Auto Loan Financing Tips and Scams

Auto financing should be a forethought, not an afterthought

When you are shopping for a new car or a used car one of the most important things to do is educate yourself about car loans. Financing is one of the areas where car dealers can use all kinds of tricks to make you think you are getting a better deal than you are. They can extend the length of your auto loan in order to get the monthly payments down. This little trick allows them to hide a high APR or car price. This chapter will teach you everything to look out for when financing a car so that you'll be able to get the best deal either by using a third party online car loan, financing at the dealership or even getting a loan from your credit union.

Biggest new car financing mistake car buyers make

The biggest new car financing mistake buyers make is trying to buy a new car without checking online auto loan rates or knowing if their credit history can support getting an auto loan. A big source of emails I get are from people with auto financing issues whose new car loans fell through at the dealer. This is why it is important to know your credit score before applying for new car financing. Use our car loan payment calculator tools to play on even ground with car dealers. Don't just get the free annual credit report, they are useless without the credit score, which you must pay for. Go to the sites we recommend below and buy the 3 bureau reports with the credit score option.

Warning about car dealer low APR new car financing, few people qualify
Estimates show that as few as 7% of you will qualify for those low APR auto loan rates we see advertised by car manufacturers. Buyers see 0% APR advertisements, but can't get these premium low auto loan rates which are only available to people with the very top credit scores. Some low APR car loans require a credit score over 700 to get that rate and most require 36 months to pay off the loan. Many of you cannot pay off the auto loan in 36 months, so you may be forced to pass on the deal. Your best bet is to assume you won't qualify, and get quotes from the online lenders I will discuss so you are prepared. If you do qualify for the low promotional APR car loan and can handle the payment terms you'll save but if you don't qualify or can't handle the terms you'll be prepared.

New Car Finance Rule: Be careful trading in a car that you still owe money on
I get complaints from people who traded in a car they owed money on for new car financing and 2 months later were shocked to hear the new car dealer did not pay off their car loan in 10 days as promised. With this scam dealers pay you less for your trade. When the bank calls, YOU are responsible because the old car loan is still in your name, until the dealer pays it off. If you trade a used car in for a new car with a loan, make the dealer put in writing they'll pay off your trade in car loan in 10 days. If they refuse to put it in writing, walk away from the deal.

Top car loan questions we receive:

Jeff, I heard on the news that nobody can get a car loan because of the financial crisis. Is this true?
As everybody knows, the credit markets are very tight right now. I've been getting a lot of emails lately from people who have good credit but are having trouble getting car loans. While the credit market has tightened, you might be able to get a loan to buy a car from online companies that specialize in car financing like Up2Drive, myAutoLoan.com and CarsDirect Car Loans. With today's credit crisis, if your credit score is below 700 it is going to be difficult to get a loan at a low APR. Even people with really good credit scores are getting high APR car loans these days. If you don't have perfect credit, I'll will discuss Auto Credit Express which is a good option even if you've never had trouble getting loans before. Don't take it personally, all of the banks are clamping down on lending.

In these tough financial times it is more important than ever to follow my tips to get the best deal with the lowest interest rate. Some dealerships might take advantage of the situation and put you in a loan at a higher interest rate than you deserve. Make sure you arm yourself with your credit report with credit score before you go car shopping so you know where you stand. Of course the best weapon you can use to keep from being taken advantage of is to have financing for your car in place before you walk into the dealer. If you're unable to get a loan from one of the lenders I discuss, don't forget that the credit union at your workplace is a good resource that might be able to help you out in these trying times.

Jeff, I just got ripped off on my car loan interest rate by the dealer! What do I do now?
Don't email us! Do something about it. Visit Capital One Auto Finance, Up2Drive or myAutoloan.com where you can refinance your auto loan immediately with lower rates. For more details about auto refinancing, visit our auto refinance section.

Watch out for dealers using the FICO Auto Industry Option score
Most car dealers run your FICO Beacon credit score and report from the big 3 credit bureaus: Equifax, Experian, and Trans Union. However, some car dealer finance managers instead use secret software available only to dealers (not you) from Equifax, that generates what they call a "FICO Auto Industry Option score." You cannot generate this score or report on your own, or buy this report either. This auto industry option credit score is different from your normal credit bureau score. It's based on your auto buying history, your car payment history, repossessions, etc. If you are a first time buyer or have no previous auto financing on your credit report, you'll score low on this one even if you have an excellent FICO Beacon score.  This angers and confuses responsible buyers who whip out their own 3-bureau report showing squeaky clean credit yet they still get rejected. Some lenders just don't want to lend you money for a car if you have no prior car loan.  It stinks, there's nothing you can do about it, don't ask me what to do, just move on to another dealer. This is another reason you should apply with an online lender first so that you have a "yes" in your pocket before you hear the dealer's "no". Your "yes" will trump their "no" every time. Personally I think this type of credit score is an excuse to charge you a higher APR for those who do squeak by, because this Auto Industry Option score is almost always lower than your standard FICO credit score. I firmly believe your excellent 3-bureau credit score should be the testament of your ability to pay your bills on time, but with these dealers your argument falls on deaf ears. Move along to another dealer.

