with a better score.

If your score is below about 620, you are considered "sub-prime" and will almost certainly have difficulty finding a bank or finance company who is willing to give you a loan or lease. If you find one, your interest rate will likely be extremely high.

First-time buyers or leasers with little or no established credit history may have to use a co-signer who has a good credit history. The co-signer's credit allows financing to be approved but otherwise plays no part unless the buyer or leaser defaults. Co-signers have no part in vehicle ownership or registration. Co-signers are not co-owners.

Dealers can change your interest rate

One of the potential "hidden" fees when financing a car is a markup that dealers can add to your interest rate, even when you have a good credit score. This called "dealer reserve" in the industry.

Say the normal interest rate from the finance company used by the dealer is 6.0%. The dealer marks up the rate by a percentage, say 2.0%, making your real rate 8.0%. This markup is never mentioned anywhere in the documents you sign. Car dealers claim the practice is justified to cover the cost of brokering customers' financing. In fact, it's additional profit.

“ What you pay for your car loan or lease directly depends on your FICO credit score ” Automotive News reports that a number of companies such as DaimlerChrysler Services, Honda Finance, and GMAC have settled on a 2.5% markup limit agreement. California now has a law that sets a 2.5% markup ceiling for most car loans. So it seems that 2.5% is now the magic number in the industry.

A common question from automotive consumers is, "Can I negotiate my interest rate?" In most cases you can try to negotiate the markup, but not the base rate, which is set by the finance company based on your FICO score . In the past, there was no good way to know how much the car dealership was marking up the rate but, now, with the recent "agreements" and laws, we can assume the markup rate is going to be as much as 2.5% added to the base rate.

Lease rates are particularly difficult to negotiate because the interest rate is expressed as "money factor" (see the discussion of lease finance fees in our Monthly Lease Payments article), and the rate doesn't appear in your lease contract.

Be aware that not all dealers mark up interest rates, but it seems to be a growing practice. Also remember that your base rate will be determined by how a finance company values your credit history and your credit score. This is why is it so important to understand how credit scoring works . A low score or mistakes in your credit history report can easily force a high base rate, even without markup. Therefore, knowing your credit score and shopping around for the best rates are always good to do.

The deal is NOT done when you sign your car finance contract

Many customers mistakenly assume that when the dealer says he has done a credit check and lets the customer sign papers, that the deal is done and everything is legally wrapped up. Not true. The deal is not done until financing has been arranged and the dealer has been paid for his car.

What you sign and what it means

When a customer finances a car with a loan, he or she signs papers that essentially say the following: " I agree to buy this car, using funds that will be loaned to me by a finance company or bank (if I am approved), and that the dealer will attempt to arrange this loan for me, and, if those funds are not approved by a finance company or bank, the deal is void unless the dealer can find another finance company that will approve me. If the loan approved, the finance company or bank will pay the dealer directly with those funds that have been loaned to me. The finance company or bank will then work directly with me to arrange monthly payments to repay that loan. I understand that the dealer will have then been paid in full for his car and will no longer be involved in the lease or loan."

Financing A Car With Bad Credit

Many assume that it is impossible to attain an auto loan when you have a bad credit rating. This assumption is quite far from the truth. Though it may seem difficult to find an auto loan when you have a bad credit, it is definitely not impossible. In recent years, poor credit auto loan business has significantly grown. The reason being that there is a greater number of people with a bad credit history. Bad-credit auto loans carry a higher risk to lenders. As a result, the lenders usually charge a higher interest rate to their borrowers. Lenders assess your credit ratings and match your requirements with the best suited auto loan package. Almost all lenders have online loan applications, which speeds up the process and makes it a lot simpler.

As previously mentioned, interest rates on bad credit auto loans are generally higher. This results in you paying a larger amount of interest. However, improving your credit rating can avoid lenders from charging you a higher interest rate on your bad-credit auto loan.

Here are some ways to improve your credit rating

* Attain a valid copy of your credit report. * Keep all current accounts up to date. Do not fall behind on any payments and pay all your bills on time. * Avoid taking multiple loans, especially at the same time.

