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Gail MarksJarvis: Need a car loan? Be aware of subprime lending

McClatchy-Tribune Information Services

November 23, 2015


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 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.

Here’s how to protect yourself:

—Ask 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 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 pre-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, 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.

—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 calculatorhttp://www.edmunds.com/calculators/affordability.html.

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 between dealers and lenders.

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