Beware of dealers using no-name credit bureaus to run your credit score
The whole lending world and most car dealers use the big 3 credit bureaus to run your credit report and credit score, so why should the one car dealer you visit be any different? We get complaints from people with their own 3-bureau report already in "The Folder" showing their high credit score, then the finance manager tells them "we use a different credit bureau", and gosh darn, your score is way lower with this off brand bureau, so they are going to have to charge you a higher APR. I smell a rat. If the dealer you are haggling with does not use one of the big 3 bureaus and their "credit bureau" produces a credit score lower than the standard industry accepted normal credit bureaus, then you should leave immediately. They don't deserve your business.

How your credit score affects your car loan rates

People with bad credit pay higher auto loan interest rates. It can hurt your job prospects, insurance companies check your credit too. Get your credit report instantly online, it's a must for The Folder. Get it online at Experian, TrueCredit or Equifax. Remember, you can run your own credit file all you want, but if dealers run it for new car loans, then your score drops a bit. The credit bureaus do treat multiple credit inquiries within a 30 day period as a single inquiry in a "shopping around" period when looking for a car loan. If your score is < 550, don't apply for new car loans until you learn how to repair your credit. Your last auto financing resort is a bad credit auto loan. Some lenders run your credit score, as well as an Auto Fico score, which is an indicator of your past history with car financing. If you have no car financing in your past, some prime lenders will reject you.

New Car Loan Money Saving Tip
If the manufacturer offers you additional rebates in exchange for you financing through the manufacturer, then you should take their car financing. Then once you have the rebate and received financing from them, go refinance your car loan online to a lower rate through one of the sites I just mentioned. Even if there is an early payoff penalty you'll often still come out ahead.

DO NOT apply for a new car loan until you get your credit report WITH credit score!

For online car loans, how much should I apply for if I don't know the cost of my car yet?
How do I pay the car dealer when I finance my auto loan with an online lender?
You can't decide between the Toyota Camry or Honda Accord, but you do know the sticker prices. While you are car shopping apply for your auto loan online. If your car has a sticker price of $25,000, you just apply for your car loan seeking $25,000 plus tax. The online car loan lenders approve you up to that amount, and they FedEx you a blank check which you are authorized to fill out at the car dealer up to your approved amount. Whatever amount you write in that blank check becomes your car loan amount, usually a number much less than you applied for. So you see, it does not matter what the final selling price of the car is, it will likely be less than your car loan approval amount. So haggle your best deal at the car dealer, and with your down payment, you'll be way below your pre-approved auto loan amount. This allows you to secure your auto financing a month before you buy your car, then you just endorse the check over to the dealer when you buy your car. You do not need to know the final cost of your car when applying for your car loan, so apply now at sites like Up2Drive and myAutoloan.com. You need to be pre-approved for auto financing before you ever talk to a car dealer to avoid scams and get the lowest APR.

If you have bad credit and are trying to get an auto loan...
Looking for a bad credit auto loan? You should read our chapter for people with bad credit: Bad Credit Auto Loan. We give you the strategies for people with bad credit, tips to increase your credit score, how to increase your chances for approval on a new or used car loan, sites that can help you get a bad credit auto loan.

Online Auto Loans: Getting the lowest Auto Financing Rate

According to the Consumer Federation of America, car buyers are often overcharged by 3% on their loans at the dealership, which can add $1000 to the life of their loan. Your best sources for new car financing are auto loan sites such as Up2Drive and myAutoLoan.com. With the lowest online auto loan rates, they usually beat dealers, no application fees or down payments. Your new car loan is approved in minutes. Get your online auto financing quotes, compare to dealer auto financing, use whoever has the best car loan interest rate. Online auto loan rates are the standard for dealers to beat. Use online car loan payment calculators and choose your best auto financing.

There's more information to cover on this topic. Read more about car loan tips.

Go On to Chapter 2: How to Buy a Car Online

The information on this site is Copyright © 1996-2012 ConsumerNet, Inc. CarBuyingTips.com is the oldest and most comprehensive car buying guide on the internet. This site is solely for your personal use. You may link to these pages or print them out for your own personal use, but no parts of these pages can be reproduced, sold, or transmitted in any form without explicit written permission.