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How to Get a Car Loan With Bad Credit

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Part I: Auto Loan Options for Bad Credit

Shopping for vehicles with bad credit can be like walking through a minefield. It is possible to get across safely and into the car of your dreams, but it will require careful thought and strategy if you want to avoid overpriced lemons, crooked loans and outright fraud.

In this guide, we explain how to find the best deal on an auto loan if you have bad credit. We dig into the pros and cons of financing through credit unions, banks, personal loans and dealers. Finally, we bring to light the biggest auto financing scams and show you how to avoid them.

We geared this guide toward young adults with a short credit history; immigrants who have not established credit; anyone with a history of late payments, credit collections and bankruptcy; and someone who has suffered from identity theft, divorce or other negative credit events.

How bad credit impacts your cost of borrowing

When you have poor credit, it will be harder for you to find affordable auto financing but not impossible. You should be prepared to face higher interest rates, for one thing, and you may be required to have a co-signer or put down a larger down payment in order to get approved.

Most people think of their credit score as a single number, but when it comes to auto lending, that’s not entirely true. Most auto lenders care a lot more about your history with auto loans than about any other part of your credit history.

A good credit score isn’t just about interest rates. Bad credit may mean that you’re ineligible for a loan at any interest rate. The single most important factor in getting approved for an auto loan is whether or not you’ve had a repossession in the last year. People with recent repossessions will struggle to find a reputable lender. During bankruptcy proceedings, you may struggle to find financing.

However, shortly after completing bankruptcy, you’re likely to get flooded with auto loan offers. Lenders know that you can’t file bankruptcy for another eight years, so they may consider you a better credit risk.

If you have bad credit, you might find a lender to approve your loan, but you’ll likely pay a high interest rate. Just how much does bad interest cost? A borrower with a credit score below 500 will expect to pay $9,404 for a $16,000, 61-month car loan, according to interest rate estimates from Experian. That’s 4.1 times the interest that a prime borrower can expect.

People with bad credit face dramatically higher interest rates than borrowers with good credit. According to the Experian State of the Automotive Finance Market, used car borrowers with credit scores between 601 and 660 had average interest rates of 9.88% compared with the 16.48% rate faced by borrowers with scores between 501 and 600.

With such high interest rates, it’s usually best to avoid taking out an auto loan until you have decent credit. However, if you finance a car with bad credit, try to follow these rules:

  • Use a significant down payment. We recommend putting down at least 20 percent on any vehicle purchase. A larger down payment not only results in a smaller loan, but you’ll pay less in interest over time. Additionally, cars depreciate in value rapidly once you purchase them. By putting down 20 percent, you’re making sure you’re only financing what the car is actually worth.
  • Do your research first. Consult the Kelley Blue Book to determine the vehicle’s value, and have the vehicle inspected by a trusted mechanic before you buy it.
  • Avoid loan terms that are longer than four years. The average subprime borrower purchasing a used vehicle takes out a loan for over five years (61.6 months), according to Experian. Long loans may mean you’ll pay more in interest and possibly face costly repairs before you finish paying off the car.
  • Borrow only what you can afford to pay back. A good rule of thumb to follow is that the total cost of your monthly car expenses shouldn’t be more than 10 percent of your gross monthly income
  • Demand fair terms. If you have bad credit, you can’t expect a great interest rate on your loan, but you can expect fair terms. Don’t accept a loan with prepayment penalties or mandatory binding arbitration clauses.

These rules can help you protect yourself against predatory lenders and unaffordable loans.

Credit union auto loans for bad credit

The fastest growing issuers of auto loans are credit unions. According to Experian, at the start of 2015, credit unions held just $215 billion in open auto loans. Today they hold $286 billion.

Navy Federal Credit Union and USAA are two national credit unions that will work with people who have bad credit. Please note, neither credit union guarantees loan approval. However, they both offer courses to help you improve your credit, and they have car-buying programs to help you find a vehicle in your budget.

Navy Federal CU Navy Federal Credit Union

  • Down payment required: None
  • Loan terms: 12 to 96 months on new vehicles; up to 72 months for used vehicles
  • Credit score requirements: No minimum score. More likely to be approved if you have a low debt-to-income ratio and few major derogatory marks (such as collections or repossessions).
  • Full review

Navy Federal Credit Union is open to members of any branch of the U.S. military, civilian and contractor personnel, veterans and their family members. They do not have specific credit minimums for their loans, but they consider debt-to-income ratios and credit history.Unlike most banks, NFCU will help you if you have negative equity in a vehicle. They lend up to 125 percent of the new vehicle’s value. Navy Federal Credit Union approves borrowers for both private party and dealership loans, and they have free online courses to help you make the best buying decisions.

USAA Auto Loan USAA

  • Auto loan APR: 2.74% to 18.00%
  • Down payment required: Varies based on credit history and income
  • Loan terms: 12 to 84 months for borrowers with poor credit
  • Credit score requirements: Not available

USAA is open to members of any branch of the U.S. military and their family members. USAA determines loan eligibility based off of your credit history, your income, and your other debt obligations. You may not qualify for a loan if you have a credit score below the mid 500s, a recent repossession, or other derogatory marks.USAA does not always require a down payment for a vehicle purchase, but they advise putting down at least 15 percent on vehicle purchases.

Banks and subprime auto financing companies

It’s getting much tougher for people with poor credit to borrow high-interest, high-risk subprime loans, as many of the largest banks in the U.S. have started to shy away from the product.

Ally Financial, the nation’s largest auto lender, limited their subprime lending to just 11.6 percent of their total lending in 2017. In 2015, the nation’s third largest auto lender, Wells Fargo, announced their intentions to limit subprime auto lending to less than 10 percent of their portfolio.Of the five largest auto lenders in the U.S., only Capital One continues pursuing the subprime auto market. They lend nearly one-third (31%) of their portfolio to consumers with credit scores less than 620.

