|
Auto Loan Facts
There
are many things lenders may require of you for qualification of
a “bad credit” auto loan. These are things that usually are
not required of people with good credit.
The Auto Lender that will approve your auto loan needs to
be sure that you will be able to make payments considering
blemishes in your past credit history. Some of the requirements
that may apply are:
Drivers
License
Lenders
and/or dealerships will ask you for a current drivers license
(for obvious reasons) as well as proof of insurance
Make sure your drivers license is valid and is the same state of
where you reside.
Proof
of Residence
Expect
to bring a phone bill preferably with your name on it or
electric, water, cable, etc… This will show you reside at that
address.
Proof
of Insurance
Yes.
If you currently have auto insurance, take a copy of your policy
with you to the dealership. If not, your local dealership
can usually provide you (through an affiliate) with low cost
auto insurance so you can still take immediate delivery. This is
designed to protect both you and the auto loan and lender,
should you have an unfortunate accident. This will help pay off
the auto loan, so you can purchase another car, truck or van
with the credit you helped protect.
Proof
of Income
If
you have excellent credit, you probably will not need to prove
your income. The lender is strictly looking at your ability to
repay the auto loan. You must have a means to make the
monthly payments. When deciding whether or not to make you
an auto loan, the lender will be looking at your employment and
income. An auto loan is far easier to repay if you are
currently employed! This will help establish your good
credit for future auto, home or other loans in your future.
This is done on a case-by-case basis
.
-
Hourly/Salary
– Last 2 pay stubs
-
Overtime
– Minimum 6 months on a regular basis to consider as
income
-
Self
Employed – Last (2)
years Tax returns including the Schedule C
-
2nd
Job – Minimum 6 months on the job in order to qualify as
additional income
-
Tips
– Must be claimed on your taxes or some cases bank
statements can be used to prove this income
-
Other
Income - Disability, child support, alimony, social
security, and retirement
How
to Calculate your Income Correctly
I
have seen too many applications get turned down (banks would
call this “debt to income ratio”) or rejected because the
gross monthly income (before taxes) was never calculated
correctly.
How to calculate:
Hourly
Rate: Hourly
rate x hours worked per week x 52/12 = Gross Monthly Income
Salary
Bi-weekly (every 2 weeks): Salary
x 26/12 = Gross Monthly Income
Salary
Semi-Monthly:
Salary
x 2 = Gross Monthly Income
For
example, lets assume your are being paid $12.00 per hour for a
40 hour work week:
-
·
$12.00 per hour x 40 hours = $480.00 per week
-
·
$480.00 x 52 weeks = $24,960.00 per year
-
·
$24,960.00 / 12 months =
$2080.00 per month
Your
gross monthly income would be $2080.00.
Most
banks as a general rule will take 50% of your gross monthly
income that your total debt cannot exceed which in this case
would equal to $1040.00.
Calculate
your debt:
First
add all your minimum monthly payments that would be reported on
your credit report that are current:
-
·
Target
$25.00
-
·
Capital One MC
$15.00
-
·
Mobil Gas Card
$35.00
The
total would be $75.00 but what if you owe on an education loan
but haven’t started paying on it yet, the banks will take out
3% of the total amount owed (assuming you will be paying this
during the course of your auto loan)
$5000.00
education loan x .03 = $150.00 per month
Your
debt so far would $225.00.
Now,
if you have a mortgage payment in your name this amount would
already be included with your credit cards and other debt that
shows on your credit report.
However, if you rent or living with family, generally
they will subtract at least $300.00 for rent unless you entered
in a specific amount above that.
Even if you state you pay $0 (such as living with
relatives, friends), they still will subtract $300.00 unless you
have proof of a home you reside in is paid for.
Note:
This would include your utility bills as well.
Your
debt so far would be $225.00 + $300.00 = $525.00
Depending
on the finance company, they may consider food/living expenses
such as gas and maintenance on your vehicle, which could be a
minimum amount of $75.00.
