Tag: bad credit auto loans

How to Drive Away With A Car Loan After Chapter 7 Bankruptcy?

Posted on | by Blaine Koehn

Successful businessman offering a car key with contract.

Chapter 7 bankruptcy is embarrassing. It feels horrible, you lose so many things important to you, and we’ve been culturally indoctrinated to treat it as some sort of massive “failure.”

What’s almost worse is that it TAKES so long. The paperwork, the meetings, the reworking how you live your life – like you’ve committed a crime instead of run into a wall.

I’m not suggesting we have a party to celebrate chapter 7 bankruptcy or anything, but let’s be realistic. There are PLENTY of reasons someone might end up having to file. Medical bills, job loss, divorce, accidents – sometimes stuff happens, even when you’re doing everything right. Chapter 7 bankruptcy is a bad experience, but it doesn’t mean you’re a bad person.

Car Loan After Chapter 7 Bankruptcy?

As I type this, in fact, experts are predicting a surge of chapter 7 bankruptcy filings as a result of the economic disruptions brought about by the Covid-19 virus. Obviously we all hope it doesn’t come to that, but if it does, most of those people won’t have done anything “bad.” It sucks, but that’s how the world can be.

Even if you made some bad decisions that led to chapter 7 bankruptcy, at some point you have to focus on the future rather than lamenting the past. Of course, you want to learn from any mistakes, whether they were your own or others. You may need to change some behaviors. Make better choices, no matter how difficult. But in the grand scheme of things – Covid-19, drug lords, political corruption, terrorism, rape, murder, and abuse? You messed up by getting into more debt than you could handle. Yes, that’s bad. Boo debt! Boo not PAYING your bills!

But are you a bad person? Not by my measure, friend. Being that kind of bad requires malice or at least a reckless disregard for others.

So… are you a failure? Not unless you stay down and don’t start getting back up again soon.

What Is Chapter 7 Bankruptcy?

What many people overlook is that chapter 7 bankruptcy is BY DESIGN a chance to reboot, to start fresh, to do better. It’s a giant financial “do over” in many ways.

The term itself comes from chapter 7 of Title 11 in the U.S. Bankruptcy Code – the written laws that dictate how this sort of thing is handled. It’s intended to be a protection for consumers, not from paying your bills, but from things like debtors’ prison. Before bankruptcy laws, people unable to pay their debts were often simply locked up – and not in the best of conditions. You stayed until someone with enough money to pay off your debts (and then some) decided they cared about you enough to get you out. If you had lots of rich friends who liked you more than they liked staying rich, you’d have no problem. Otherwise, it was often quite literally a life sentence. Or perhaps “death sentence” would be more accurate.

If you remember learning about “Shays’ Rebellion” in high school – one of the triggers for tossing the Articles of Confederation and writing what became our brand new U.S. Constitution – that was largely a revolt against debtors’ prisons. It’s Article I, Section 8 of that Constitution which authorizes Congress to write some laws governing how bankruptcy works in what was then still a very new nation. And they did. States have some wiggle room when it comes to protecting debtors – the people to whom you owe money at the time you first file for chapter 7 bankruptcy. The basic process, however, should be the same no matter where in the U.S. you live.

Bankruptcy Comes With Modern Society

In short, as society progressed, bankruptcy protection was born. The goal isn’t to make it easy to avoid your responsibilities, but most government protections are there to shelter us from the worst possible consequences even when we are partly culpable. If I leave something too close to the stove and my home catches fire, there will be consequences. I will lose things and it will hurt, but the local fire department won’t ask if I screwed up before they agree to spray water on my house and grab my cat. Their willingness to save as much of your stuff as they can isn’t meant to encourage you to light more things on fire.

Bankruptcy is an effort to put out the fire. Obviously it’s ideal if you can avoid new fires in the future, but that’s not the same as deserving blame blame blame and shame shame shame.

Can you tell that I feel strongly about this?

How Does Chapter 7 Bankruptcy Work?

We’re going to settle for a general overview here since my goal is to talk about moving past chapter 7 bankruptcy rather than a “how to” guide. If you’re considering bankruptcy, read on, but then consult with a lawyer about your specific situation. I’m Mr. Overview here – a great place to get started and maybe help you know what questions to ask.

Chapter 7 bankruptcy is sometimes called “liquidation bankruptcy” because it attempts to move things along fairly quickly by “liquidating” (selling) your assets to pay off some of your debts. It’s different from chapter 13 bankruptcy, which is almost like a debt restructuring plan. With chapter 13, you get to keep more (or all) of your stuff and essentially repay your debts over a longer time period. It’s a bit more involved than that, but for now, that’s enough to give you an idea of how it’s different than chapter 7 bankruptcy.

If you file for chapter 7 bankruptcy, the court will place a “stay” on your current debts. This means creditors are temporarily banned from demanding payments, repossessing your stuff, foreclosing on your mortgage, or garnishing your wages. It’s a giant “HANG ON A SEC AND LET’S SORT THIS OUT’ from the legal system. The flip side of this is that this same court immediately takes legal possession of everything you own.

Well, OK – not EVERYTHING. Many things are exempt. By lots of what you own. The point is, it works both ways – debtors have to chill for a moment, but you’re not exactly off the hook, either.

