In the last few years car loan financing has changed incredibly. The banks have tightened up lending, and people’s overall credit situations have worsened. Buying a new or used car is a big investment, so financing can be tricky! And there’s a few things you should know before going into a dealership and attempting to finance a new or used car — even if you have great credit!
What Car Loan Finance Companies Look For
When financing a vehicle, the rate, term, and therefore payments are going to be determined based on a few different factors. First, is credit bureau through either Equifax or Trans Union. Second, is the amount of investment YOU are making into the vehicle. And third, the vehicle itself. The worse your overall credit situation, the more the banks will scrutinize each piece of this puzzle. Let’s take a look at each piece to see how you can give yourself the best opportunity for automobile financing, even with bad credit.
1. Your Credit History
In years past, banks would lend car loan money based almost exclusively on your beacon score. Today, that’s totally out the window. Car loans today are based on previous comparable credit performance. What this means is, a loan officer will take a look at your credit history (you can see what that looks like by searching google for “free annual credit report”) and search for previous accounts that would be similar in financed amount and payment to the car you are looking to finance.
I’ve seen many customers who have not paid well on almost everything except previous auto loans, which they paid good on. And because those car loans and or other comparable payments were paid well, they got financed even though they had previous charge-offs, bankruptcy, a large amount of collections, and more. Often times these people had very very low credit scores, but their comparable credit was good enough to get a car loan!
On the other hand, if you haven’t paid other similar credit well at all, or had prior charge-offs, repossessions, or slow payments, it does make securing financing on a car a bit tougher. However, there are two other factors that weigh almost as heavily as your credit history, so don’t fret! Even with slow pays, repos, etc I have been able to secure financing on a new car for people who could satisfy a bank’s wants in the other two areas. Take a look:
2. Your Investment
Another area that banks take very seriously, whether you have good or bad credit, is what type of investment you are willing to make into the vehicle. This can either be a cash investment, or something that can be easily liquidated such as a trade-in vehicle that has equity in it. In general, cash weighs more heavily since it means that you are willing to put some skin into the loan. Remember, a car loan for a bank is a liability. They want to make sure that it will be repaid, and someone who puts any money — especially a significant amount of money, $2,000 or more — makes the loan less risky for them. The less risky a car loan is for a bank, the more likely they are to be free with their money and loan it to you.
I have seen many instances where a customer’s credit history was frankly terrible, and they had no comparable credit that was any good. But they had a significant cash down payment and/or equity in a trade-in vehicle, and so it lessened the risk of the loan and they got approved for auto financing. The same person without the cash investment in the loan would not get approved, simply because the bank won’t feel that the person seeking the loan, if they have poor previous credit experience, is willing to make all the necessary efforts to repay the loan. Banks like to loan money, but even more important is that the money they loan gets repaid in a timely manner. Having a cash investment helps the banks to feel sure this will be the case.
Remember, your investment is just one area that plays a part in getting approved for a car loan with bad credit. It is good to have a large cash investment, but one is not always required.
3. The Vehicle You Are Looking To Purchase
The bank is going to loan money to you which will be secured by a vehicle. So what type of vehicle it is, it’s average value, condition, miles, and who you’re buying it from all play a large part in what type of financing you can receive. Let’s look at each of these points individually:
- Type of vehicle — matters because certain vehicles have lower risk factors than others. For example, loaning money on a fast sports car to a younger person carries a higher risk than loaning money on a minivan to a family of five. Because of this, if you have poor past experiences with car credit and not a large investment, but want a car that’s likely not very practical, a bank isn’t going to be as easy to lend money on that car as they will one which is more practical and suited for your needs. Also, newer cars are less likely to cause problems than older ones, so banks are more easy to lend money on a brand new vehicle and give a better finance rate, than on one that’s three or four years old.
- Average Value — Different banks use different sources to gather information about a car’s value. The value determines how much can be financed on the vehicle and if any negative equity can be carried over to the next vehicle. Cars with a higher value or that hold their value better than others are easier to get financing on.
- Condition — As mentioned earlier, the bank will be investing their own money into your vehicle, so if it’s not in good condition, it’s not likely something a bank will want to invest money into. This is why it’s typically better to buy from a dealer and banks give better rates to dealers, since there’s someone to stand behind the condition of the car.
- Miles — The more miles a car has the more likely it is to have problems, and also therefore the less stable the value is on a car. For that reason, cars with lower miles — especially new cars with next to no miles — are easier to get financed on. If you have bad credit, the general rule of thumb is to stay away from cars with more than 60,000 miles. And on used cars, banks like to see it when customers opt for extended warranties to protect them from large future shop bills.
- Who you’re buying it from — actually plays a larger part than you think. If you’re buying a car from a dealer, the bank knows that dealer is more likely and has better resources to stand behind the car than a private owner. Dealers also often offer extended warranties which help lower the overall risk. So it will be much easier to get financing through a dealer. Picking a larger new car dealership will also lend you a benefit, since they likely have good relationships with lots of banks that they can use to help you get financing.
The Bottom Line on Financing
The bottom line is, there are many factors to getting financed on a new or used car in Spartanburg — or anywhere! Get to know where you stand in each of these areas and you will have a better idea of what type of financing you are likely to receive on your next car purchase.