Auto Loan: All Banks Are Not Created Equal

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First of all, I would like to ask our car buyers not to underestimate their credit worthiness. A lot of people called me up and asked, "I got a bad credit. Can I still get a car loan?". Just as I suggested in the title, all banks are not created equal. You think your credit is not too good compared to your friends, but to some bankers, it is of the top 10% in their applicant pool. Some car lenders are more bullish and write more auto loans, and also, in different economic times, credit score is computed differently. When the economy is expanding, credit becomes easy. That's when the Federal Reserve has lower interest rate and pretty much anyone can get a loan. Lastly, some car dealers may not be completely honest with you, telling you how bad your credit was, just so they can sell a higher interest auto loan to you. Stop listening to them but shop around! Everyone can get a car loan at a fair price.

Less known to the general public is that most car dealers make more money on their car financing side of business than profit from car sale or trade-in itself. In that sense, most of the franchise car dealerships are more in a banking business than in an automobile retail business.

Some car dealers make so much profit on car loans they generate they can even afford a small loss on the car sales, and pay you extra for your old clunker just to have you sign the loan package at very high interest rate. And you will be stucked with high interest auto loan for the next few years and easily get yourself into negative equity scenario, also known as "upside down" or "heavy in the trunk". Spend as much time on negotiating on car loan as on the car itself.

Be prepared. All car credit decisions come down to two things: your credit profile, and the car. A lot of banks do not want to finance older cars. But many banks cater to borrowers with less than perfect FICO credit score. Once you know your credit profile, and know the car you want and can afford, you are ready for car loan shopping.

Local credit unions are a good place to start. They are local, and they have prior relationship with you. They can give you a quick quote on auto loan. Some credit unions like Federal Employees Credit Union know that their customers have better job security than private sectors, and therefore lower risks of default, and will give you a more competitive rate over other financing sources.

Some local banks do not finance cars purchased over the internet. A simple work-around is to purchase the car with short term loan, and then bring the car to them to have it re-financed. Auto loan re-financing should also be considered when the interest rate drops.

Dealer car financing. For new car dealers, they can finance it through the financial arm of car makers, like GMAC, NMAC and various motor acceptance corporations with low interest rate. Auto dealers work with many banks, and they are experienced in getting a good car loan package for customers with different credit profiles. It is not uncommon that they can submit the credit application to hundreds of lenders in their network through program like DealerTrack. After they take the profit, they may still present you with an attractive offer. Take that offer, and compare it with other sources of car financing.

Dealer in house car financing. These are the "tote-the-note" lot, or "buy-here-pay-here" lot. They have much higher interest rate but they are dealing with higher risk car buyers. There are some deals to be found here. Make sure you are aware of the policy on late car payment. Some car dealers repossess the car the next day payment is late, and that leaves you out with no car for work.

Car financing through credit card. Another source of funding for your car is to put the auto loan on the credit card. Make sure you pay more than the minimum every month, and know the interest rate they are charging. Some card companies change their rate in the middle of the loan. Be sure to read the fine point of the contract. Good thing about this financing option is that if you cannot make car payment, there will be no repo guy lurking behind your back.

Car financing through home equity loan, or HELOC (Home Equity Line of Credit). This is an excellent choice if you own a house. The rate is most likely be competitive because it is backed by your house instead of your car. Some banks offer both home equity loan and car loan. And the former most likely will have a better rate than a simple car loan.

Do some research on the internet when shopping for a car loan. Some websites actually submit your auto loan application to many car lenders through their affiliate network, and come back with the best rate possible. It may take some work, but it will pay off handsomely with the lower interest rate you will be paying.

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