How old to get a car loan

how old to get a car loan

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    How to Buy a Car with Bad Credit

    You're in a tough spot, and it seems like there's a whole army of dishonest "Bad Credit, No Credit, No Problem" dealers and lenders out there just waiting to take advantage of you. But here's the good news: People with bad credit can find cars and financing if they're willing to do some homework and shop around a bit. Here's how consumers with credit problems can still get a decent deal on a new set of wheels.

    How old to get a car loan

    Consumers who think they have bad credit should start their car-shopping efforts by getting copies of their credit reports at least a month before even stepping into a dealer's showroom. After all, knowing what's in these reports — and making sure all information is correct — can help you keep dishonest car dealers or loan brokers from putting you into worse loans than you deserve. If you've ever had a credit card, car loan, student loan, mortgage or other debt, chances are credit bureaus Equifax, Experian and TransUnion each have their own credit report on you. But under federal law, they must each give you a free copy of their reports once per year. To get your free copies, go to the industry's official AnnualCreditReport.com Web site. (Beware of imitators with similar URLs.) Carefully check all three bureaus' reports for errors or negative information that's more than 7 years old. If you find any problems, AnnualCreditReport.com has online tools to help you correct them.

    Once you've corrected all errors, you should buy a copy of your "FICO" credit score (named for the credit-software firm originally called Fair, Isaac & Co.). FICO scores normally come with your credit report, but federal law doesn't require credit bureaus to give you them for free. However, you can buy a copy of your score for around $20 from Equifax.com or MyFico.com (Both also sell packages that include a free FICO score plus some credit-monitoring services that you might or might not want.) FICO scores run from 300 to 850, and people with high scores pay much lower interest rates than those with low ones.

    Don't deal with "bad-credit specialists"

    How old to get a car loan

    Once you've checked out your credit situation, deal with mainstream auto dealers and lenders. Good dealers will usually put customers with bad credit into high-interest loans, but some bad-credit specialists will stick you into deals that are virtually designed to fail. Miss one or two payments on such a loan, and a bad dealer will be looking to repossess the car. That's because "repos" often involve big fees that serve as a major source of income for dishonest dealers. Another thing to watch out for: Some dealerships will imply that you need to buy extended warranties, clear coating or other expensive (and often unnecessary) add-ons if you want financing. You don't.

    How old to get a car loan

    As an alternative, look for a nonprofit lender that offers personal loans. Capital Good Fund , for instance, offers car loans from $8,000 to $20,000 for residents of Florida and Rhode Island only for the purchase or refinance of a new or used car; while they finance vehicles sold through most dealers, they encourage borrowers to work with dealers like Hertz, Enterprise Car Sales, or others that have high levels of customer satisfaction. In addition, they offer loans up to $2,000 for a variety of purposes, including the purchase or repair of a vehicle or paying off high-interest debt, to residents of Florida, Rhode Island, and Delaware. They are an example of a United States Treasury certified Community Development Financial Institution, or CDFI. Look up the nearest CDFI in your area to see if they can help you.


    How to get the best car finance

    How old to get a car loan

    It is a way of borrowing money to buy a vehicle. The finance agreement is normally secured against the vehicle you buy, and you do not own the vehicle until the agreement ends.

    When you apply the lender decides if you can afford the finance and runs a credit check.

    While vehicle finance is often sold by car dealerships at the same time as their vehicles, you can shop around and get quotes from other lenders to get a better deal.

    You can use vehicle finance to buy brand new or second hand vehicles, including:

    It is a cash loan that is used to buy a vehicle - you own the car straightaway and owe the loan balance to the lender.

    Logbook loans are loans that are secured against the value of your car, not loans specifically to buy a car.

    This depends on the type of vehicle finance you choose, the main costs are:

    The deposit: This is the money you pay upfront to get your vehicle. You do not always have to pay one, but if you do, a larger deposit may reduce your monthly payments.

    The interest: This is the cost of borrowing money over the term of your agreement. Most agreements charge interest, but you can sometimes find 0% or low rates.

