Arranging Financing

(and what to know if you finance through the dealer)

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(This page is meant for those looking to get a conventional car loan, if you’re looking to lease, you should check out our leasing guide if you haven’t already, before continuing on to Negotiation)

Having chosen your vehicle you’re probably wanting to dive right in and start negotiating. However, we strongly recommend taking a few other steps before going in to the dealer, or requesting quotes online.

In order to not get ripped off or spend far more on financing than you should, you need to know the following:

  1. Where to find financing online
  2. What your credit scores are and what’s on your reports
  3. What your scores tell you about what loans you’ll qualify for
  4. How financing through the dealer works, ways they can take money out of your pocket
  5. How to evaluate the 0% or very low APR offers from dealerships and decide if you should take the cash incentive instead
  6. What the Auto Adjusted FICO Score is and how to use it to your advantage
  7. How applying for loans affects your credit, what you should and should not do
  8. How to refinance a higher rate car loan when you qualify for a lower interest rate

Additional information for those with less than perfect credit

  1. How to improve your credit to get a loan or get a better interest rate
  2. Resources for getting a loan with poor or no credit history

Getting your credit reports and scores
No matter what you think about how good or bad your credit is, its imperative that you get the facts and make sure the data on your report is accurate. Many times, there are inaccuracies on your credit report lowering your score that can easily be corrected, but only if you know they’re there! You need to get all 3 reports and scores, the information on each often varies as do the scores You may have a clean report and good score from 2 agencies but . You can get your credit reports free once a year but that doesnt include a score which is vital. When you purchase your FICO scores you also get current copies of your reports with individual suggestions of what you can change to improve your scores.

Get your Equifax and Transunion FICO scores and reports
Get a Experian Triple Advantage Free Credit Score
(Experian FICO scores are no longer available to consumers as of 2/14/2009)

Unfortunately due to a dispute between Experian and Fair Issac (the owner of the FICO scoring system) consumers can no longer get their Experian FICO score directly although it is still what lenders use. At this point the free score from experian is the closest you can get to what lenders will be using to make your loan decision

*Protip Checking your own score and report will NOT lower your score

With all the services which promise a free score, you may wonder why you should pay for your scores. The reason is that you want to looking at the same score lenders actually use, the FICO score. The non-fico scores often are significantly different and arent a good indicator of what your chances are of getting a loan.

If you start shopping for loans without your scores, you have no idea of how likely it is you’ll get approved at a rate that you’ll be happy with. Worst case is your credit is too low to qualify for a loan and you’ll be further damaging your credit score with rejections.

If you go into the dealership and apply for a loan without knowing your scores, they can put on a sad face and tell you that you credit history doesn’t qualify you for a low rate but they can do you a big favor and finance you at 11.9% (which they have significant incentive to do as this is one of the ways dealers make money, more on this below). They may also smile, tell you the 5% financing should go through just fine and then call you back a week later and deliver the bad news that you didn’t qualify for the that rate and need to come in and resign papers at a significantly higher interest rate.

Reading your scores and what you qualify for
The following chart is a general indication of what is considered good or bad

720 and up Great you should qualify for the best rates available
680-719 Good, you should qualify for a low rate although you may have trouble getting the best rates
650-679 Fair, you should be able to get approved but your rate may be a bit higher
600-649 Poor, you might have trouble getting approved and will definitely be paying more
Below 600 Bad, you’re going to have a hard time getting a loan and will be approved only at a high rate if at all

In addition to your credit rating, you need to make enough money for the lender to feel comfortable making the payment.

$1,400/month gross income (the equivalent of 40 hrs a week at $8.10/hr is usually the minimum to get a car loan at all. A general rule of thumb is that lenders prefer to see your car payment not exceed 20% of your net (take-home) monthly pay. So if your income after deductions is $2000/month it may be hard to get a car loan with more than a $400/month payment.

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