You can gain pre-approval before you start shopping for a vehicle. This is the best way to shop for an auto loan if you have bad credit. You do not want to pursue auto financing from the scam artists at a dealership.

Below, are auto financing companies and banks that will issue loans directly to people with poor credit.

SpringboardAuto SpringboardAuto.com

  • Loan size: $7,500 - $45,000
  • APR: 8.29% to 23.00%
  • Loan terms: 12 to 72 months
  • Down payment required: Minimum $250
  • Credit score required: 500
  • Vehicle requirements: 2009 or newer, mileage less than 125,000

SpringboardAuto.com is a direct-to-consumer, online auto lending platform. SpringboardAuto.com specializes in loans to people with imperfect credit histories. SpringboardAuto.com uses a soft credit inquiry to determine your loan eligibility. A soft inquiry allows you to shop for a vehicle loan without hurting your credit.

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Road Loans RoadLoans.com

  • Loan size: $5,000+
  • APR: 10.20% to 27.99%
  • Loan terms: 12 to 72   months
  • Down payment required: Dependent on multiple credit factors.
  • Credit score requirement: There is not a minimum score required, however applicants are required to complete a credit application. Credit score is not the sole factor, but it plays a key role in determining approval and loan terms.
  • Income requirement: $1,800 monthly minimum income

RoadLoans.com is a company owned by subprime auto lending giant Santander. Santander has suffered from more than its fair share of criticism in the subprime auto lending market. According to a March report by Moody’s Investors Service, the bank failed to verify incomes of 8 percent of borrowers whose loans it later bundled up into bonds and sold to investors. From a consumer’s perspective, it’s important that lenders verify your income before approving you for a loan because it’s never a good idea to borrow more money than you can reasonably afford to repay.

The scandals make this a reluctant recommendation, but the loans offered by RoadLoans.com are direct to consumer. That means you’ll see better rates and fair terms on the loans.

Capital One Capital One

  • Loan size: $4,000 - $40,000
  • APR: 3.39%+
  • Loan terms: 24 to 72 months
  • Vehicle requirements: Must work with one of 12,000 nationwide dealerships. Vehicle must be a 2005 model or newer with less than 120,000 miles.
  • Down payment requirement: Must have a 10 percent down payment
  • Income requirement: $1,800 per month
  • Full review

Of the five largest bank lenders, only Capital One continues to expand their subprime auto lending operations. Capital One uses a soft credit pull to help you understand how much you may qualify for. Once you qualify for a loan, Capital One issues a “blank check,” which you can fill out at one of over 12,000 nationwide dealerships.

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AutoPay Autopay.com

  • Loan size: $5,000 - $100,000
  • APR: 2.49% to 25.00%
  • Loan terms: 24 to 84 months
  • Credit score requirements: 600 minimum score
  • Income requirements: $2,000 month income

Autopay.com is an online lender that specializes in auto lending for people with fair credit. You need a credit score of at least 600 and an income of at least $2,000 a month to qualify for a loan on Autopay.com.

How to compare auto loan rates

Once you’re serious about car shopping, take some time to get the best auto financing. When you apply for an auto loan, you’ll usually see a “hard credit inquiry” on your credit report. This will drag your credit score down by a few points. To limit the damage of hard credit inquiries, do all your comparison shopping inside a 30-day window. Any auto loan applications that you submit within 30 days will count as just one hard credit inquiry on your score.

Get pre-approved for an auto loan

Once you know your numbers, you might think it’s time to start car shopping, but that isn’t quite right. It’s important to get pre-approved for an auto loan first.

Loan pre-approval allows you to walk into a car-buying situation knowing that you’re looking for price and quality, not financing. It frees you to focus on the final price of the vehicle and the value of your trade-in. Even more important, pre-approval can keep you from getting scammed by shady dealers.

If you’re planning to buy from a private-party seller, pre-approval is even more important. Most individuals won’t wait around for weeks or months for financing to come through. Without a pre-approval, you’re unlikely to get the deal.

Using personal loans for auto financing

If you’ve had a car repossessed in the last few years, you may struggle to qualify for any auto loans. But you may still qualify for a personal loan. This is one of the few situations where a personal loan makes sense to finance a car.

Personal loans also make sense if you expect to pay off the loan in less than a year. For example, you may want to take out a loan as a “bridge loan” while you work out the private party sale of a vehicle. If you’re underwater on a vehicle, you may need a personal loan to help you pay off your original loan upon the sale of your older vehicle.

Most people using personal loans will want to look for an unsecured personal loan. Unsecured means that you don’t have an asset to back up the value of the loan. Interest rates on unsecured personal loans tend be higher than those of auto loans. If you have bad credit, the interest rates can be as high as 36%, according to the MagnifyMoney comparison tool.

If you own an insured vehicle, you may consider a secured personal loan. These also have high interest rates, but those are somewhat tempered by the collateral. Of course, if you sell your vehicle or otherwise ruin it, you have to repair the vehicle or pay back the loan right away.

These are some of the best options for personal loans if you have bad credit:

Avant personal loanAvant

  • Amount: up to $35,000.
  • APR: 9.95% to 35.99%
  • Loan terms: 24 to 60 months
  • Upfront Fee: Up to 4.75%
  • Full review

Avant specializes in unsecured personal loans for people with OK to bad credit. The interest rates are high, but these are one option for people with bad credit. We recommend these loans if you’re borrowing a small amount or for a short time and you cannot qualify for better terms.

OneMain personal loan OneMain Financial

  • Loan size: $1,500 to $20,000
  • APR: 18.00% to 35.99%
  • Loan requirements: May require a vehicle as collateral or a co-signer (or both)
  • Full review

OneMain Financial specializes in secured loans for people with bad credit. The loans carry super-high interest rates, but they may be the best rates available if you have bad credit. When you apply for a loan through OneMain Financial, you must complete the loan in a local bank branch.