Your
debt so far would be $525.00 + $75.00 = $600.00
Car
Insurance is also included of $50.00 to $100.00 depending no the
bank since it is mandatory to have full coverage on the vehicle
during the course of the loan.
Your
debt so far would be $600.00 + $100.00 = $700.00
In
the beginning, we stated that your bills could not exceed
$1040.00 and by subtracting $700.00, this would leave you with
$340.00 left available to make your car payment.
However, banks can take other factors into consideration
not stated here.
50%
of your gross monthly Income $1040.00 – Total Debt of $700.00
= $340.00 Maximum Payment
Down
payment
Usually
yes. However, banks are getting more and more aggressive
with their auto loans and may finance 100% of your new or used
car or truck purchase (on a case by case basis). Many
people wonder whether or not they need a down payment. With a
bad credit auto loan you generally need some sort of down
payment. This does not have to be a large down payment. Remember
that the dealer wants to sell the car and the amount of the down
payment is negotiable. They will generally work to fit your
needs and available funds. However, if they cannot work with you
and you are required to put money down to purchase a car, you
can always applying for a pay
day loan.
There is no credit check so your
past credit history does not impact the loan approval process.
All you need is an income of $1000.00 a month, a checking
account and be at least 18 years old. You can have the money
deposited into your account by the next business day.
References
The
last thing that they will want you to bring is at least 6
references to include their name, address, and phone number
where they can be reached.
Co-signers
One
of the best ways to improve your chances of being approved for a
bad credit auto loan is to have a co-signer. The co-signer is
liable for the payment of the loan and will have to pay if you
default. Because the co-signer is liable, his or her good credit
will help you to be approved for the loan.
Going
to the Dealership
When you are
ready to go to the car dealership especially when you have bad
credit can be frustrating because your options are limited when
it comes to picking out a vehicle. However, when you
first arrive at the dealership, don't spend a lot of time
finding a vehicle unless you know that you can get approved
first since its up to the lender how much they approve you for
and what exceptions they will grant. The last thing you want to
do is spend hours at the dealership looking for the perfect car
and then find out that you are not able to get approved or get
approved for less money with restrictions.
Cars,
especially new ones, depreciate (become less valuable) very
quickly. In other words, a new car may suddenly lose $2000 in
re-sale value the moment you drive it away from the dealer.
Also, keep in mind that during the early part of the repayment
period, most of the payments are consumed by interest charges,
so the consumer's equity will grow very slowly. The loan often
is much greater than the wholesale value (based on year, make,
model, options and miles) of the car so refinancing may be out
of the question for the first couple of years or longer of
owning the vehicle. If you are thinking about refinancing
your vehicle or trading it in within the first couple of years,
make sure that your LTV (loan to value) doesn't exceed 150%
otherwise chances are of doing either are less than likely.
Previously,
every time your credit report was pulled, an inquiry would show
up on your credit report and would lower your score very
quickly. However, that isn't the case any longer as long
as you're shopping for the same type of loan within a two-week
period. For example, you found a car you liked at a local
dealership so they pulled your credit report to determine which
lenders they are going to fax your information. They fax
it to 3 different lenders to see who will approve you with the
best interest rate, highest amount, longest term and smallest
down payment required. Of course, all 3 lenders will have
to pull your credit report also however after the first
dealership that pulled your credit report your credit score
won't be affected no matter how many times a bank, finance
company or a dealership pulls your credit report.
Usually, a
dealership can submit your application to a lender without a
specific car in mind in which they will approve you for:
The Total
Purchase Amount - this can include the price of the vehicle
plus tax, title, warranty and any insurance you decide to
purchase which includes disability, life or gap (optional)
Payment
Call - this is the maximum monthly payment that they decide
you can afford to pay based on your debt to income ratio which
will vary between lenders however typically it is 50%
The
Interest Rate - The lender will approve you for specific
interest rate which depends on your credit score.
Generally, the lower your score is, the higher your interest
rate will be. However, you can still negotiate with the
dealership on the interest rate because it is not a fixed rate.