How Does The Court Manage Bankruptcy Process

The court will appoint a trustee who manages everything going forward. They’ll distinguish between the exempt property (stuff you can’t lose in the bankruptcy) and non-exempt property (stuff you probably will). Exempt items often include your home, one vehicle, personal jewelry, essential appliances, books, toothpaste, socks, etc. Here’s where the protections of chapter 7 bankruptcy become clear – no one’s allowed to come to grab your family photo albums or take your microwave. On the other hand, if your home or car is worth enough, they may sell them anyway and make humbler arrangements.

Non-exempt items of potential value are then sold and the money distributed to your creditors based on a hierarchy we’re not going to worry about right now. The fact is, you can lose a lot of stuff the law doesn’t think you need in order to function. Maybe you don’t have much value, to begin with, or maybe you do and don’t realize how hard it will be to let it go. Chapter 7 bankruptcy is no fun, my friend.

After six months or so, many of your remaining debts are “discharged,” or canceled. Credit card balances, car payments, medical bills may be among them. Some debts aren’t eligible to be discharged – student loans, taxes, alimony, and child support, for example. You have to pay those one way or the other.

How Can I Get A Car Loan After Chapter 7 Bankruptcy?

You have several options for car loan shopping. That in and of itself should be celebrated. You have a chapter 7 bankruptcy in your past and STILL, you have SEVERAL options.

Let’s recognize going in, however, that none of them is ideal. Your credit score always impacts the type of loan you’ll be able to get, including maximum amounts and interest rates. The first car you finance after a bankruptcy probably isn’t going to be your dream car, but remember – we’re starting over. We’re rebooting and rebuilding. We can live with an older vehicle in good shape for a few years.

I’m not talking about a rust-bucket that’s been badly spray-painted with springs sticking up out of the seats or anything. Just a slightly older, less expensive model to get us started.

Option #1: Traditional Options

Don’t automatically assume your local bank or credit union is going to turn you down, or that the major dealers in your area won’t offer you financing. The competition they face from reputable online lenders and other alternative financing has changed the game a bit, although how much will vary widely from institution to institution. Your odds are better if you’re a long-time customer, even if that just means small checking and savings accounts.

Be ready for some painful terms, and don’t take ANY of it personally even if they turn you down altogether. At the same time, I wouldn’t automatically accept the first thing they offer you. Find the time to compare interest rates from different lenders. Just because you’re going to have trouble finding great terms doesn’t mean you won’t have options. If you’re employed and can show fairly reliable income over the past year or more, you may be surprised how eager they are to work with you no matter what’s happened in your credit past.

But you won’t know until you ask.

Option #2: Smaller Local Dealerships

Smaller lots probably only deal in used vehicles. Many come with little or no warranty and only their verbal guarantee of condition. If you’re comfortable applying for a used car loan, that’s great. If not, offer to buy lunch for a friend or family member who is. The good news is, they often offer to finance to folks who wouldn’t otherwise qualify. A subtle hint you can look for is the giant sign saying something like, “BAD CREDIT AUTO FINANCING.”

Details will vary – you may be looking at weekly payments or a larger down payment or some other arrangement you wouldn’t find from a traditional source.

You don’t have to take the first offer, but don’t write them off too quickly, either. Remember, we’re rebooting and rebuilding, and you have to start somewhere. You may feel like you’re taking a chance on this unknown little dealer, and you are – but they’re taking a chance on you as well. What if you’re both honest, hardworking people doing your best?

Option #3: Online Lenders

The 21st century has changed lending substantially. The lower overhead and national reach of online lenders means they’re able to be creative and competitive in ways it’s almost impossible for traditional lending institutions to match. Some even specialize in bad credit auto loans. The process is usually quick and fairly straightforward, and if approved, you may see the money deposited in your account in 24 hours or less.

The only trick, really, is sorting through them. That’s where we come in. Loanry maintains a curated database of some of the most reputable and creative online lenders available. When you let us know what you need, we scour our database looking for the lender most likely to make a good match. It’s then up to that lender to win you over and keep you happy.

Also, you have a lease option for buying a car, but in this situation, it is better to skip this possibility.

That’s right – they’re competing for YOUR business, not the other way around. And isn’t that how it should work?

Once You’re Approved

It’s good that you have a car; it’s better that you have a chance to rebuild your credit. If you don’t already have a workable household budget, make one. Use it. If you’re not sure how, we’ve written about them repeatedly here – do some homework. It will be worth it.

It probably goes without saying, but MAKE THOSE CAR PAYMENTS on time, every time. It’s not just about the car or the dealer, it’s about a new mindset and new habits and a new credit history. The longer you avoid new credit trouble, the higher your score. The higher your score, the better your options. Do you see a pattern?

What Does Chapter 7 Bankruptcy Do To My Credit?

I wish I could put this more gently, but it’s brutal to your credit score and a major stain on your credit history. Chapter 7 bankruptcy can stay on your credit report for up to ten years, although some of the specific debts will go away earlier than that.

In other words, it’s bad.

So, we’re accepting that upfront. If there are feelings associated with this reality, let’s go ahead and feel them while we’re at it. But friend, as we used to say not that many years ago, it is what it is. It’s done. The biggest question now is, “Now what?”