Best egg personal loan Best Egg

  • Amount: Up to $35,000
  • APR: 5.99% to 29.99%
  • Term: 36 or 60 months
  • Upfront fee: 0.99% - 5.99%
  • Full review

Best Egg is one of our highest rated personal loans for avoiding fine print. If your credit score is at least 640, you could get approved. It is very difficult to get approved below 660.

The truth about dealer financing

Even with the best credit score, dealer financing is rarely a good deal. This is especially true if you buy a vehicle with an in-house loan office that claims, “No Credit, No Problem!”

Used car dealerships only work with a few auto lenders, so they can’t guarantee that you’ll get a great rate. On top of that, some auto financing companies let dealerships mark up the loan and keep the additional interest as a commission.

Even in the best-case scenarios, dealer financing can also get you focused on the wrong numbers. Salespeople will focus on the monthly payment amount rather than the price of the vehicle you’re buying and the value of your trade-in. To get the best possible deal, you want to know the price you’re paying for the vehicle.

Part II: Shopping for Auto Financing With Bad Credit

  • Essential Car-Buying Checklist

  • Check your credit score
  • Compare rates from several lenders and get pre-approved BEFORE going to the dealer
  • Follow the 20/4/10 rule: Put at least 20% down; finance the car for 4 years or less; car payments should be less than 10% of your monthly budget.
  • Check used cars for safety recalls (run the VIN at SaferCar.gov)
  • Have a trusted mechanic inspect the vehicle
  • Check Kelly Blue Book for price comparisons
  • Negotiate the vehicle price
  • Don’t waste your money on extended warranties
  • Buy insurance on your own
  • Complete the sale (at a local DMV if possible)
  • Transfer the title right away

4 numbers to check before you buy a car

If you’ve struggled with credit in the past, or you’re a new borrower, then you need to know your numbers before you shop for a vehicle. Knowing these numbers will help you make a wise purchasing decision.

  • Credit score
    • You can check your credit score for free from a number of websites. The scores you see on the free websites won’t exactly match the scores auto lenders use. They will use FICO® Auto Scores 2, 4, 5, 8, 9, which can be purchased from myFICO.com for $59.85. Don’t like what you see? Don’t hire a shady “credit repair” company. Our ebook will explain how to repair your credit on your own, for free!
  • Interest rates
    • Many banks and credit unions use soft credit inquiries to help you estimate your auto loan interest rates. You can compare rates at Lendingtree.com to see what rates you might qualify for.
  • Your budget
    • We recommend following the 20/4/10 rule: Put at least 20 percent down, finance the car for less than four years, and have a payment of less than 10 percent of your income. You can use the Auto Affordability Calculator to help you determine a budget.
  • Current car’s value
    • If you’re driving a paid-off car, you have an asset that can go a long way in making your new car more affordable. Many dealerships will let you trade in your old vehicle as a down payment on a newer vehicle. Use Kelley Blue Book to negotiate a fair trade in value.

Dealer financing scams and how to avoid them

“No credit? Bad credit? No problem!”

When you shop for credit at a place that advertises, “No Credit? No Problem!” the financiers smell desperation. They may stick you with a bad loan, or they may outright break laws. These are just a few scams you might encounter from dealer financing operations. According to Consumers for Auto Reliability and Safety (CARS) Foundation president, Rosemary Shahan, “In general, buy-here pay-here financing is just overpriced junk. […] We always recommend that people avoid financing at the dealership. There are just too many games that they can play.”

Yo-yo financing

Yo-yo financing is when dealers allow you to sign a contract at one rate, and then unilaterally change the terms of the contract a few weeks after you’ve taken home the vehicle. They usually claim that the “financing fell through” and you need to sign a new contract at a higher interest rate. This is an illegal practice, but it may require costly litigation to prove.

To protect yourself, keep copies of all loan documents you sign, and don’t drive away with a car until you’ve paid for it.

Mandatory binding arbitration clauses

Most dealer financing includes forced arbitration clauses. In this clause, customers waive the right to a jury trial and must settle disputes in private arbitration. Dealers can delay arbitration or fix outcomes by paying private companies.

Shahan claims, “When you go to arbitration, you’re almost always going to lose. The companies have them in their pockets.”

Overpriced extras

Some loan officers stuff contracts with overpriced extras with dubious value. For example, they may include service contracts, extended warranties and unclear fees. When you do the math on these products, they’re rarely worth the money.

If you plan to take out a loan for more than your car is worth, you may have to buy Guaranteed Auto Protection (GAP) Insurance. This insurance covers the difference between the amount of your loan and the value of your car. It helps you pay off your loan if your car gets totaled. Generally, you’ll want to buy this (and all other car insurance) on your own.

Undervalued trade-ins

Your old vehicle is an asset, and you should get close to Kelley Blue Book value for it. Some shady dealers will value your vehicle at pennies on the dollar. Because of a low valuation, you may be stuck financing a larger amount. A private sale will always yield the biggest bang for your buck, but that might be inconvenient for you. Even so, you need to negotiate for a fair trade in value.

Focus on the monthly payments

Salespeople often focus on monthly payments rather than true affordability. Because of that, you may lose track of the price you’re actually paying for a vehicle. When buying a vehicle, getting a loan pre-approval will help you focus on the price rather than the monthly payment.

Selling mechanically unsound vehicles

Some used car dealers sell vehicles that don’t work to unsuspecting customers. Even worse, some dealerships sell unsafe vehicles that are branded as “certified pre-owned.” Used vehicles can be sold as certified pre-owned despite the fact that they have unrepaired safety recalls.

The Federal Trade Commission requires banks to check for unrecalled safety recalls, but buy-here pay-here lots don’t have to. Unless you check for safety recalls yourself, you might buy a vehicle that the manufacturer has called unsafe.

In general, once you’ve purchased the vehicle, you can’t return it, and you have to pay for repairs on your own. Before you buy a used vehicle, have a trusted mechanic inspect it. Additionally, check the VIN number at SaferCar.gov. This database will tell you if the car you want to buy has unrepaired safety recalls.