    The fees: This is charged for things like damaging the vehicle, exceeding your mileage limit or missing payments. There may be a purchase fee too, so check carefully.

    There are several types you can choose from and they all have different pros and cons:

    With a hire purchase agreement, you put down a deposit to buy a vehicle and pay off the rest over time, normally between one and five years but sometimes longer.

    For example, you buy a new car for Ј12,000 and put down a Ј2,000 deposit, the remaining Ј10,000 is repaid over the next five years.

    At the end of the hire purchase agreement you will have paid off the vehicle in full and there is nothing further to pay.

    Low interest rates

    Flexible repayment term

    No mileage restrictions

    Higher monthly payments

    Minimum 10% deposit needed

    Only own vehicle at the end

    Personal Contract Purchase (PCP)

    Sometimes known as Personal Contract Plans, PCPs are often sold by dealerships alongside their vehicles - they normally last for between two and four years.

    You pay a deposit at the start of the PCP and monthly instalments for the duration of the term. At the end of the plan, you can choose to pay a lump sum to buy the vehicle - this is sometimes called a balloon payment.

    For example, you buy a new car for Ј12,000, pay a Ј1,000 deposit, pay instalments totalling Ј5,000 over three years and then pay a Ј6,000 lump sum to own the car.

    If you decide not to pay the final payment you can either hand the car back, or exchange it for a new PCP agreement and get a new car from the dealership.

    Lower monthly payments

    Small deposit needed

    Flexibility at end of agreement

    Pay optional lump sum to own car

    Only own vehicle at the end

    Yes, you can return it and cancel your PCP early if you have made at least half of the payments on your agreement - this is called voluntary termination.

    This is the minimum amount of money your car will be worth at the end of your PCP agreement.

    They are very similar to PCPs, except the final payment is compulsory. They are much less common than PCP deals but some lenders still offer them.

    This is when you rent a vehicle from a dealership - so you never actually own it. The rental payments cover how much the vehicle will depreciate over time.

    For example, you choose a new car, set mileage limits for three years and pay monthly instalments. After three years, you hand the car back.

    PCH agreements are popular with businesses who want to offer their employees company cars and never want to own the vehicle.

    No concerns over depreciation

    Few maintenance costs

    Must get comprehensive insurance

    Never own the vehicle

    A car loan is a normal personal loan where you borrow the cash and use it to buy your vehicle. You will owe money to the lender but they will have no claim on your car.

    For example, you borrow Ј12,000 and use it to buy a car. You owe the lender Ј12,000 and pay it back over the agreed term.

    The most you can usually borrow using a personal loan is Ј25,000 and they can last for between one and seven years.

    No mileage limits

    No deposit needed

    Own the car straightaway

    Rates may be higher

    Application may take longer

    Risk of negative equity

    Vehicle finance is not always the best way to buy a vehicle, there are several alternatives, including:

    Cash: This is often the cheapest option if you have the money available, is hassle free and will not involve a credit check.

    0% money transfers: This is where you transfer cash from a credit card into your bank account and use the money to buy your car. You pay a transfer fee (around 4%) and have a set number of months to pay off the balance interest free.

    Overdrafts: This is where you borrow money from your bank account to pay for your vehicle but the interest rates on overdrafts can be expensive.

    If you have the cash to buy the vehicle upfront, then you can sometimes get a discount when you buy it.

    You need to be confident you can afford your choice, both now and for the duration of your finance agreement.

    You need to factor in your running costs in your calculations including:

    If you are unsure, look at a lower spec car or one with a smaller engine. Buying new comes at a cost too and you could save up to 30% off by going second hand.

    Most agreements ask you to pay monthly by direct debit until the end of your term.

    You will usually have to pay a fee, how much depends on your finance agreement.

    If you miss several payments, the lender could take your vehicle away and add a default notice to your credit record.