Most of the time the dealership will give you a higher interest
rate than what the bank approved you for. This is how the
dealership can make a lot of money from you when they sell you a
vehicle. However, this rate can still be lower than going to
another dealership that uses the same lender or getting a loan
directly with that lender yourself. A dealership that
sends 75% of their business to a lender will more likely approve
a loan or approve exceptions for a loan than a dealership that
sends only 25% of their business to the same lender which are
called indirect loans. Some lenders will provide loans directly
with the public which are called direct loans. This type
of loan will allow you to purchase directly from a dealership or
through a private party. However, it is difficult for
someone with bad credit to get approved for that type of loan.
Every
state has a maximum interest rate they are allowed to charge and
sometimes it makes it harder for the consumer to qualify for a
car loan. As an
example, Arkansas has an interest rate cap of 8%, which means
that unless you have perfect credit you might as well forget
about getting a car loan. Traveling
to a neighboring state such as Texas, Tennessee, Missouri, or
Mississippi is the only way that customers looking to purchase
with less than perfect credit can purchase.
Term of the
loan - The make, model, and year of the vehicle will
determine the term (how many months) the bank is willing to
finance on the loan however in some cases how many miles on the
vehicle may also effect the term. For example, the average miles
a used vehicle should have per year is 15,000 miles according to
Kelley Blue Book which determines the wholesale value of a
vehicle. If you choose a vehicle that is 2 years old with
50,000 miles on it, chances are the lender will shorten the term
of the loan since a vehicle with higher miles has a greater
chance of breaking down. This could lead to money out of
your pocket for repairs and as a result not being able to pay
your car payments.
|
|
|
|
|
|
|
|
2000
and older
|
|
Model
Year
|
2006
|
2005
|
2004
|
2003
|
2002
|
2001
|
$6000+
|
$4000-
$5999
|
$2500-
$3999
|
Under
$2500
|
Term
|
60
|
60
|
57
|
54
|
48
|
42
|
36
|
30
|
24
|
18-12
|
The
Extended Warranty -
This is optional for anyone purchasing a purchase a used car.
However, it is something that you should purchase because
there is no way to know when or if the car you purchase will
break down. Usually, warranties cover pretty much
everything as long as you keep up the regular maintenance of the
car such as oil changes and tune-ups. For
example, the transmission could go out on the car and that could
cost a small fortune.
With
the extended warranty, there are different types of warranties
you can get that depend on how many years it will cover, miles,
and what parts it covers. However,
the important thing to remember is this is not a fixed rate
either which means you can negotiate the price of the warranty
with the dealership as well.
A dealership can make a huge profit from selling you the
extended warranty. You can figure out approximately how
much the car dealership is paying for the warranty by taking
half of the price they try to sell it to you for. Only negotiate
the price of the warranty after you have negotiated on the price
of the car, the trade in (if you have one) and the interest
rate. If a car dealership loses money on selling the
warranty, they definitely will try to add that amount somewhere
else in the car deal.
Simple
Interest Loans
Is
the best kind of auto loan you can get because it works like a
credit card (only you can’t charge anything on it).
-
If
you decide to pay more than your regular monthly payment,
you will see the difference going to your principal balance
and not the interest.
-
The
more money (even an extra 10 dollars a month) you pay
monthly and the faster you pay your principal balance (even
paying early can save you a lot of money in interest down
the road.
-
If
you decide to refinance, you only refinance the principal
balance not the interest.
Fixed
Interest Loans
Expect
almost your whole monthly payment go towards paying off the
interest first which means forget about refinancing or trading
in your vehicle anytime soon.
-
On
a six-year car note, expect to pay at least 2-3 years before
getting into a situation that you won’t be “upside down
on your vehicle”. In
other words, you owe more on the car than what it is worth
according to the Kelley Blue Book.
Lease
Buyout
It's
a great idea if you only expect to keep the car for a couple of
years and don’t plan driving around USA.
-
Depending
on the Lease Agreement you sign, the average amount of miles
allowed per year is about 12,000 to 15,000 and anything over
that amount if you decide to return your lease at the end of
the agreement is very costly.
