Car Loans Blog and Resources

When it comes to GAP insurance, and a GAP waiver, many Americans are confused about the difference between these two products. Which one do they need, if they need one at all, and what is best for their purchase? Let’s start with what they have in common: GAP stands for Guaranteed Asset Protection. This type of policy basically helps car buyers to avoid having to keep making monthly car payments on their car, in the event that it is stolen or totaled. No one wants to be paying on a car that they don’t even have anymore. GAP coverage pays the difference between what your regular car insurance policy provides and your remaining loan balance.  Although the terms are often used interchangeably in the auto industry, we got some help from auto finance experts to break down the difference between a GAP waiver and GAP insurance. Here’s what they said: GAP options: waiver or insurance "Most consumers don’t realize that there are options," says Danielle M. Diodato, Esq., Associate General Counsel at Dealer Owned Warranty Company (DOWC®) in Ringwood, NJ. "There is not a lot of functional difference between GAP insurance and GAP waivers, but there is a difference in how a car buyer can obtain each of them." GAP waiver basics "GAP waiver and GAP insurance aren’t actually the same thing, and most car buyers get GAP waiver," Sonia Steinway, CEO of Outside Financial. "A car buyer’s first line of defense, or first opportunity to secure any kind of Guaranteed Asset Protection (GAP), is actually during the purchase or lease of the vehicle, in the form of a GAP waiver," says Diodato. "Since a GAP waiver is negotiable directly with the dealership, it may be cheaper than obtaining GAP insurance. And the cost is rolled into the car payment over the life of the loan." "Waivers aren’t legally considered insurance," explains Steinway, "which means they don’t have to be regulated as insurance products. Other companies (like many auto lenders) can sell GAP waiver without having to get that license. The creditor agrees to waive any ‘gap’ between what you owe on your loan and the value of the vehicle if it's totaled or stolen." "Since GAP waivers are between the lien holder or creditor and the consumer — where the consumer obligation would be waived for the GAP amount by the creditor in the event of an accident — there is no insurance company involved, so GAP waivers are not subjected to insurance regulations," Diodato explains. GAP insurance basics "While a consumer can shop around for GAP insurance following the purchase of a vehicle," Diodato continues, "it is regulated by the state in which you are doing business, like any other form of insurance. And, consumers should expect that their insurance premium will increase following a GAP insurance claim." "In most states," says Steinway, "insurance companies have to comply with very strict regulations, including having rates pre-approved by the state insurance department, and get licensed as insurance providers. Only an insurance provider that has the appropriate license (and is regulated by the state's insurance department) can sell GAP insurance." "Also," warns Diodato, "GAP ‘insurance’ does not carry from one insurance company to another, and consumers can sometimes forget to add that coverage back in if they wind up switching insurance companies for one reason or another." On the other hand, she explains, "A GAP waiver stays with the loan until maturity," so this won’t be an issue." Questions to ask when you buy GAP coverage "Wherever you buy GAP," Steinway advises that you "make sure you ask the salesperson the following questions: Does the policy include the deductible on your collision or theft insurance? Does it include any negative equity or rollover balance from a previous loan? Does it exclude cars that are uninsured or underinsured? Does it cover interest and fees that build up starting when your car is stolen or totaled until the insurance payment is made? Does it include any obligation you may have for window etching or other add on products?" Asking these questions should help you ensure they know exactly what the insurance policy or waiver covers. You want to know exactly what it covers, and for what price, to make sure that you are getting the right coverage for your new car, whether you buy or lease.  Special thanks to our experts: Danielle M. Diodato, Esq., is Associate General Counsel at DOWC in Ringwood, New Jersey. DOWC® is among the fastest growing service contract providers and administrators in the United States. DOWC® offers customizable F&I products, expertise in compliance, and a full suite of technology designed to optimize productivity and expedite claims adjustments, processing, and reporting. Sonia Steinway is Co-founder and CEO of Outside Financial, an online car lending platform that offers education to empower shoppers and the ability to prequalify for finance through a variety of lending companies, outside of a car dealership. Applicants are matched to lenders after filling out a quick application.