    Car Financing for Teens – How It Works

    How old to get a car loanTeenage drivers often consider an auto loan — financing — as a way of getting the car they want. But it isn’t always the best solution. It might be no solution at all, especially for those under 18 years old. For those 18 or over, there may be a number of financing options.

    Be Careful Taking a Dealer’s Advice

    Many teens make the mistake of taking dealers’ advice regarding financing and trade-in situations. For example, if the teen has a trade-in and is still paying on a loan, there’s a good chance the loan is “upside down” which means the loan balance is more than the car is worth. A dealer will offer to “help” by “paying off the old loan” and rolling the negative loan balance into a new vehicle loan, instantly creating an even worse upside down situation — a cycle that is often repeated multiple times, making the problem worse at each turn of the cycle.

    This is a bad way for a teenager to begin a lifetime of buying cars and managing money. It can easily result in loan defaults, repossessions, and credit problems that will haunt them for years to come.

    See our First Car Guide web site for much more information and advice on teenagers, first cars, and automobile financing. The information on this web site is essential to teens buying a car for the first time. It covers a wide range of topics from picking the right car to finding insurance.

    Another in our network of web sites, Used Car Advisor, is also an excellent source of advice and tips for teenage car buyers, particularly learning how to avoid common car scams.

    Stay Away from Problem Financing

    Teens often have limited finances and are desperate to find a way to buy and finance a car.

    The most common method for teens under the age of 18 to get a car is to have their parents buy it for them, possibly with an informal family loan arrangement. The car must be in the parents’ name, as must the registration, title, tags, and insurance. When the child becomes 18, the parents can “sell” the car to him/her to change ownership. If financing is involved, the teen could get a conventional car loan from a bank or credit union, although without a credit history, parents would have to co-sign. It’s a great way for young adults to begin building credit for themselves.

    For those 18 years old and over, it is common for parents to co-sign for the young buyer on a conventional auto loan, assuming the teen has an income sufficient to repay the loan. Even though a parent co-signs, the car and loan are in the teen’s name. See, Do I Need a Co-Signer?

    Avoid Buy-Here-Pay-Here Car Dealers

    Unless it’s the only option open to you, try to avoid “buy-here-pay-here” (BHPH) car dealers, who sell older cars, charge high interest rates, and are very intolerant of late or missed payments. Much of their business is selling, repossessing, and reselling the same cars. These types of dealers don’t use banks or finance companies to provide customer loans, as do conventional dealers, and therefore can ignore customer’s credit problems. However, many customers soon realize the disadvantage of buying from such dealers — unreliable and overpriced vehicles, no warranty or return policy, super-high loan interest rate, and strict repayment policy.

    Teens and Credit – Bad Credit or No Credit

    Many teenage first-time drivers have not had time to establish a credit history, which can cause financing issues. Some do have a credit history, but have had late payments and loan defaults which reflect negatively on their history and creates a low credit score.

    Getting approved for a loan and buying car insurance are based on credit scores, which are determined by consumers’ borrowing history. This information can often be wrong or outdated.

    It’s always wise to know your latest credit score before looking for financing.

    Don’t let a car dealer surprise you with credit and financial information about you that you don’t already know about yourself.

    A poor credit score can result in very high interest rates, high insurance rates, high down payments, and even loan refusals. The recent downturn in the nation’s economy has created tighter credit, making it much more important to have a good credit score than ever before.

    Finding a source for loans is always a problem for new teen drivers. CarsDirect Car Loans is a well-respected car loan company that offers loans to people who have limited or poor credit, even no credit. This company’s rates for young drivers are some of the best.

    Auto Credit Express and InstantCarLoan.com are other excellent companies to get online car loans, expecially for people with no credit, poor credit, repossessions, or even bankruptcies. They specialize in providing auto financing for people with unusual circumstances. Compare rates and go with the best deal.

    Teenagers often get started in car financing by having a family member co-sign for them. This is the best way to get off to a good start and establish a good credit history for future financing.

