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.
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.
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.
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.
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
pre-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 run-up to the crisis.
Richard Cordray, 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.
how to protect yourself:
questions before even looking at a car. Before shopping
for a car, get a copy of your FICO 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, Edmunds senior consumer advice editor.
You can ask to be pre-approved on a loan. Once you’ve
been pre-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
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
pre-approval, you will control the discussion.
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.
there are car lots that prey on desperate people,
charging 20 percent or even 50 percent a year for
subprime auto loans, said Reed. 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, said Reed.
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 calculatorhttp://www.edmunds.com/calculators/affordability.html.
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.
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 between dealers