Remember, a bad-credit auto loan can not only help you get new or used vehicles but it will also help you rebuild your credit history. The best way to gain insight into the best rates for bad-credit auto loans is by doing some comparison shopping; much like you would when searching for your desired used or new vehicle. When looking at auto loan offers, always compare the Annual Percentage Rate. This will help you determine the best loan for you and your budget.

by: Chris George

Financing A Car With No Credit

If you have no credit history at all, it's a good time to sit back and really think about a good strategy for building a solid credit history. Don't jump at the chance to get credit cards as they can be the fastest way to get overloaded with debt. Most everyone has had a bad experience with them and they should be treated like a loaded gun.

Financing a car with no credit is simple and your approval is based on your income. There are some special finance companies that cater to helping people with their first opportunity for a car loan. There are reputable companies online that can help you do that, it's just a little difficult locating them sometimes with all of the spam and gimmick websites that abound on the internet. There are some really great opportunites though.

You should consider if you are wanting to put any money down. While you may not have to have a down payment, reducing the amount financed with cash down can be a wise idea if you can afford it. It reduces the amount of finance charges that are paid over the course of the loan and also reduces your monthly payments.

On a five year loan, you can generally expect that a thousand dollars down will reduce your monthly car payment by about $20.00. Of course, if you have a considerable amount to put down, your payments can be very, very low. Make sure that you make an educated decision and don't rush into anything that you can't afford.

Financing A Car After Bankruptcy

A car loans after a bankruptcy is one way to help build back your credit history. In fact, once your bankruptcy closes, you can apply for a car loan the next day. To get approved with the best rates for your car loan, follow these tips. Review Your Credit Report

Before you start applying for a car loan, check out your credit report and make sure all your accounts are in order. It is not uncommon after a bankruptcy to see open accounts that should be closed, which hurt your credit rating.

While looking at your credit report, consider adding a page explaining the situation that resulted in your bankruptcy. If there were extenuating circumstances, lenders may approve you for a better rate than under normal conditions.

Plan Your Car Purchase

Before purchasing a vehicle, decide what you can afford in a monthly car loan payment. This will help you decide which financing package is best for you. Both the loan amount and length of payments will determine your monthly payments, so there is flexibility in determining which vehicle you can afford to purchase.

Use A Car Loan Lender

Car loan lenders make their money by finding you a loan. Car loan lenders work with several financing partners to back loans with all types of credit risk, including bankruptcies.

Online car loan lenders deal with thousands of loans, and can usually find you a better deal than your local car dealerships. Online car loan lenders will send you a check when you are approved, basically making you a pre-approved car loan buyer.

Explain Your Situation

Car loan applications will ask if you have ever declared bankruptcy and why. This is your chance to explain what led up to the situation and what steps you have taken to resolve your credit situation. Be sure to include improvements in your financial history too.

Consider Refinancing

Once you are approved for a car loan, keep your eye on future refinancing. By making regular payments on all your bills, in a year’s time you could qualify for significantly lower interest rates. In three years, you can build your credit score to near excellent and qualify for even lower rates.

Car Loans for Students

Are you sick of public transportation? Perhaps you are tired of having to walk to class in wet, cold weather? Maybe you need a car to get to and from a new job that you just started. If you are a student seeking an easier means of getting around, there is answer! You can apply for a student car loan, even if you have no credit or bad credit! Student car loans have two major advantages!

1) Buying a car will help eliminate all of your no-transportation headaches!

2) Utilizing a car loan to purchase a new car will help build your no credit or bad credit history into a positive one. Every monthly payment you make for your car loan will be reported to every major credit reporting agency.

I have no credit. How am I going to get approved for an auto loan?

With most car loan companies, being young and having no credit is not a factor when it comes to granting approvals. How come? Because a car loan is a secured type of loan. The lenders are protected by the fact that if your loan goes into default, they get your car.

What about bad credit? How do students get approved for a car loan with poor credit?