    Teens should realize the importance of not overextending themselves financially and of making payments on time. A single late payment can result in credit score reductions that can take months, even years, to fix. A single repossession or loan default can be damage one’s ability to get loans and other credit for up to seven years.

    How old to get a car loan

    To help decide on a price range for a new or used car, it’s best to use a car loan calculator to experiment with vehicle prices and options that produce an affordable monthly payment. It’s important to understand the relationship of interest rate, loan term, and loan amount to monthly payment amount. Loan finance costs can be a substantial part of the overall cost of buying a car. Novice car buyers are often surprised that the total cost of buying a car is much more than the price of the car itself.

    When buying a car, teens should make sure they can not only afford the monthly payments but also the cost of auto insurance (very expensive for teens), gas, maintenance, annual fees, and minor repairs not covered by insurance.

    Although teens car easily find cars online at sites such as Craigslist and eBay, buying cars that you can’t go see, can’t drive, can’t inspect, and can’t talk to the seller face-to-face is not recommended and is an invitation for disappointment and even to be scammed. It’s safer and smarter to buy locally and from an individual or reputable dealer. We recommend using our Car Deal Finder to find cars in your area.


    How to buy a car with bad credit

    How old to get a car loan

    The do’s and don’ts of buying a car when you have bad credit

    by Kate Williams, Ph.D.

    How old to get a car loan

    ConsumerAffairs Research Team

    How old to get a car loan

    Low credit is generally defined as a score under 629. You can have low credit for a variety of reasons, including a history of making late payments to lenders, identity theft or simply not having enough years of credit history. Your credit score dictates what type of interest you’ll end up paying on your car loan, and a low score means a higher interest rate.

    The good news is you aren’t necessarily destined to pay a high interest rate on your auto loan for five or more years just because your credit score isn’t good. This guide will help you figure out how your credit score affects your auto loan along with your options for getting an auto loan with affordable payments if you have bad credit.

    I’ve prepared this guide with the following groups of people in mind:

    Young adults who have a short history of credit and a low credit score

    Immigrants who have not established a long credit history and need a vehicle

    Anyone with less than great credit

    To find out what options are available for consumers with bad credit who need to buy a car, I talked to nationally-recognized credit expert John Ulzheimer, who has over 24 years of experience in the consumer credit industry, and Beverly Harzog, consumer credit expert and author of The Debt Escape Plan. In addition, I read 14 publications about credit scoring and securing auto loans. These sources provided me with insight into how credit scoring works, how it can negatively impact your ability to get a low interest rate and what you can do to keep yourself from getting even further into debt when you have to buy a car with bad credit.

    Before we start talking about how to buy a car with bad credit, let’s talk about what a credit score is. Your credit score is a three digit number that is calculated based on your credit history. While there are several credit scoring calculators out there, the one that controls the market, and therefore the only one you really need to worry about, is your FICO credit score. The FICO credit score scale ranges from 300-850.

    According to Ulzheimer, any score under 540 is at risk of being denied an auto loan of any kind, and a score of 740 or higher is likely to get the best interest rate, although your results may vary based on what is in your credit score and who you are working with as a lender.

    How old to get a car loan

    What is counted in your credit score?

    Your credit score is based on your credit history, which includes credit cards, student loans, auto loans and mortgages. In addition to the type(s) of credit you have, your FICO score also calculates your payment history including late payments, how long you have had accounts open, how often you use your accounts and how many new credit lines you have open.

    Because every individual’s credit history is different, certain factors will hold more weight than others. For instance, if you do not have a long credit history and have several late payments, your credit score will be factored differently than someone with a long credit history and the same amount of late payments.

    Even though every score is factored based on the individual’s personal credit history, FICO maintains a particular breakdown for calculating credit scores:

    Payment history (35 percent)

    Your payment history makes up the biggest percentage of your FICO score, which can be good or bad news depending on how often you pay your bills on time. If you are a frequent late-payer, now is a great time to start getting those payments in on time. The good news is that because payment history makes up such a large portion of your overall score, it can be relatively easy to bump up your credit score if you just start making payments on time. Payments that have gone into collections and judgements are counted here.