Title scams

Some dealers fail to transfer a title within a timely manner. That opens you up to credit and legal risks. Car dealers should explain exactly when you should expect to see the title. Ideally, you can walk out of a dealership with an assigned title or certificate of transfer.

Know your rights

Car buyers do not have many ways to protect themselves from shady dealers or financiers, but if you know your rights, you can protect yourself from the most damaging problems.

  • Title rights. Every state has different rules surrounding title transfers, but in every state you have the right to a title when you purchase a vehicle. You should know exactly when to expect the title before you pay for a vehicle. When you buy from a private party, you should expect to transfer the title immediately regardless of state laws.
  • Insurance rights. A bank may legally require you to purchase vehicle insurance. However, you have the right to purchase the insurance on your own. Take advantage of this right; you’ll save a ton of money.
  • Refuse financing. Despite high-pressure sales tactics, you don’t have to take out financing from a dealer. You can take out a loan from a bank or credit union instead.
  • Contract rights. If you’ve signed a valid contract, a financing company cannot change the terms. They cannot force you to sign a new contract with less favorable terms.

Don’t work with dealers that don’t respect these rights. If you’re caught with a company that does not recognize your rights, complain to the Consumer Financial Protection Bureau right away. The CFPB helps customers connect directly with financial institutions and responds to issues within 15 days.

Since vehicle buyers don’t have many “inherent” consumer protection rights, you protect yourself.

Only work with private parties or dealers that allow you to do the following:

  • Inspect used vehicles
    • A trusted mechanic can help you evaluate the mechanical soundness of a vehicle. Most people cannot tell a lemon from a peach, and they need the help of a mechanic to determine the value of a vehicle.
  • Run the VIN through SaferCar.gov
    • Don’t buy a car that has an unrepaired safety recall. These vehicles are dangerous. If a vehicle has a scratched-out VIN, don’t buy it. It’s too big of a risk.
      Avoid mandatory binding arbitration
  • Avoid mandatory binding arbitration
    • Most loans include a jury waiver clause or an arbitration clause. These clauses keep costs down for the bank, but the clauses are nonbinding. That means you have the right to appeal if you believe the bank or credit union committed fraud. Dealerships and dealer financing often require mandatory binding arbitration. That means you can’t appeal even if the dealer defrauded you with an unsound vehicle or an unclear title or other problems.
  • Pay before you drive away
    • A salesperson should not push you to take home a vehicle before you’ve paid for it. When they do that, they are almost certainly going to stick you with a higher vehicle price, or worse financing terms. Pay for your car first, then drive it away

Understanding your auto loan contract

  • Mandatory binding arbitration – This means you cannot sue your financing company. Instead, all disputes are resolved through a private arbitration company paid for by the dealer. DO NOT work with companies that require mandatory binding arbitration.
  • APR – This is the effective interest rate that you’ll pay on your loan.
  • Dealer preparation fees – Unless a dealer has provided custom preparations for you, this is a bogus fee designed for the dealer to make extra money.
  • Origination fee – This is the fee that the bank charges to originate the loan. It’s usually baked into the cost of the loan.
  • GAP insurance – Guaranteed Auto Protection Insurance covers the difference between the value of your vehicle and the value of your loan. You may be required to purchase this if you have negative equity. However, you can buy this insurance on your own.
  • Extended warranties – An extended warranty means that the manufacturer will cover the cost of repairs for a limited time. Most of the time, the warranties cost far more than the repair costs down the road.
  • Loan term – This is the length of time required for you to pay your loan. We recommend keeping loan terms to less than four years.
  • Loan-to-value (LTV) – The LTV expresses the value of your loan relative to the value of your vehicle. We recommend a starting LTV of 80 percent or less. If you have an LTV greater than 100 percent, then you rolled negative equity into the loan.
  • Negative equity – When your vehicle is underwater (you owe more than the vehicle is worth), you have negative equity. It’s possible to buy a new car with negative equity, but we advise against it.
  • Trade-in value – A vehicle trade-in can help you go a long way toward having a 20 percent down payment for your vehicle. During a trade-in, a dealer pays you for your old vehicle. You can almost always get more money by selling your vehicle in the private market, but it’s not very convenient. A dealer will make a trade-in offer that you can either accept or reject. Use Kelley Blue Book to determine whether you’ve received a fair trade-in value for your old vehicle.

Getting a co-signer for an auto loan

People with bad credit stand to gain a lot from having a co-signer on their auto loan. You can expect to qualify for a larger loan with lower interest payments, but asking someone to co-sign an auto loan is no small request.

A co-signer agrees to make your car loan payments if you are unwilling or unable to fulfill your loan obligations. If you skip a loan payment, you ruin your co-signer’s credit. For that reason, we generally discourage most people from becoming a co-signer. However, spouses who share finances may find that co-signing the loan is helpful for the family finances.

A co-signer can help you qualify for lower interest auto loans by providing one of three attributes:

  • Their income may help you meet the minimum requirements for an auto loan.
  • Their credit history is better than yours.
  • They have a lower debt-to-income ratio than you.

If you’re a freelancer or small business owner, a co-signer may also offer the required income stability that puts you into a lower risk category.

When you ask someone to co-sign a loan, remember that they are putting their credit on the line for you. If you don’t think that you can make your loan payments, then you’re putting them at risk. Be careful about the request

How to refinance from a bad credit auto loan

If you’ve taken out a high-interest auto loan, you should be on the lookout for refinancing opportunities. Most people who make on-time auto loan payments and reduce their credit card debt will find their credit score increase over time. If you’re starting with a very bad credit score, you can see over a 100-point improvement within 12 to 18 months of good credit behavior.

Once your credit score is in the mid 600s, take a serious look at refinancing opportunities. People with credit scores between 601 and 660 paid an average of 9.88 percent on used auto loans, a full 6.6 percent lower than the rates paid by people with subprime credit.