If you have a little time before you absolutely must buy another vehicle, I suggest doing the sorts of things I’d recommend if you had no credit one way or the other, to begin with. Even six months or a year (better yet, TWO years) of doing the right things can make a major impact on your credit.

What Sorts of Things, You Ask?

Get a secured credit card. These are the ones where you actually have money deposited ahead of time (or tie them to your savings account) to “secure” your credit card use. You can then use it just like a credit card. Partly this gives you flexibility and convenience that cash doesn’t always offer (you ever try to book a hotel room on the phone without a credit card?). Mostly, though, it helps begin rebuilding your credit. Timely repayment is treated just like repaying any other credit card for purposes of your credit score, despite the fact that you literally have the money already set aside to back up every purchase.

Borrow with a co-signer. If you need something too expensive to pay cash but smaller than a house or car, consider using store financing. Most anywhere that sells refrigerators, computers, or furniture, offers some sort of financing to make it happen. A co-signer is a trusted friend or relative with strong credit who agrees to “partner” with you on the loan. Even though you’re primarily responsible for repayment, if you miss a payment for any reason, they’re liable for your debt. This can help you get approved even when you have poor credit. On the other hand, this can be a relationship-killer if you default and they’re stuck paying your debt.

Conclusion

If you have a chapter 7 bankruptcy in your past, that’s where it should stay – in your past. It may impact your options, but it doesn’t define everything about you, even financially.

Take what steps you can to begin rebuilding.

Don’t be afraid to ask for help.

Start small and avoid repeating past mistakes.

You. Got. This.

If you ever need reminding, or want to look into that “online lender” thing a bit more closely, let us know. We’ll be glad to help.

Subprime Auto Loan Options to Get You on the Road

Posted on | by Kevin Strauss

Subprime auto loans are types of loans that are used to finance a car that is purchased. They are offered to people with a limited credit history or a low credit score. These loans usually have a higher interest rate when compared to prime loan options. And they can come with a prepayment penalty if the borrower chooses to pay off the loan early. However, these borrowers may have no other option for purchasing a vehicle. So they are often willing to pay the higher rates and fees associated with subprime auto loans.

The History of Subprime Auto Loans

Subprime auto loans became a big business in the auto finance industry after the monetary expansion of 2001 to 2004, along with subprime mortgages and other lending options for higher risk individuals. Financial institutions were flush with money so they sought out higher returns by charging higher interest rates to subprime borrowers. The term subprime was then used in the media later, during the mortgage crisis of 2007 and 2009. Subprime lenders began to thin out after the Great Recession but have since been making a comeback.

With the risks lenders face with subprime loans, you may be wondering why they even bother. The answer is that there is a lot of profit, especially in the auto industry. By having a blend of loans that have different credit risk profiles, auto lenders can manage the total risk and this maximizes the profit potential.

How Do Subprime Auto Loans Work?

There is no official cut off for a subprime loan. Usually, your credit rating would have to be below 650 and above 450 in order to be considered subprime. In general, there are fewer than 20% of Americans who fall below 600. In evaluating borrowers, lenders can ask to see W-2s, 1099s, and pay stubs to be able to prove income. If a borrower is in a line of work that is hard to prove income, such as being a restaurant server who receives a lot of cash tips, then he or she may need to bring in bank statements that indicate a history of consistent deposits in their account.

Some lenders do accept bank statements in place of standard pay stubs. Even when getting subprime auto loans, it’s still best to shop around for rates. Not all lenders will be using the same criteria for approval and some charge different fees than others. Interest rates can be quite high because the lender wants to ensure it can recoup the cost should a borrower default on payments. Borrowers may decide they want to improve their credit score to qualify for better loan terms.

Determining If You Have a Subprime Credit Score

Understanding your credit score can make a big difference when paying for bad credit auto loans. In order to interpret your credit score and what it tells you about your borrowing power for loans, you need to know where your score falls on the range between the lowest and highest number generated by the scoring system. All credit scores have the same goal, which is to help lenders understand how risky it may be to do business with you. A high credit score will mean that you are less risky and have a low likelihood of default. A lower score means more risk to a lender.

The average FICO credit score for Americans is 701. If you have a score of 800-850, that is considered exceptional. If you have a score of 740-799, that is considered very good. But if your score ranges from 670 to 739, that is considered good. A score between 580 and 669 is fair. A score that is below 579 is considered very poor. Scores in the fair range are likely to be considered subprime borrowers. Those with poor credit scores may not qualify at all, even for subprime auto loans.

Types of Credit Scores Matter

You may be surprised to learn that there are different types of credit scores. The scores are calculated using computer models and look at the contents of your credit report. The three national credit bureaus are Equifax, TransUnion, and Experian. Models developed by different companies, such as the FICO score, differ in how they calculate and report the scores. There are usually multiple versions of a given model available from the developer of the software used to score. When you are comparing one credit score to another, or looking to track changes over time, it’s important that you know which scoring model is being used to calculate the score, which credit bureau furnished the credit report, and the highest and lowest scores you get using the model.

When looking at your credit, you need to look at the credit score range. For example, the good credit range spans quite a bit and wouldn’t make you eligible for a variety of loan offers. The FICO score is used in about 90% of the lending decisions so it’s a good reflection of creditworthiness to a lender.