    There are a few things FICO considers in this category. First, what is the overall amount of money you owe on all of your accounts? Keep in mind that even if you pay off multiple credit cards every month, your FICO score may reflect a balance depending on what your lender has reported to the credit bureau. Generally the balance of your last statement is what is used when you pull up your credit score. Your FICO score will also consider what you owe on specific accounts such as credit cards and loans.

    In addition to how much total money you owe, your score will calculate how close you are to reaching your credit limit. Individuals who are close to maxing out their credit limit are a higher risk for lenders than those who are not. Having a high percentage of accounts with balances also makes you a high risk for lenders.

    Finally, your score considers how much you still owe of the installment on a loan. Paying down your installment is a good sign to lenders that you can manage your debt.

    Length of credit history (15 percent)

    Your FICO score takes a look at how long you have had open accounts, how often you use those accounts and the average age of all of your accounts. It is still possible to have good credit even if your accounts are new, based on the other factors in your FICO score.

    Credit mix in use (10 percent)

    Your FICO score will be higher if you can demonstrate an ability to manage different types of credit lines such as a car loan, mortgage and credit cards.

    Opening several new lines of credit in a short amount of time is a red flag for lenders, especially if you have a short credit history.

    While this is the general breakdown of your FICO credit score, keep in mind that your score will be weighted differently depending on your particular credit history. If you only have one credit account, for instance, your score will look different than if you have multiple credit cards and a mortgage.

    How old to get a car loan

    How bad credit affects your car loan

    In general, a credit score that is 740 or higher will get you the best interest rate on an auto loan. If you have great credit, you might be able to score an auto loan as low as zero percent (yes, you read that right). If you have terrible credit (lower than 580), you might be looking at interest rates as high as 20 percent or even close to 30 percent. That can add up to paying thousands of dollars extra for an automobile with bad credit versus good credit.

    Lenders want to feel confident that borrowers will pay their money back on time and in full, which is why consumers with good to great credit get the best interest rates. They pose a low enough risk based on their credit history that lenders feel assured they will pay their debt back responsibly.

    Consumers with bad credit, on the other hand, pose a high risk. Things like missing payments, defaulting on loans and having a high debt-to-income ratio all raise red flags for lenders, who will charge a high interest rate when they do not feel confident they will get back the money they are lending.

    In addition to reviewing your credit score, lenders will also take a look at other factors that are not included in your FICO report such as :

    What type of loan you are trying to get

    Your work history

    How to shop for an auto loan when you have a low credit score

    Where you can get auto loans

    Anyone shopping for a car should also shop around for a lender. It’s a misconception that you have to settle for the first financing offer you receive, and, in fact, you shouldn’t consult with only one lender any time you need to take out financing for a purchase. You can get an auto loan from several sources including:

    Dealer Financial Services Group (DFSG)

    7 steps to take to get an auto loan

    Regardless of the reason for it, having a low credit score can make it difficult to buy a car. In general, car dealerships raise interest rates for buyers with low credit scores, also called subprime buyers, because subprime buyers pose a greater risk than buyers who have great credit. However, even when you have bad credit, it’s important to reach out to a reputable bank or lender to see what options are available for financing your auto loan instead of automatically accepting a high interest rate. Follow these steps to secure a fair loan:

    1. Ask yourself how badly you need a car

    Are you buying a car because you really don’t have any other mode of transportation? Or is your car more of a luxury item? Both Ulzheimer and Harzog recommend only buying a car with bad credit if you are in an emergency situation.

    Before you start shopping for a car and an auto loan, take a closer look at your situation to see if you have another option such as using your current car, carpooling or using public transportation for 6 months to a year while you work on rebuilding your credit.

    “If getting a car isn't an emergency, I suggest getting a secured card and spending at least six months (a year is better, though) responsibly using the card,” says Harzog.

