If you’re buying a new or Certified Pre-Owned (CPO) car, many manufacturers offer first time borrower programs through their in-house, “captive” lenders. Read the fine print online or call and ask a finance manager at the dealer(s) you’re planning to visit what the stipulations are, both regarding your credit, and if you need to be a recent graduate or such. This will help you avoid wasting time if you wouldn’t qualify anyway. But don’t let them pull your credit bureau or take any personal info.
COSIGNERS
A cosigner can make all the difference on getting a good interest rate on a car loan—or getting one at all. Cosigners can be a spouse, significant other or close relative. Lenders look much more closely at cosigners than they used to before the meltdown, so they need to have good debt-to-income ratios and high credit scores to be helpful.
The cosigner is an equal in the eyes of lenders and credit reporting agencies, so a car loan affects their DTI ratio too. And any late payments you make will affect their credit. Because of these factors, it is harder in my experience to get someone to cosign than it was a decade or more ago. Banks are especially leery of socalled “straw purchases” where there’s no stable relationship between the cosigner and prime borrower.
A cosigner doesn’t have to be locked into the car loan forever
If the first six to 12 payments are all made on time, it is usually possible to find another lender (or even the same one) to refinance the original loan without a cosigner, assuming that person hasn’t damaged their credit and still has an adequate DTI ratio. Contact the original lender and some new ones; those on-time payments will make all the difference.
WHERE TO FINANCE
The usual financing sources are:
- At the dealer, using the “captive” finance companies (owned by the manufacturers, such as Toyota Motor Credit) and manufactureraffiliated banks such as Ally (General Motors).
- Nation-wide banks with strong auto lending arms like Wells Fargo and Chase (who also finance at dealers through their indirect-lending arms).
- Credit unions (who now finance almost as many cars as banks).
- Local banks.
- Subprime lenders (more on this later).
- Large lending institutions such as Capital One.
- Home equity: During the peak of the real estate bubble I saw up to a third of my clients use home equity loans or lines of credit to finance a car. While I don’t think we’ll ever see those kinds of numbers again, some may still be able to take advantage of this source and the tax deductions that it allows.
When you go through the dealer to use a certain lender, it is called “indirect” lending; when you deal with the bank directly, it is “direct” lending. This can be a bit confusing. As an example, you could get preapproved with your credit union as a direct loan, but then go to the dealer and complete the loan paperwork at the same interest rate using a preapproval code provided by the credit union, just like an indirect deal.
In a direct lending scenario, banks and credit unions will give you their “buy rate,” which means there’s no additional interest rate markup in the loan (though they may pay bonuses to a loan officer). Many of these same lenders also work with dealers. The buy rates they offer the dealer can be the same as what they’d give you, less, or more. There isn’t any clear pattern to this, so it worth getting preapproved with a lender (direct loan) first.
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