Calculating Your Credit Score

The specific calculation method that is used to calculate a FICO score is a trade secret but there are some things that factor into how your score is calculated.

Payment History: Paying bills and your debt on time is the biggest factor that affects your score and can account for 35% of the score.

Credit Usage Rate: You shouldn’t be using more than 30% of your total credit card limit if you want to keep your score higher. The credit utilization rate is responsible for about 30% of the score.

Length of Credit History: Your score will continue to increase over time, as long as you are following basic guidelines. New credit users aren’t able to speed up the length of the credit history but can help build up the score as the credit history continues to get older.

Total Credit and Debt: The credit score reflects total outstanding debt, as well as the types of credit you use. The FICO score likes it if you have a variety of different loan types, including installment credit and revolving credit.

Recent Applications: If you recently have applied for a loan then it will trigger a process called a hard inquiry. This means the lender has requested your credit score. A hard inquiry will usually lower your score by a few points, but as long as you continue to pay bills on time, the score will rebound quickly. If the lender uses a soft inquiry, or you are checking your own score, then it doesn’t have an impact.

Why Are Subprime Auto Loans Popular?

The standards for subprime loans have gotten more relaxed that they are being given out more often. There are a few reasons for that.

Collateral

A car loan is secured by the vehicle, which can be repossessed if you default on the loan. This means that some lenders are more willing to take the risk of giving loans. New technology makes it possible for the lender to disable the car remotely if you miss a payment.

Secondary Debt Sales

The growing market for subprime auto loans that are bundled into asset-backed securities have also prompted some lenders to make financing available to those who wouldn’t have qualified just a year earlier due to a history of not managing obligations.

Dodd-Frank Exclusion

The Dodd-Frank Financial Reform law from 2010 exempted automobile dealers from the oversight of the U.S. Consumer Financial Protection Bureau. This means that financing that is arranged through a car dealer is less regulated from loans that are obtained from a credit union or bank directly. It’s easier for lenders that are working through a dealer to take advantage of borrower’s bad credit.

Getting Subprime Auto Loans

If you have a credit score that puts you in the subprime category, you should still shop around for a loan. Banks, credit unions, and online lenders will specialize in borrowers with poor credit. Auto loans for bad credit online may be easier to get.

Figure Out What Kind of Car You Can Afford

See what kind of monthly payment you are going to be able to fit into your budget before you apply for a loan. If you aren’t able to finance the car you want within your budget then consider looking at more affordable or older models. Sticking to your budget is very important.

Work with a Lender You Know

If you have a credit union or bank where you already have an account, you may be more likely to get a better auto loan from that institution.

Know Your Credit Score

Your credit score carries a huge weight and is the main factor that puts you in subprime borrower status. Knowing your score will help you know where you stand and what your options are.

Consider More than Just the Monthly Payment

You need to weigh the total cost of financing the car. If you lengthen your term then you will pay more in interest over the life of the loan.

Look at All the Expenses of Car Ownership

This will include title fees, insurance, maintenance, repairs, and state taxes.

Shop Around

Just like with other loans, you need to shop around for subprime auto loans. Shop around and compare offers so you can make sure that you are getting the best possible loan terms for your situation. You can do that here, on Loanry. Remember, all lenders we work with are reputable companies who can be trusted when it comes to loans and honesty about terms and the agreement.

Benefits of Subprime Auto Loans

While there are plenty of disadvantages of subprime auto loans and you need to proceed with caution, there are some advantages as well.

Helps You Get a Vehicle: Depending on where you live, you may not have an option to use public transportation and need a car to get to and from work. Subprime auto loans can get you in a vehicle without having to spend the time working on improving your credit score.

Can Help with Credit: A subprime loan can help you improve your credit if you make your payments on time.

Can Help First Time Buyers: If you are a first time car buyer then a loan may be your only option for buying a car. You may not even have a credit score at all if you are just looking to buy a car for the first time.

Disadvantages of Subprime Auto Loans

There are some hidden risks with subprime auto loans. Before you sign a loan agreement, consider the potential cost.

High Interest Rates: A subprime auto loan usually comes with a higher APR than a conventional auto loan. The APR is the interest rate of the loan expressed as a yearly rate. The APR for an auto loan can also include fees, such as one for the origination of the loan. This number will give you a sense of how much the loan will actually cost. The interest rates on a subprime auto loan can be up to 29%. Those with employment situations that require access to a car can often be vulnerable in these situations and won’t have much of the power to negotiate the loan’s rates and terms.

Extra Fees: In addition to the higher APR, there may be higher fees attached to the loan. Some of these high fees can include a processing or origination fee, a prepayment penalty, and a service contract for repairs and maintenance service.

Risk of Repossession and Default: Subprime auto loans are at a higher risk for repossession and default. If the borrower takes out a loan with a harder-to-manage payment plan, it’s likely he or she will default and then the car is going to be repossessed.

Income Demands: Although subprime loan lenders may not be demanding about your credit score, they can be stricter when it comes to your income. You must have sufficient cash flow and income in order to cover the monthly payments. The lender will go through a thorough financial check in order to make sure that you can meet the payments. If you aren’t able to prove that you have enough cash flow, you likely won’t qualify.