    A secured card is one way to build credit when you don’t have a credit history, and it can also be used to rebuild credit. You make a deposit in the bank when you open your secured card to secure the card, and you get that deposit back when you close your account.

    “When you're using a secured card, you're actually using credit,” Harzog explains. “As long as the card issuer reports your payment history to the three major credit bureaus, you'll begin to rebuild your credit history and bring up your FICO score.”

    However, “if you have bad credit because you misused credit cards, this is not a good idea. Don't use credit cards again until you feel comfortable you can control your spending.”

    If you must get a car and have bad credit, then prepare yourself for a high-interest loan. If you have high credit because of your payment history (which makes up 35 percent of your credit score), then start paying your bills on time. Even a few months of paying bills on time can bump up your credit score. If you can push buying a car off for even a month or two, you might end up with a high enough credit score to make a difference when it comes to interest rates.

    2. Check your credit report

    Don’t take a dealership’s claim that you have bad credit at face value. You are allowed to perform a free credit report check once every twelve months. See for yourself what your score is, what activity has affected your score and if there is any suspicious activity on your report. Bring your credit report with you when you meet with potential lenders so that you are on the same page when you discuss your financing. Harzog suggests talking to your lender about your credit history “if you have a good reason for a negative item” to see if that affects your interest rate. Some lenders may be willing to work with you depending on the reason for your low credit score.

    “Don’t think that just because you have bad credit you can’t get a car loan,” says Ulzheimer. In addition, “don’t just assume that your credit is bad.” Your definition of bad credit might not be the same as your lender’s definition, and different lenders will offer different rates. Do your research by finding out the rates various lenders charge so you don’t get taken advantage of.

    Ulzheimer recommends looking up a lender’s auto lending rate sheet to learn what the current rates are for new and used vehicles based on your credit score and bringing this information with you when you meet with a lender.

    It’s a cruel irony that applying for loans means lenders will check your credit score, and each check of your credit report negatively impacts your credit score. The good news is that scoring models usually count every credit inquiry performed by an auto loan lender within a 2 week time frame as just one inquiry. Because of this, it’s important to only apply for auto loans when you are actually ready to take one out. Otherwise you risk making your credit score problem worse.

    5. Opt for a shorter loan period

    You might have lower monthly payments with a five-year versus a three-year loan, but pay attention to the interest rate. Generally interest rates are lower for shorter term loans, meaning you will end up paying less for your car overall. Plus, you’ll end up with a few extra years in which you won’t need to make car payments so you can focus on paying off other loans to raise your credit score.

    6. Look for newer versus older vehicles

    Common sense might tell you an older vehicle will cost less, but the truth is older vehicles tend to charge higher interest rates than newer ones. Ulzheimer recommends anyone looking to finance a vehicle look at new cars first, and then newer used cars since these are the cars that tend to offer the best financing.

    However, it’s possible to find a better deal on an older used vehicle, so check out all of your options before deciding. You may end up finding an older vehicle you can afford to buy with cash, which would eliminate your need to get financing in the first place.

    7. Consider getting a cosigner

    Depending on your situation, getting a cosigner for your car loan might be your best option to get a loan at a reasonable interest rate. Consider looking for a cosigner if any of the following apply to you:

    Your income is lower than the minimum requirement for an auto loan

    You have bad credit

    Your debt-to-income ratio is too high to qualify for a loan

    You have a variable income

    Asking someone to cosign on an auto loan is a big deal, and Ulzheimer strongly discourages anyone from agreeing to be a cosigner. Your cosigner will be responsible for making your payments in the event you are unable to fulfill your loan obligations, so only take this approach if you are confident you will be able to make your payments in full and on time. Provided you are able to make your payments, having a cosigner on your loan can help boost your credit score.

    How old to get a car loan

    What not to do when shopping for an auto loan

    Shop at a “buy here pay here” lot

    You might have heard commercials from local car dealerships targeting subprime buyers, but be wary. Those “buy here pay here” dealerships will generally charge more money for cars than they are worth. “Buying a car from one of these lots won’t necessarily hurt your credit score, but it won’t help it either,” says Ulzheimer. That’s because these lots don’t have to report to the credit reporting agencies, meaning your credit score will remain the same even if you make all of your loan payments on time and in full.