Same thing as getting approved for financing with no credit! Students with bad credit should not have a problem getting a car loan with bad credit because the lenders are protected.

by: Jacob Andrews

Now Buy A Car At Your Comfort

While looking for a car loan, borrowers prefer an option where they have the least hassles in addition to low rates of interest. Easy motor loans are a quick answer to this. They provide you with the best of terms and conditions that make it an appropriate option to avail. Before looking for easy motor loans, the borrower should make some effort in deciding beforehand and work out the details about the motor that he wants to buy. The model of the car, the make, accessories etc all have to be decided before the borrower applies for the easy motor loans.

The borrower should make sure that he has the easy motor loans approved before he goes to the car showroom so that he is not lured away from his pre-decided specifications by the showroom owner for some other deal. While applying for easy motor loans, the borrower should be careful about any hidden fee and processing charges which may amount to a lot.

Easy motor loans can be secured by pledging the very same car as collateral. This will help him in obtaining a lower rate of interest. Unsecured easy motor loans help the borrower in obtaining money for the car without any security. The amount that is borrowed has to be repaid in a term of 2-7 years. The term is short as the value of the car starts to depreciate after this duration.

Bad credit borrowers can also avail easy motor loans. The rate of interest charged is slightly higher than the usual but that can be cut down with the help of proper research for finding a suitable lender.

Online research can help a lot in finding easy motor loans. Quotes can be obtained online and then a proper comparison of these quotes can help in finding a suitable deal for easy motor loans.

Easy motor loans are a very comfortable way to borrow money for buying a car. The terms and conditions provided are suitable to the borrower. Easy motor loans thus prove to be a highly borrower-friendly deal.

Don't Get Stretched

Before you go car shopping, you have to know how much car you can afford. That means you need to know how much of a down payment you can make, how much you're likely to get for your current car and how much your monthly payments will be. It's tempting to just let the dealership work it all out for you.

In that scenario, you tell the salesman what kind of monthly payment you're looking for and show them your trade-in. They'll tell you whether you should stick with the entry-level model or if you can move up a step or two. And you'll probably be pleasantly surprised that you can drive a much nicer car than you thought for monthly payments that fit your budget. Yes, the loan stretches out for six years but... look at this car! Feel those seats. Listen to that big, strong V8. Come on, if you can afford it each month, who cares how long the loan is?

Well, obviously, another year or two of payments means thousands of extra dollars out of your pocket. It's just being removed more gently.

Then there's another problem you might find out about years later. The longer your car loan is, the longer you'll be "upside down" in your car payments. In other words, a longer loan extends the period during which you'll owe more on the car than the car is worth.

So figure out your payment situation and know what you can afford before you start shopping.

Very Bad Credit Loans??

While looking for a car loan, borrowers prefer an option where they have the least hassles in addition to low rates of interest. Easy motor loans are a quick answer to this. They provide you with the best of terms and conditions that make it an appropriate option to avail. Before looking for easy motor loans, the borrower should make some effort in deciding beforehand and work out the details about the motor that he wants to buy. The model of the car, the make, accessories etc all have to be decided before the borrower applies for the easy motor loans.

The borrower should make sure that he has the easy motor loans approved before he goes to the car showroom so that he is not lured away from his pre-decided specifications by the showroom owner for some other deal. While applying for easy motor loans, the borrower should be careful about any hidden fee and processing charges which may amount to a lot.

Easy motor loans can be secured by pledging the very same car as collateral. This will help him in obtaining a lower rate of interest. Unsecured easy motor loans help the borrower in obtaining money for the car without any security. The amount that is borrowed has to be repaid in a term of 2-7 years. The term is short as the value of the car starts to depreciate after this duration.

Bad credit borrowers can also avail easy motor loans. The rate of interest charged is slightly higher than the usual but that can be cut down with the help of proper research for finding a suitable lender.

Online research can help a lot in finding easy motor loans. Quotes can be obtained online and then a proper comparison of these quotes can help in finding a suitable deal for easy motor loans.

Easy motor loans are a very comfortable way to borrow money for buying a car. The terms and conditions provided are suitable to the borrower. Easy motor loans thus prove to be a highly borrower-friendly deal.