Is a Subprime Auto Loan Right For You?

If you need to work on your credit score but don’t have the time before you need the financing then subprime auto loans may be better for you. As long as you can make the payments on time, you can actually improve your credit score and still have the financing you need for a reliable vehicle.

If you are tired of getting rejected for traditional loans and credit options then a subprime loan can be for you.

Leasing a car makes sense for certain situations but if you can’t afford a car lease or don’t end up qualifying for one then you will need to get a subprime auto loan.

In the subprime loan market, it’s easier for borrowers to get the money they need and be approved. This approval process can be smoother and get you on the road sooner.

Where to Go for Subprime Auto Loans

It’s best to find subprime auto loans at a bank or credit union instead of the dealership. It’s never a good idea to step into the dealership without preapproved financing, especially if you have subprime credit. When you get preapproved financing from a lender other than the dealer, it can help you with your car buying budget based on what you can afford, instead of the car you are trying to buy.

What Happens if You Don’t Pay Back a Subprime Loan?

If you aren’t able to repay your subprime auto loan then your current financial situation is only going to get worse. If you have just one late payment then you may be able to redeem yourself with a long series of on-time payments. Many lenders don’t want you to default on the loan and will help work with you to make sure that doesn’t happen. Some unscrupulous lenders have built a business model where they do repossess your car and then sell it to another borrower with credit issues.

If you fail to make your payments and you default on your loan then it can destroy what little you have left of your credit score. This can make it much harder or impossible to borrow again. You will also risk losing your vehicle. In some states, you can also be liable for the difference between the amount the lender gets from selling your vehicle and the balance of the loan. Subprime auto lenders may have electronic auto trackers installed in order to make finding the car easier so they can repossess it. Some even go a step further with a system that disables the vehicle until a you make a payment or they have the car back.

If you think you are in danger of missing a payment then the best course of action is to contact your lender. You don’t want to just hide from them. Describe your circumstances and see if you can find a solution. If your issue is just a one-time thing then you may be able to skip a payment. If it’s a long-term issue then they can work with you to sell the vehicle so that you won’t have your loan obligation.

Can You Avoid Getting Subprime Auto Loans?

If you can avoid getting a subprime auto loan, it may be in your best interest. There are some things you can do to get a new vehicle when you have a bad credit score.

Improve Your Score

Take a look at your credit history and be sure to correct any errors in your reports. Then work to improve your credit score. While it’s easy to destroy your score with a bad financial decision, raising it can take patience and time. You want to have several months of on-time bill payments and start reducing your credit card debt. This can help get you out of the subprime lending market and into a much less expensive loan. Even if you don’t raise your score to get into the next category of borrowers, if you can show an improvement in the history of payments, it can convince a loan officer at a smaller financial institution to give you a chance to prove yourself.

Find a Second-Chance Lending Program

Some lenders, especially community banks and credit unions, have what they call second-chance borrowing programs for their customers with not the best credit history. The loan terms can be restrictive but a second-chance loan can be a stepping stone in the right direction to avoiding non-subprime auto loans.

Use a Co-Signer

Have a friend or family member co-sign a more traditional loan. This can be helpful for getting you in a car but be aware that it can be dangerous to the credit score of your co-signer. Before you have a friend or family member co-sign a loan, both you and the co-signer should understand the risk and benefits.

Refinancing

If you don’t have a choice to accept anything other than a subprime auto loan then you need to make sure you pay all your payments on time and in full. After doing this for the first year, you can put yourself in a position to be able to refinance the loan with better loan terms and interest rates.

What Is the Most You Can Borrow with a Subprime Auto Loan?

You can only qualify for subprime auto loans? Then you have to be more realistic about your car choices. You need to choose a vehicle that fits in your budget. So you need to see how much car you can afford. With a budget in place, you can focus on cars that fit within those parameters.

When dealing with subprime auto loans, there can be a few layers to the qualification process. They can affect how much you can borrow. Prime lenders typically look at your income, debts, and credit score. Then you get approved if you have good credit. Subprime lenders have some extra qualifications, such as a minimum income per month, a certain amount of time at your current job, and references. These extra qualifications will of course vary by lender and your credit score. But they can also affect how much you can borrow.

Since lenders usually look beyond your credit score, one of the main things that they will focus on is your debt-to-income ratio. If the ratio is high then you may not qualify at all. If it’s high but not high enough to disqualify you, it adds to the cost of your car paymen. Along with your cost of insurance.

While there is no set answer on how much you can borrow, it’s important to shop aroun. This way you can get an idea of what you qualify for before you go car shopping. This way, you aren’t going to go over budget and won’t risk finding out you can’t qualify after you already found a car.

How Do Subprime Loans Affect Your Credit Score?

Subprime loans will affect your credit just like any other loan will. Your payment history is such an important factor in your score. So it’s absolutely necessary to make payments on time if you hope to improve your score in the future. One way to make sure that this happens is to set up automatic payments from your checking account.

Make sure that there is always enough in your account in order to cover what you owe. Then you don’t have to face additional fees. Or overdraft your checking account. If you do miss a payment keep in mind the following. It won’t be reported as late until 30 days after the due date. You may face fees if you are just a few days late. But it doesn’t show up on your credit report right away. Make up the missed payment as soon as you can. Before it shows up on the report and affects your credit.