    Let yourself get schmoozed by verbal promises

    It’s easy to believe a salesman, particularly when they’re telling you things you want to hear about your car loan. Don’t believe your car salesman or F&I officer based solely on verbal promises. Make sure everything is in writing before you agree to terms.

    Go car shopping without checking out your options

    A lot of consumers are misinformed about what their credit score is and what options they have for financing based on it. Do some research before you go car shopping to see what rates you are eligible for. If you are clearly uninformed, you could wind up signing on to an interest rate that is way higher than what you are eligible for. In addition, avoid talking about yourself as high-risk: the more desperate you appear, the more likely you are to have interest points tacked on unnecessarily, which just translates to money in your salesman’s pocket.

    When you’re already tight on cash, you don’t need to pay for extras that aren’t necessarily worth the money in the first place. Things like extended warranties, GAP insurance and credit life policies are all optional (regardless of what your F&I officer tells you) and could end up costing up to thousands of additional dollars over the lifetime of your loan.

    Sign anything without reading and understanding it thoroughly

    I know you just want to get out of the dealership and on the road, but if you remember only one thing from this article, let it be to read everything carefully before you sign and walk away. Neglecting this could end up costing you thousands of dollars and/or making your credit even worse depending on what is included in your contract. Ask questions if you don’t understand, and don’t be afraid to walk away and tell the F&I office that you need some time to think it over before you sign. They’ll want your business when you’re ready to give it to them, no matter how much of a fuss they make at the thought of you leaving.

    Things to look for include: penalties for prepayment, a loan with pre-calculated interest and who the primary buyer is when you are getting a cosigner.

    Leave the dealership before you finalize your financing

    This is a cruel trick played on eager consumers who just want a vehicle that can drive. Some dealerships will offer you financing “based on final approval,” and will let you drive off the lot before your financing is actually finalized. You, the unsuspecting consumer, are later told that your original financing wasn’t approved and are then slapped with a significantly higher finance rate. Don’t fall for this. Leave the lot in your old clunker, take the bus, walk home or catch a ride with a friend instead of driving off the lot in a car without approved financing.

    What to do if you end up buying an auto loan with a high interest rate

    “A lot of people don’t realize they can refinance their auto loans,” says Ulzheimer. “They think of refinancing for house loans and student loans, but they don’t know that they can get a better rate on their auto loan by refinancing when their credit score gets better.”

    If you absolutely need a car and you end up with a punitive interest rate, keep in mind that you can refinance in 12 months, or whenever your credit score goes back up. Talk to your lender to find out what your options are. You don’t need to pay 30 percent interest for five years if your credit score improves and allows you to get better financing.

    Pay more than the minimum payment, and pay on time

    Another way to reduce the time period of your loan is to pay more than the minimum payment each month to reduce the amount of overall payments that you make. If you can’t pay more than the minimum, at least make sure that you make your payments on time since, even at a high interest rate, an auto loan will still help your FICO score.

    An auto loan is “an installment loan and it contributes to the ‘mix of credit,’ which is a factor in your FICO score,” according to Harzog. However, “it's only 10 percent of your score so don't expect to get a big bump in your score.”

    Whether you have no credit history or you have made some mistakes in the past, having a bad credit score can make it difficult to shop for a car loan. However, many banks offer auto loans to people with bad credit. Start by asking your local bank or credit union where you keep your checking and/or savings account to see if they can help you with an auto loan. Larger national banks can also help you secure an auto loan if you have bad credit.

    In general, it is better to go with a bank or an auto financing lender rather than the car dealership down the street that is offering a “buy here, pay here” deal. If you do wind up with a high interest rate on your car, work on rebuilding your credit score so that you can eventually refinance. As Harzog says, “When you have good credit, you often have good options.”



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