Refinancing an auto loan is easy compared to shopping for initial car financing. That’s because the shopping process includes known variables. You know the value of your vehicle and the amount of financing you’ll need. You also know the interest rate you need to beat. If your current vehicle is underwater (you owe more than your car is worth), you may need to bring cash to the table to complete a refinance.

We recommend shopping for loan refinances through our parent company, LendingTree. LendingTree compares dozens of auto refinance offers all at once and shows you the best rates in the market. You can also compare offers to those you might find through myAutoloan.com or SpringboardAuto.com.

Part IV: Car shopping FAQ

Before you declare bankruptcy, you can buy a vehicle up to the motor vehicle exemption amount in your state. Unless the vehicle is expensive, you’ll probably get to keep the car during bankruptcy proceedings. However, your auto loan won’t be discharged in bankruptcy. You need to pay the auto note as required. If you include an auto loan in bankruptcy proceedings, you won’t be allowed to keep the vehicle.

Most people struggle to find auto financing after they’ve declared bankruptcy but before the bankruptcy is discharged. Courts even frown upon buying a car with cash during bankruptcy.

Once your bankruptcy is discharged, you can expect subprime lenders to flood your mailbox with auto loan offers. This is because lenders know you can’t declare bankruptcy for another eight years. However, it’s not necessarily a great time to finance a vehicle. Waiting a year or two for your credit to repair will allow you to finance a vehicle at a much lower interest rate.

If you don’t get approved for an auto loan, ask the bank why they didn’t approve you. Do you have insufficient income? Do you have a recent auto repossession on your credit report? Do you lack credit history? Perhaps your debt-to-income ratio is too high.

Once you know why you didn’t get the loan, you can work on fixing the problem. This guide can teach you how to improve your credit score for free. It’s also important to note that just because one bank didn’t approve your loan, doesn’t mean you can’t get a loan. Our parent company, LendingTree, helps consumers shop for multiple loans all at once. Using LendingTree or other loan aggregation sites can help you find a bank willing to lend to you.

Of course, you could resort to dealer financing, but we don’t recommend it, even as a last resort.

Some banks will not lend to you unless you have a co-signer (also known as a co-applicant). The co-signer agrees to pay for your loan if you stop making payments. If you have low income and bad credit, you’ll probably need a co-signer. However, most others can get around having a co-signer. If possible, we recommend avoiding loans that require a co-signer.

If you currently own a car, you can opt to trade in your vehicle at a dealership. When you trade in your vehicle, the dealership offers credit against the purchase of a newer vehicle. Many people use trade-ins in lieu of down payments.

Dealerships offer less money for a trade-in than you would get in the open market. However, private sales can be complex, and they often take a long time. Because of that, trade-ins can be a win-win for dealers and buyers. The key to a winning trade-in is not getting ripped off. Use Kelley Blue Book to determine your vehicle’s value, and use the KBB value to negotiate a fair trade-in price.

If you owe more than your car is worth, you need to be extra cautious about a trade-in option. When you trade in a vehicle with negative equity, you’re automatically starting your new loan underwater. To stop the cycle of negative equity, you need to find a vehicle that you can pay off in less than four years.

Most people cannot tell the difference between a high-quality and a low-quality used vehicle. We recommend paying a trusted mechanic to inspect the vehicle before you buy it. If a seller won’t let a mechanic inspect the vehicle, you don’t want to buy from them.

You should also personally check the nationwide vehicle registry to be sure a vehicle does not have any unrepaired safety recalls. If the vehicle has unrepaired safety recalls, don’t buy it. It’s not safe to drive.

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Auto Loan

How to Buy a Car Online — from Start to Finish

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Visiting a car dealership lot can sometimes feel like walking on a knife-edge. Salespeople could pressure you into spur-of-the-moment decisions that could leave you buried up to your eyeballs in debt for the next several years.

Buying a car online can be a much smoother and well-informed experience compared with traditional car buying, but it does require a bit more legwork on your part. Before you dive in, you’ll want to make sure you’re well-informed on how to buy a car online.

Part I: Traditional vs. online car buying

Curious about buying a car online but unsure of how the experience compares to traditional car buying? The processes are similar in a lot of ways, but skipping the dealership can actually give you a leg up as a buyer.

The troubles of traditional car buying

Before the internet revolutionized everything, there really was only one way most people bought a car: They’d visit car lots, find a car they liked and then sit down with a car salesman to work out an agreement. This led to the dreaded negotiation process.

“There’s all this back-and-forth and, ‘Oh, I’ve got to go talk to my manager,’” said Jack Gillis, executive director of the Consumer Federation of America and author of “The Car Book.” “Well, the guy goes back and has a cup of coffee and lets you sit there and steam for a while, then he comes back and gives you some song and dance about why they can or can’t do something.”

Because most people treated car dealerships as one-stop shops for buying a car, they often wouldn’t be informed about the full range of cars, financing options or trade-in choices available to them. Without these bargaining chips, consumers are at the mercy of the car salesmen.

How buying a car online empowers the buyer

With online car buying, it’s possible to complete every phase of the car-buying experience — from finding the right car to negotiating — entirely online.

Perhaps the biggest benefit of buying a car online is that it puts you in greater control of the car-buying process and no longer at the mercy of the salesmen at one dealership. You can expand your options for cars, financing and trade-ins, and then use your findings to negotiate for your best price possible.

“The whole digital part really is empowering for the buyer because there’s so much information that you can use to make an informed decision,” said Matt DeLorenzo, managing editor of KelleyBlueBook.com.

The downside of all this power is that it requires a bit more legwork on your part to bring all the pieces together. On the bright side, doing your homework can save you thousands of dollars and ensure you get the best car possible.

Part II: 7 steps to buying cars online

Step 1. Choose the right car

It’s important to choose a type of car that will best fit your needs. Do you want a fuel-efficient vehicle for short commutes? Do you need to haul around large amounts of cargo? Do you have a large family or a small one? Thinking about questions like these can help you zero in on what kind of body style (truck? SUV? compact car?) will suit your needs.

