On a house, a single point of interest can mean hundreds of dollars a month on the payment. On a typical $25,000 car loan, a point of interest will change a 60-month payment by only about $11.00 per month. A $1,000 price change on the same loan will affect the payment about $19.00 per month.
Merely mentioning “buy rate” will mark you out as a more astute customer
If you’re doing an indirect loan, ask what the buy rate is. Though the dealer doesn’t have to disclose it, it can help you negotiate the best possible interest rate. The most important thing is to have more than one option for financing so you retain as much control as possible—so get preapproved first. On the Resources page of the site are some good sources, no matter your credit, who handle prime and subprime borrowers.
There are no prepayment penalties on car loans
PRIME LENDING
Prime scores are generally considered to start at 680 credit scores; this is the “B” interest rate range, depending on lender. Anything over 740 makes you “A+” or “superprime” on credit and should qualify you for the best interest rate any lender offers. Many lenders offer automatic approval to people with scores over 740; in this case, they barely seem to glance at other parameters such as DTI. Debt-to-income will still matter, though, especially for those who score hovering just around 700.
Other parameters considered will be the number of “trade lines” on your bureau score; each reflects a loan you had in the past or currently have.
As of the time this was written, the rates offered by lenders to you if you’re a prime shopper should be in the 2-5 percent range on a new car, and 3-6 percent on a late-model used car
NON- AND SUBPRIME LENDING
If your credit scores range between 620 and 679, you are considered a “nonprime” or “near prime” borrowing risk and may end up having to use a specialty lender. Below 620, you are subprime. This type of loan is also called special finance (or “spi-fi” for short). All the basics of a prime loan still apply, such as a good DTI and having job history. There will be other hoops to jump through, such as showing proof of income, needing to provide from three to 10 references and making sure all your loans are current.
If you have any type of loans—or even collection accounts— past due, it will make it almost impossible to get a prime loan
Even subprime loans with interest rates below 10 percent will be tougher. Again: Check your credit bureaus and try to take care of anything late before shopping—at least know what you’re up against. There are online lenders who will do subprime preapprovals, I have some listed on the Resources page. I strongly advise getting a preapproval from one before going shopping. Subprime shoppers are much more vulnerable to rate markups and manipulation by dealers.
The more money you can put down on a “spi-fi” loan the better
That’s both from the standpoint of qualifying in the first place and also from an interest rate perspective. Many banks and credit unions will still lend to you if your credit scores are in the mid-600s; if you’re below 599, you’ll usually have to go to a “sub-subprime” lender like Westlake Financial Services—or have a very strong cosigner.
Twenty-percent down payments are the norm on a “sub-sub” loan. The term of the loan is usually limited to 36 or 48 months, and there are often limits on how old and/or how many miles the vehicle can have on it. Westlake, for example, limits mileage to 80,000. Basically, the lender is expecting 40 percent or more of these loans to end in a repossession, so their goal is to make sure the amount they loan is less than the wholesale value of the car, so they can dump it at auction without losing much money if the buyer stops making their payments.