-
Choosing
a lease means keeping that vehicle for the full term of the
agreement. You
are not able to refinance or what is called a lease buy out
until the lease agreement expires.
At that time, if you decide to purchase the vehicle,
you must find a bank to purchase the vehicle that requires
certain stipulations to include good credit.
Returning the lease early requires, in most cases, a
large penalty fee that can average a couple thousand dollars
if you want to keep your credit in good standing.
Refinance
Why
do people refinance their car loan? If
you want to lower your monthly payment or lower your interest
rate and does not cost anything, it's a great idea for almost
anyone.
Typically,
when you refinance, what you do is pay off the existing balance
and then sign a new loan with new terms. Before you even
apply for auto refinancing, you can do the homework to see if it
will work for you. First, call your lender for
a 10-day payoff on your vehicle. Since interest accrues on
a daily basis, the amount to pay off your vehicle also increases
until you make your next payment. The reason for getting a
10-day payoff is typically the lender who will be paying off the
loan has time to cut the check and mail it to the lien holder.
If the lien holder receives the check before the 10-day grace
period, there will be an overage check cut which then should be
mailed to the person on the loan.
Once you have
the payoff amount, you now need to figure out the value of your
vehicle. The
value of a vehicle can be found by consulting an auto
industry-pricing guide such as NADA or Kelley Blue Book or by
calling any bank or finance company that offer auto loans .
They will ask you what year, make, model, miles and an
additional options on your vehicle. Additional options can
include:
-
AC
-
Tilt
-
Cruise
Control
-
Power
Windows
-
Power Door
Locks
-
Tinted
Windows
-
Premium
AM/FM Stereo
-
Cassette
-
CD/6-CD
disc changer
-
Alloy/Premium
Wheels
-
Leather
Seats
This is called
the loan-to-value ratio or LTV a
comparison of the loan amount to the value of the vehicle. For
example, one bank may refinance up to 150% LTV and another may
only do 125% LTV. You calculate this buy taking your payoff
amount and dividing it by the wholesale bluebook value. Now,
depending on the bank or finance company, their guidelines can
differ.
For example:
Your lender
gave you a 10-day pay off amount of $11,537.23 and the wholesale
bluebook on your vehicle is $9,637.50. By dividing these 2
numbers, you will know the LTV which in this case I came up with
1.197..... which is 119% LTV.
Now, typically
the lender will look at the year and miles of the vehicle to
determine the term of your loan they are willing to extend
out to and the interest rate will obviously be determined by how
you paid your existing car loan and your other bills that report
to the credit bureau.
If
you choose to refinance to get a lower interest rate, find out
how many months you have left on your existing loan/ This
will determine the term for you new loan unless you are
struggling making your regular monthly payment and would like to
lower your monthly payment. However, it may end up doing
more harm than good. For example, if the total term of
your loan was 48 months and you made 24 payments. By
refinancing, the bank may be able to
give you the same term as your existing loan which is 48 months.
This will give you a much lower payment but in the long run even
with a lower interest rate, you will end up paying a lot more.
Basically extending the term of the loan for 2 more years is
also adding 2 more years of interest you will also be paying on.
Not only that, but your vehicle may start have mechanical
problems as you are adding more miles on it.
No,
there is no certain required waiting period when it comes to
refinancing. You may even refinance more than once in a matter
of months. However, typically with a customer that has bad
credit is paying a much higher interest rate on a car loan might
find that he won't be able to refinance for a couple years or
more because he owes too much money on his current loan.
It is also the case if you try to trade your vehicle into
the dealership. Since the dealership has to pay off your
existing loan, they are at a loss unless they can sell you a
vehicle that they purchased far below wholesale bluebook.
Then in turn will cover the difference of the LTV of your
existing vehicle. Since banks or lenders will only lend up
to 110% LTV plus Tax, Title, License and Warranty. Gap
Insurance, Disability and Life Insurance can also be added
however this is totally optional to you and may consider
depending the kind of work you do. You do need to consider
how much your payment will increase by adding these as well.
|