Once you narrow down a body style, it’s time to research what specific makes and models of cars might be best for you. Good research websites include Edmunds, Car and Driver and Kelley Blue Book.

If you’re buying a new car, you might be offered certain options and add-ons from the dealer, such as VIN window etching or rust-proofing. Before you go signing up for every option offered (and sign away your whole paycheck in the process), it’s important to research these options. You can face big markups and can easily get these add-ons yourself if you decide you need them down the road.

Step 2. Determine the price you want to pay

Next up is determining how much car you can actually afford. The more conservative rule of thumb is the 20/4/10 rule, but if that’s not possible for your budget, make a concerted effort to try to meet the 10/5/20 rule. Here’s how the two rules break down:

Rules of Thumb for Transportation Costs
20/4/10 Rule10/5/20 Rule
Minimum down paymentMake a minimum 20% down paymentMake a minimum 10% down payment
Loan termFinance for no more than four yearsFinance for no more than five years
Monthly transportation expenses, including insurance, gas, etc.Total expenses shouldn’t exceed 10% of your monthly incomeTotal expenses shouldn’t exceed 20% of your monthly income

These rules could help you set a cap on your car-shopping budget. For example, if you have $3,000 saved, it might be a good idea to avoid buying a car for more than $15,000 ($15,000 x 0.20 down = $3,000). From there, you can assess any financing offers to make sure that you’re not spending more than 10% of your income on the car and that your financing doesn’t stretch beyond the four-year mark.

You can narrow your car search down even further using these budget caps. If a car’s MSRP is far outside of your budget, weed it out of consideration. You can use websites like Kelley Blue Book or the National Automobile Dealers Association to research the current prices for new and used cars in your area.

Step 3. Get approved for financing online

It’s important to get preapproved for an auto loan before you actually go shopping. Getting preapproved for a loan does not mean you have to take the financing; rather, it helps you stay within your budget and gives you a bargaining chip in negotiations.

You can easily get preapproved for an auto loan online through websites like LendingTree, which is the parent company of MagnifyMoney. Using our auto loan marketplace, you can fill out one online form and potentially get offers from several auto lenders at once, depending on your creditworthiness. It’s also a good idea to check around with local banks and credit unions, which may offer deals locally.

You’ll generally need a high credit score to qualify for the best auto financing offers. If you don’t have a high credit score, you will likely be preapproved for a loan, but it may come with higher interest rates. If you’re outright denied for a preapproved loan, you may need to consider shopping elsewhere or waiting a little while so you can take steps to increase your credit score.

If you are qualified for preapproval, the lender will give you a preapproval letter. Make sure to keep a copy of this letter, and bring it with you when it comes time to negotiate a price on the car you’ve chosen.

Step 4. Choose the right source

Once you get to this point in the process, it’s time to cast your net and see what cars are out there.

One place to look is AutoTempest, a comprehensive website that searches several websites, including Craigslist, for specific makes and models. If you’re looking for one particular brand, don’t overlook your local dealership’s website. Other possible websites to go to scope out cars include:

We also made a list of the best online car-buying sites that you can check out to help you in your search.

With the power of the internet, the whole world (or at least the whole country) can be your virtual car lot. If you’re able to travel to pick up your new vehicle, you might be able to save a trunkful of cash by broadening your search.

For example, if you live in a snowy climate and are looking for an all-wheel drive car, you might try looking in a warmer area. “There might be better incentives on all-wheel drive cars in, say, Arizona than in the Northeast where they got a lot of snow,” said DeLorenzo.

Step 5. Get quotes

Once you’ve identified your targets, the next step is to find out how much they’ll cost. You’ll negotiate your final price in the next step, but this step sets a starting point.

Contact the dealership directly and ask for a quote for each vehicle you’re interested in. It’s important to do this as the price may have changed or the vehicle may have been sold. But perhaps the main reason this is crucial to do is so dealers will be motivated to give you a better price than what’s online, and it puts the starting line for negotiations much closer to the finish line.

Email or call the dealership and ask for their internet sales manager, as this is the person you’ll work with through the negotiation process. Give them the VIN or stock number of the vehicle you’re interested in and ask for a quote. Then, ask them to email it to you so you have it in writing.

It sometimes can be difficult to get a dealership to quote a price, but it’s important to insist that dealers give a price estimate for the make, model and year. If quote collecting isn’t your thing, you also can hire a service to do this for you, such as CarBargains. For $250 and a detailed description of what you’re looking for, CarBargains will collect at least five different dealership quotes for you.

Collecting these quotes gives you the bargaining power you need to negotiate prices down as low as possible in the next step.

Step 6. Time to negotiate

Ah, the dreaded negotiation. Since you’ve already gone through all of the steps to be an informed consumer, negotiating your price will be a much smoother process. Specifically, you’ll be negotiating the price of three separate items: vehicle price, financing cost and trade-in value.

Vehicle price

This is the most important piece. You can — and should — present the offers you’ve received in the prior step. Did someone offer $12,500? Show that emailed quote to another dealer and ask if they can lower their price to $12,000. Car dealerships are usually very easy to negotiate with online.

“If you think about it from an efficiency point of view, an online salesperson can be working more deals at one time than somebody on the floor who’s physically with one person,” said DeLorenzo. “Sometimes it’s actually more cost-effective for the dealer to sell it through or do a lot of the negotiation online.”

Car salespeople will often try to upsell you on add-ons when negotiating the price for a car. “They may say, ‘Well this will only cost you 10 bucks more a month.’ Well, yeah, and that’s $120 over a year. Over five years that’s $600, $700. You can’t let bells and whistles cloud your judgment,” said DeLorenzo.

Stick to the basic total numbers, not the monthly payment, and don’t let yourself get distracted.

Trade-in price

Chances are that you already have a car that you want to trade in to help defray your costs. Most dealerships will accept trade-ins, but be warned: You will probably get much less than if you shop around for trade-in prices on your own.

Websites like Kelley Blue Book allow you to find a fair trade-in price for your vehicle. In addition, you can use a tool on Kelley Blue Book’s website called “Instant Cash Offer” to get bids from dealers on your car.