Work on Your Credit Before Applying

If you are hoping to avoid subprime auto loans then it helps to work on your credit before applying. It’s possible to get approved if your financing needs aren’t urgent. But it’s helpful if you can wait. This way you can get a better interest rate and be in a better place financially.

Start by checking your credit score. If you get a copy of your credit report, it may have specific areas that you need to work on. It’s possible that you have fallen behind on payments with a credit card or loan. So work to catch up as fast as possible and make sure to make on-time payments moving forward. If your credit utilization rate is high then start to pay down debt as soon as you can. While improving your credit score can take some time, it’s worth it, in the long run, to save you money.

Final Thoughts

While subprime auto loans are here to help get you in a vehicle quickly, there are also some risks. You will likely pay more in interest and fees. However, there are options available and if you shop around, you can find the best rate for your situation. Research your various options and don’t take the first offer you get unless it is, in fact, the best offer. Avoid other short-term loan options, such as auto title loans or payday loans, in order to get into a car.

Used Car Loans with a Green Light Approach

Posted on | by Kevin Strauss

If you shop for your auto loan when buying a used car, it puts you in a better negotiation position and can save you the money over the life of your loan.

Need to Know Information about Used Car Loans

There are different things you need to keep in mind before you apply for used car loans.

Interest Rates

The interest rate you get will depend on your income and credit score, the length of the loan, and the vehicle. If you have a loan and make consistent payments and your credit score improves then you could also refinance your used car loan to get a better rate.

Loan Terms

Some lenders will offer loans for up to 84 months. It’s best to pay off a car loan as soon as you can since cars, whether they are used or not, depreciate quickly. Owing more on the loan than your car is worth means that you are under water, which can be a bad financial situation. The best interest rates are also available on shorter loan terms. It’s recommended that you have a 36-month loan for used cars.

Hard vs. Soft Credit Pull

Some lenders will do a soft pull on your credit to get you prequalified for the loan. This won’t do damage to your credit score but it also doesn’t mean that you are guaranteed approval or will get the quoted rate. Other providers will run a full credit check. A full credit check temporarily lowers your credit score by a few points. Even with a hard credit check, the interest rate could still differ from what you were quoted. A hard pull is required before the loan is finalized.

Restrictions

There are some lenders that only work with a certain network of dealers. Other lenders don’t lend money when you are buying a used car from a private seller. Lenders can also exclude some types, makes, or models of a car for your used car loans.

Why Preapproval Is Necessary for Used Car Loans

Preapproval for used car loans can help you with the negotiation process and get you in a car quickly. With preapproval, you can avoid the favorite tactic of a car salesman: the monthly payment. If you are negotiating based on the monthly payment, it can be easy to lose sight of the real price of the car. However, when you are preapproved, you are a cash buyer. This means you can concentrate on negotiating the price of the car instead of having to mentally juggle many different figures.

Negotiating the best deal for your car can help you cover any fees and taxes. If you are at a dealership, the finance manager may try to beat the interest rate of your preapproved loan. If the interest rate is lower and the terms are the same, you can take the loan. However, you want to review the contract carefully before signing. There is the risk that the finance manager could juggle numbers in the dealership’s favor instead of yours.

Where to Shop for Used Car Loans

The auto finance business is large and there are hundreds of different institutions making billions of dollars on used car loans every year. This means it can be hard to determine the right place to find a used car loans. The largest lenders are the big national banks but it’s important to remember there are other options out there.

Banks

Banks will usually have conservative and very specific loan polices. Some banks may only cater to borrowers with a better credit standing. These institutions are then offering some competitive loan rates. The offerings with banks vary and some banks are more willing than others to give loans to people with bad credit.

You likely already have a good relationship with at least one bank so your local branch can be a good place to start. Many banks also have websites that make it easy to check current rates. When you visit the branch, it can be a good way to avoid any misunderstanding and mistakes and it could result in you getting a better offer.

Credit Unions

These lenders do operate a little bit differently than banks but have lower operating costs than banks. Many credit unions will only lend money to their members. However, some also make loans to other people that may not have accounts with them. You may get lower interest rates, better and more personalized service, and have an easy loan application process.

Online Lenders

Online can be a very convenient way to borrow money and it’s much easier to find competitive rates. As a precaution, you should check the Better Business Bureau rating for every lender before you file an application online. You can apply to different lenders at once without it having an impact on your credit score. You also can get more competitive rates than traditional banks. However, it can be hard to reach a person for assistance and you can be bombarded with calls and emails from different lenders. You can also look at our selection of lenders here on Loanry.

Finance Companies

Finance companies used to be more popular in the past. These companies only make loans and don’t offer many of the other products that are typically offered by financial institutions, including checking accounts. Instead, these companies borrow money for banks and then lend to you. Many finance companies cater to niche customers in the auto loan market, such as those with bad credit.

Dealerships

Dealers will typically work with the financial group of the automaker, along with banks and other sources. Shoppers with offers from some of the other sources can negotiate the dealer’s initial loan quote into something more attractive, which is why it’s necessary to do research. Getting your financing from the dealership is convenient since you are already there. However, the interest rate can be higher in order for the dealer to make a profit and may only be available to those with great credit scores.