“The beauty of having something like that is that it sets a floor for what your car is worth,” said DeLorenzo. “You’ll know you’ll get at least that much in trade or in an outright purchase, and that’s important leverage to have when you’re negotiating a new car deal.”

Additionally, you can try selling your car yourself through sites like Craigslist. Generally, going this route will net you your best price for your old car, although this may take more time and energy than simply driving onto a car lot with your old car and driving off with a new one. Here’s more on what to know before you trade in your car.

Financing cost

The final piece of the puzzle is how you’re going to pay for your new car. Since you’ve already taken the time to be preapproved for an auto loan, this step should be simple.

Show the dealer your preapproval letter and ask them if they can beat it. If so, great. If not, then you know you’ve already secured the best auto financing deal possible.

Step 7. Making the final purchase online

Once you’ve lined up the three pieces of the puzzle — the lowest car price, the lowest financing price and the highest trade-in value — it’s time to make your decision. Most dealerships still require you to physically come in to complete the final paperwork signing. However, that’s beginning to change.

“Savvy dealers are beginning to digitize as much of that kind of paperwork [as possible], to just make it easier to buy a car from them,” said DeLorenzo. “It works out better for them, too. I mean, if they’re able to get you in and out quicker, they can sell more cars quicker.”

But as far as completing the entire purchase process online? “I think there are dealers who are willing to do that,” DeLorenzo said. “The question is, do you want to do that?”

For now, you’ll likely still need to do some of the physical aspects of buying a car, such as taking it for a test-drive, in person. Perhaps someone will invent a virtual test-drive machine in the future!

Part III: Staying safe while shopping for cars online

Luckily, outright scams aren’t too common when it comes to buying cars online, according to Gillis. Many car dealers are subject to consumer-friendly regulation by the Federal Trade Commission. Still, there are some things to be aware of when shopping for cars online.

Beware the bait-and-switch

One situation that Gillis has seen involves a bait-and-switch technique when consumers arrive at the dealership to complete the purchase after negotiating everything online.

“You’ve got it all squared away. You get to the dealership to close the deal, and all of a sudden, ‘Oh my gosh. I can’t believe it, someone just came in and bought that car, but we have another one here that actually has a few better features on it, and it’s just the color you wanted, and it’s only gonna cost you $20 more per month,’” Gillis said.

If this happens to you, be prepared to walk away from the dealership as they’re likely just trying to weasel more money out of you.

Get an inspection from an independent mechanic

If you’re buying a used car, whether at a dealership or from someone you found on Craigslist, you should absolutely get an inspection first. Everyone has heard horror stories about buying a lemon (or worse, being the person who bought the faulty car). The seller will surely tell you that the car is in perfect shape, but how do you really know? Getting an auto inspection by an independent mechanic is perhaps one of the best ways to protect yourself.

If you’re unable to take the car to your own mechanic, DeLorenzo recommends a service from AiM Certify. For as little as $129, you can book an independent mechanic anywhere in the country to travel to the dealership and perform an inspection for you. You’ll get back a full mechanical report complete with actual photos of the car.

Try before you buy

If you’re not happy with your choice, you may have wasted tens of thousands of dollars. That’s why it’s crucial to take a test drive before you commit.

“Most of the problems that consumers end up not liking about their vehicles could have been determined in a test-drive,” said Gillis. “For example, it’s hard to park, or the back seat really isn’t that comfortable, or the trunk really doesn’t hold that much, or when changing lanes, there’s a big blind spot in the back.”

Jenn Jones contributed to this article.

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Fact Checked By: Tom Sumrak

Reviewed By: Christina Gonzalez

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Auto Loan, Reviews

Review: PenFed Auto Loans

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

If you’re looking to buy a car and need financing, the dealership isn’t your only option. Credit unions can be an attractive alternative as they’re motivated to set up good deals for their members. Pentagon Federal Credit Union is a perfect example as PenFed auto loan rates start as low as 2.14% for new vehicles and 2.99% for used. Rates dip even lower for qualified borrowers who purchase a vehicle through its car-buying service.

PenFed auto loan details

PenFed defines a new auto loan as one where you are the original owner and the vehicle is a 2018, 2019 or 2020 model. Used car loans are available for all model years up to 60 months while 72-month loans are available for autos from model years 2015 through 2020.

Refinance loans. If you have an existing auto loan, you could also refinance to access the same PenFed rates. The only difference is that you’re only allowed to finance up to 100% of the vehicle’s value, not 110% like a new or used auto loan.

Payment Saver loan. Finally, PenFed offers a Payment Saver program in which you take out a PenFed auto loan with a smaller monthly payment in exchange for a higher interest rate. At the end of this loan, you will still have an outstanding balloon payment which you will then need to pay off, refinance to another loan or cover by selling/trading in the vehicle.

 

New auto loan

Used auto loan

Payment Saver

APR range

2.14% to 17.99%

2.99% to 17.99%

Starts at 2.99% for new auto loans and 3.74% for used.

Loan amounts

$500 to $100,000

$500 to $100,000

$10,000 to $100,000

Loan terms

36 to 84 months

36 to 72 months

24 to 60 months

Credit requirements

Minimum credit score of 610

Minimum credit score of 610

Minimum credit score of 610

Maximum LTV

110%

110%

N/A

The fine print

At PenFed, the best rates and flexible loan amounts are available on the shortest terms. For example, if you want a 36-month PenFed new auto loan, the minimum amount can be $500 and the lowest possible APR is 2.49%. But if you want a 72-month new auto loan, the minimum amount must be at least $15,000 with a lowest possible APR of 3.99%.

Loan to value ratio: For all of its auto loans except for a refinance, PenFed Credit Union offers 110% LTV financing, meaning you can borrow more than the actual value of the vehicle to cover costs like tags, taxes and extended warranties. But be careful when borrowing more than your car is worth — you don’t want to become upside down in your auto loan.