How to Get an Auto Loan

If you are going to borrow money for a car purchase, it’s important to shop around in order to get the best possible rate.

How Much You Can Spend

The first step when learning how to get an auto loan is to determine how much you can afford to spend. Ideally, you want to pay off the car within three years since this can cut down on the interest you will pay and help prevent you from becoming underwater. You may qualify to borrow more money in order to purchase a nicer car but this doesn’t mean that you should do so. Just because you can afford the payment doesn’t mean that it makes financial sense to do so. You don’t want to be unable to afford your payments.

Start Auto Shopping

Start with banks and credit unions to see what the interest rates are. It’s important that you do a lot of research in this step. You should also look at other ways to save on your loan. This can include setting up automatic payments or switching banks in order to qualify for a lower interest rate.

Be Prepared with Your Financial Information

When you are going through the preapproval process, you could be required to provide proof of your income. If you aren’t required to do this during this stage then you will be required to do this when you sign the loan. Some companies are stricter about the preapproval process than others. If you are not able to save up for an auto loan then you need to save up and purchase the car with cash, which will limit your options.

Start Shopping for a Car

Once you have been preapproved then the fun part of shopping for a car begins. Take the time to look for the best car available and you shouldn’t be afraid to negotiate a lower price. If you are able to secure your own financing then you have leverage sine you aren’t depending on the dealership for financing. When shopping for a car, you could be tempted to trade in your old car. It may be better financially if you sell your old car and apply the funds to a new down payment. You shouldn’t roll any current car loan into a new one. This causes you to be upside down on your new car.

Other Tips for an Auto Loan and Car Shopping

When shopping for used car loans, there are some other tips to keep in mind to save you money. Buying a car is not an investment. Even if you shop for a used car, you are still taking a loss as it depreciates. When not relying on dealership financing, you should negotiate as much as possible. This can save you a lot of money. You should have the used car checked by a mechanic before you purchase it.

This is even more important if you don’t know anything about cars. This prevents you from buying a car that will need a lot of repairs or has already been in a serious accident. Be ready to have car insurance as soon as you are purchasing the car. If you already have insurance, you can add the new car to your existing policy. If you don’t have an existing policy then you need to set up one.

You don’t want to finance the fees and extras. It can be easy to roll any fees into the financing but this is a bad idea. And it can make your loan exceed the value of your car and then puts you in financial trouble should anything happen to your car. Also, it adds to the true cost of the items you are adding. For example, if your dealer tells you that a paint protection package adds just $15 a month to the payment, unless you do the math you won’t realize it can cost you $1,080 plus interest on a six-year loan.

Many lenders will be willing to loan you the money for six or even eight years and this can give you a lower payment. It’s also a risky financial move. Long car loans usually have higher interest rates and can be more expensive in the long run. Even if you do qualify for this then you risk having the car‘s depreciation outpace the rate you are paying it back.

Why Does Used Car Financing Cost More?

When you start shopping for a used car and financing you will see that it typically comes with higher interest rates and shorter loan terms than you find on new car loans. There are also restrictions on the value of the vehicle and the age. The reason for this is the risk of the loan. Lenders have found that there is more risk when they lend money on used cars. The additional costs that lenders face means higher interest rates.

The short term and other restrictions can lower the likelihood that the lenders take a major loss. Depending on the car you choose, some lenders can treat it as a new car. Vehicles that have lower miles or aren’t very old will be treated this way. Some lenders also offer new car interest rates for any manufacturer-certified used cars.

Comparing Used Car Loans

When comparing options for used car loans, it’s very tempting to just look at the monthly payment. This is not the only thing you should be focusing on in order to determine if it’s a good offer or not. Some lenders have variable rate loans but most borrowers will seek fixed loans.

Instead of looking at monthly payments, you want to look at the total cost of the car, including the total of all the payments during the loan and the amount you have to pay upfront with fees. You can use a used car loan calculator to help you figure this out. Here is an example. If you are buying a three-year-old SUV for $25,000 and have $5,000 for the down payment, this means you need a loan for $20,000.

The best offer you can find is a five-year auto loan at a 6% annual percentage rate. Using the calculator, you see that the monthly payment is $387. You then multiply that by 60 since that is the number of months you will be paying. This means the total cost is $28,220. If you choose a three-year loan with a 4.5% interest rate, this increases your payments to $595 a month but then the total cost is only $26,420. This can save you more money if you are able to work that payment into your budget.

Working with the Dealer on Your Used Car Purchase

When you have financing in place, you then need to start shopping for the car. Buying a used car can involve some more steps than when you are buying new. You want to make sure to get a vehicle history report. If the dealer resists your efforts for this then you should walk away from the deal.

Car salespeople usually try to merge the price of the car, trade-in, and financing into one transaction. When they bundle the deal, it can allow them to move savings and costs from one part of the deal to another. This confuses you about whether you are getting a good deal or not. For example, they could be able to give you a great trade-in deal but then they are boosting the cost of the car you are buying. You want to keep each transaction separate to focus on the price of the vehicle you are considering. Be polite but firm throughout the negotiation process. You want to get the best deal you can but they want to earn profit. Keep in mind that you may only buy a car every few years but they do this every day.