PenFed Credit Union does not have geographic restrictions on its auto loans, which are available nationwide. Its Payment Saver program is not available for Smart cars, trucks and SUVs. PenFed Credit Union also doesn’t offer financing for other vehicles like boats, RVs or motorcycles.

PenFed’s car-buying service

You could shop for an auto loan and the vehicle itself through PenFed Credit Union’s car-buying service. Through its website, you can search an online database of both new and used vehicles from dealers certified by car-buying firm TrueCar.

To use this program:

  1. First, search local listings online.
  2. If you find a vehicle you like, fill out a contact form to get in touch with a certified dealer.
  3. Set up your PenFed Credit Union financing.
  4. Test-drive the car at the dealership and, if you’re happy with it, sign the paperwork to complete the purchase.
  5. Report your purchase to take advantage of additional benefits.

Pros and cons of PenFed’s car-buying service

PenFed says members who use this service save an average $3,350 off a new car’s MSRP. But the biggest advantage might be a lower APR: as low as 1.49% for PenFed’s new auto loan and 1.99% for its used auto loan, a full 1% lower than its standard rates. You would also be eligible for additional benefits including $1,000 to cover insurance deductibles if you’re in an accident.

Downsides are that you’re restricted to TrueCar’s listings at specific dealers that do not guarantee that you’ll receive the lowest possible price. It’s possible you could get a lower price on your own at dealers of your choosing. But if you’ve done your research on your car, compare it with the price you receive through PenFed Credit Union.

How to apply for an auto loan with PenFed

Since PenFed is a credit union, you need to be a member to use its loans. However, you can apply for a new or used auto loan first to find out what they’d offer before you join. For the refinance and the Payment Saver program, you need to be a member to receive an offer, but you can sign up at the same time as your loan application.

Here’s how it works: Apply using PenFed’s online application. The application will ask for:

  • Amount you’re trying to borrow
  • Your income
  • Your outstanding debts
  • Your Social Security number (to pull up your credit score)
  • Your address and other contact information.

Preapproval: If you’ve been a member of PenFed Credit Union for more than 90 days, you may be eligible for a preapproved auto loan. Getting preapproved let’s you know how much you could borrow before you start looking at vehicles. Once you submit your application, PenFed may be able to make an instant decision but it can also take up to 48 hours to review everything.

To help you plan for your loan, you could use the PenFed auto loan calculator to punch in information about your loan: amount, down payment, interest rate and your trade-in value to arrive at your approximate monthly payment and how much you’d owe in interest. You could also use our auto loan affordability calculator to start with your preferred monthly payment and work backward to a car price that fits your budget.

Can anyone join PenFed Credit Union?

Because PenFed Credit Union has an open national membership charter, anyone can join from anywhere in the country.

When you sign up for Pentagon Federal Credit Union membership, the online application will present you with a number of options for how you can qualify:

  • Past or present military service
  • If you work or are part of a list of accepted employers and organizations
  • You live in one of PenFed’s covered locations
  • You have a family member who is part of PenFed Credit Union

If one of the above doesn’t apply to you, you can make a $15 donation to join Voices for America’s Troops or a $17 donation to join the National Military Family Association to qualify for PenFed membership.

As part of setting up Pentagon Federal Credit Union membership, you’ll need to open one of its savings/share accounts with a balance of at least $5. It’s a free account that does not charge a monthly maintenance fee. This applies even if you just want to take out a loan. You also may need to provide your driver’s license, Social Security card and a recent utility bill so PenFed can verify your identity.

Pros and cons of financing through PenFed

PenFed auto loans can go as low as 2.14%, even 1.49% if you use its auto-buying service. That’s highly competitive even by credit union standards. However, you need excellent credit to qualify for its best rates. PenFed’s minimum loan term is 36 months for a new or used auto loan — you can’t take a shorter loan than that.

Pros

Competitive interest rates – PenFed rates go as low as 2.14% for new auto loans, well below the average auto loan rate of 5.66% for borrowers with the best credit.

Better deals through its auto-buying service – If you use the PenFed car-buying service, not only could you save money on your vehicle purchase, you could also qualify for a substantial discount on your auto loan APR.

Easy online application – There’s no application fee and you can apply for PenFed auto loans online. For its new and used auto loans, you can also apply without being a credit union member and only join if you like its offer.

110% LTV – PenFed auto loans can go up to 110% of the vehicle value, so you can borrow extra to cover other costs like tags and taxes.

Cons

Tougher credit score requirements – PenFed Credit Union only accepts people with a minimum credit score of 610 for its auto loans, and you may need over 800 to get the best rates.

Membership required – If you aren’t a PenFed Credit Union member, you’ll need to join and open one of its savings accounts before you can take out an auto loan. This may require donating to charity if you can’t qualify for another reason like your military service.

Limited online/phone support – There is no live chat option online and the phone system can be a bit tricky for non-members. We were eventually able to get to a live person, but it took several attempts.

PenFed vs. Navy Federal Credit Union

Navy Federal Credit Union is a close competitor to PenFed as they both have strong ties to military servicemembers and their families. When it comes to auto loans, Navy Federal Credit Union is another excellent choice. Its starting APRs and loan terms are nearly identical to PenFed and it also offers a car-buying program to help you find good deals.

Pros of Navy Federal: One key difference is that Navy Federal Credit Union has a wider range of vehicle loans. Besides auto loans, it offers motorcycle, boat and RV loans while these are not available at PenFed.

Cons of Navy Federal: On the other hand, qualifying for membership at Navy Federal Credit Union is more difficult. You are only eligible based on your past/present military service, because you work for the DOD or because a relative is a member. PenFed does not have these restrictions and everyone can use its products. Also, Navy Federal’s car-buying service does not offer a discount on its loans, like the one at PenFed.

If you are eligible for both credit unions, it may be worthwhile applying for an auto loan with each one. Neither charges an application fee so there’s no cost to see who would come up with the best deal for your financing.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.