You are more likely to get a good deal on a used car if you make a larger down payment. Putting money down reduces the amount you have to finance and this gives you lower monthly payments or a shorter loan term. It can lower your loan-to-value ratio, which shows how much the car is worth in proportion to how much you owe on it. The lower the number, the more likely you are to get a better deal. A substantial down payment reduces the possibility that you will owe more than the car is worth.

Watch out for yo-yo financing. Dealers let you take the car home with the financing paperwork set. Then you get a call from the dealer saying that the financing fell through and then you need to sign different papers. Those new papers cost more than what you negotiated earlier. Sometimes there can be legitimate problems with financing but many times the dealership knows all along that you don’t qualify. You get to take the car home so you get attached and then are willing to pay the higher cost.

Working with a Private Party for Your Used Car Purchase

When you going to purchase a used car from a private party, you have no choice but to get financing from a credit union or a bank since you won’t be able to use dealership financing. It’s important that you get a vehicle history report since some lenders offer them as a benefit of you using their auto financing. Unlike when you work with a dealer, you have to do the paperwork yourself and ensure that you transfer the title to your financial institution. Some private sellers can accept peer-to-peer financing and take the third-party lender out of the picture. This auto financing is actually pretty rare so you shouldn’t count on it.

Getting an Auto Loan with Bad Credit

If you don’t have the best credit, there is still the possibility that you can get bad credit auto loans.

It helps to know your credit score before you begin the auto loan shopping process. There may be factors that you aren’t able to address immediately, such as making late payments, but there may be factors that you can fix quickly, such as an error on your report.

If you need auto loans with bad credit, you need to research as much as possible so you aren’t caught off guard when the time comes. Research should include key terms and the APR. When buying a used car, you should also know the Kelley Blue Book value of the car you are interested in.

You can’t limit yourself to just one lender. There are a variety of different lenders that give used car loans for bad credit. Each one wants your business. Even two candidates that have the same credit scores may not be the same for the lender. For example, you may have a better chance then someone with the same score but with no credit history. It’s important to do your research but you don’t want to wait too long. Lenders running a hard credit check will hurt your score. It’s best to visit three different lenders in a 14-day period in order for there to be minimal impact on your score.

Avoid borrowing from subprime lenders. These lenders are going to be a sure bet if you are wondering how you can get a loan with bad credit. Since these lenders cater to customers with low credit scores. It seems like these lenders will make the car buying process stress free and easy. However, these loans come with sky-high interest rates and won’t really do much to improve your credit score.

Many of these loans can also use your vehicle as collateral. If you fail to make payments then you can lose your car. You should only be considering subprime lenders if you aren’t able to find other financing options. It’s best to work on your credit score and save up some cash instead of going through subprime lenders.

You can ask a friend or relative to go with you and consider a co-signer. Even if you don’t want to consider a co-signer, bringing someone you trust to help negotiate can help inspire confidence. Confidence, along with know-how, can also lead to favorable loan terms. If someone does co-sign for you, remember that they will be responsible should you default on your payments. Be sure that you can make payments before taking on a co-signer, otherwise you risk damaging your personal relationship with that individual.

Nonprime buyers can be more likely to see lending contracts with no essential services and goods. Other costs, such as car insurance, can also increase up for nonprime buyers. Don’t allow loans to be contingent on getting any extras, such as after-market services or extended warranties. You also don’t want the loan to be contingent on car insurance, even though you do need it. You are better off for shopping for that separately.

While it may be tougher to get a loan, there are options available for you and you can consider the refinance process later on after credit improves.

Getting a Car Loan with Bad Credit: Money Speed Bump

Should You Refinance Your Used Car Loan?

There can be a number of reasons why it makes sense for you to refinance your auto loan.

Your Credit Has Gotten Better

When you first got your car, maybe your credit wasn’t great. However, consistent and on-time payments improve your credit. So, if you were on-time every time, you may have a better credit score right now, so you can get a lower interest rate. This lowers your monthly payment and saves you money in interest over the life of the loan.

A Dealer Marked Up the Interest Rate

If you got your existing loan at the dealer then the car dealer may have increased the interest rate. So basically, you could have gotten a better deal elsewhere. This happens often when shoppers don’t check their credit score or what rate they qualify for before getting a car. There is a good chance you can undo this damage by refinancing.

You Aren’t Able to Keep Up with Payments

Maybe you bought your car for too much or overestimated your ability to pay off your current loan. You could also be suddenly facing an unexpected financial challenge. By refinancing, you are able to extend the length of the loan, which can lower payments. Don’t take this step too lightly. If you do extend the term of the loan then you pay more in interest. However, it could be better than damaging your credit by not keeping up with payments or facing repossession of your car.

Interest Rates Dropped

Interest rates can fall for a variety of different reasons, including regulatory changes, increased competition in the market, or changing economic climates. If rates are lower now then when you first got your loan, refinancing could help you save on interest and allow you to pay off your loan sooner.

Final Thoughts

Getting used car loans doesn’t have to be a complicated process. There are certain things you need to remember before you get used car loans. But the process can work just like other loans. Auto loan shopping is one of the most important things you can do in order to ensure you are getting a favorable rate and the best terms. There are many different options for where you should go for used car loans and there are even options for those with bad credit. There is also the possibility to refinance in the future.