When you are shopping for a new car or truck, most finance experts suggest that you get pre-approved for an auto loan before you select a car. But is this car financing advice relevant for people with all types of credit, even bad credit? We asked industry experts to help us understand the auto loan pre-approval process as it applies to consumers with less-than-perfect or downright bad ratings with the credit bureaus. When you finish this article, you will better understand how the pre-approval process works and how it benefits you if you have bad credit. Can you get a pre-approved loan for buying a car if you have bad credit? "Yes, absolutely," says John Vincent, senior reporter for U.S. News & World Report Best Cars, "you can get pre-approved for a loan if you have bad credit, and it’s crucial you do so." While bad credit consumers definitely can seek pre-approval for their vehicle purchase, they won’t be successful with every traditional lending institution. Most big banks and nationwide lenders have a minimum credit score as part of their lending requirements. Much of the time you need to have good credit or better to get a good rate to buy a car with these big lending contenders. "There are a number of auto lenders that provide pre-approvals with bad credit," explains Chane Steiner, CEO of Crediful. Car buyers with poor credit history will need to check if they can get a pre-approved car loan from one of these specialty companies by filling out an online application. In addition, Vincent explains, "Many lenders, especially small banks and credit unions, have special programs to help borrowers with damaged credit get back on their feet." These may not be big-name financial institutions, but there are well-reputed, smaller lending institutions as well as online lenders that specialize in car loans for people with subprime credit. Although, it won't be the best loan terms available. "Your interest rate will be higher than someone with better credit," says Steiner, "However, it is possible [to get pre-approved with bad credit].""You can expect to pay more for a loan if your credit isn’t good — as much as three times the rate that someone with excellent credit might pay," says Vincent. When you are car shopping with a poor credit score, how can pre-approval help? “The worse your credit is, the more important it is to compare your rate options,” explains Sonia Steinway, CEO of Outside Financial. “Rates (and rates of approvals) can vary wildly from lender to lender, depending on how they make their underwriting decisions. Getting a pre-approval helps shopping in a few ways: First, it can help you set your budget. If you know you can only afford a certain amount per month and a certain down payment, getting pre-approved will help you figure out the max you can pay for your vehicle. Second, only loans outside the dealership avoid the dealer’s markups and fees. We calculate that the average dealer markup on a new car loan and related products is nearly $1,800 — more than dealers make on selling you a car! Third, getting pre-approved sets a rate for negotiating with the dealer. If they’re able to match or get you a better rate than you bring from outside, you can take it knowing you’re getting the right deal for you. Just make sure the dealer is actually matching your pre-approved offer and not stretching out a larger loan amount by increasing the loan term or giving you a lower APR but packing in ancillary products at inflated prices.” What can happen if you don’t look into pre-approval? Have you ever gone to the store to buy something, spent quite a while picking it out and falling in love with it, only to realize that you forgot your wallet, don't have enough cash, or your card is declined when you get to the checkout? That feeling is the worst, but we’ve all been there. "Acquiring a reasonable loan is more difficult for [people with bad credit], says Mike Todaro, Sales Manager at Matt Blatt Kia of Toms River. He adds, "Getting a pre-approval beforehand will save you wasted time at a dealer." It will also save you from that dejected feeling we talked about before. Todaro illustrates what he means about wasted time with this example: "Tim has a 438 credit score, is looking at a Kia Sorento ($27,000 SUV), and doesn't have pre-approval. He'd gone through test drives and ultimately spend his whole day finding the perfect SUV. When it comes time for securing financing, he gets denied for a loan of that amount. Tim leaves and tries another dealership, only to have the same events occur. This situation is frustrating and makes the car buying experience unpleasant and unnecessarily time-consuming. With a pre-approval, Tim would know that if he did find his perfect vehicle, he'll be taking it home." "By getting a pre-approved loan," explains Vincent "you’ll have a good idea what kind of car fits into your budget, given the interest rate you qualify for. Better to know what cars you can afford, rather than falling in love with a car and then struggling to figure out a way to pay for it." You will save time and save yourself from heartbreak after spending a whole day falling in love, only to have your loan application for in-house financing denied. Why is it important for bad credit consumers to seek pre-approval before car shopping? "Pre-approvals mainly benefit people with bad credit or no down payments," advises Todaro. But why? It helps shoppers know what they can afford. "Having a pre-approval before shopping for a car sets up a range of what you'll be able to buy," explains Todaro. "Your options and criteria are available to you before you get your mind set on a vehicle." This will save you from the wasted time and heartbreak that "Tim" experienced. "[I]t's even more important," Steinway adds, “for consumers with bad credit to seek car loan pre-approval because those borrowers are particularly vulnerable to getting a bad deal at the dealership. Some lenders specialize in working with borrowers with bad credit or with limited credit histories." If you think about it, auto loans are available from banks, credit unions, online lenders, and lastly, from a dealership's in-house financing or contracted lending partners, which may be limited as to what they can approve if you have a bad FICO credit score. With a dealership financing, your last step of the day, after checking out all the cars, is to see if you can get approved. Why not see what your options are before heading out? Online, you can check with a variety of websites to see what kind of rates and terms you would likely qualify for, all with a soft credit check. Be warned: "It's an unfortunate truth that some unscrupulous dealers in the marketplace prey on consumers with bad credit," advises Vincent. "They have no problem putting people into extremely costly loans, or they have no chance of paying back. Having a pre-approved loan helps you avoid these tactics." What if you are having a hard time getting pre-approved financing? It is harder for people with a bad credit rating to get the green stamp of pre-approval for their car purchase, but it is worth it. This may be hard to hear, but it is the truth. You will have a harder time getting pre-approved, than someone with good credit. "If you get denied for a pre-approval," says Todaro, "try to come up with some money to put down, find a cosigner, or take time to rebuild your credit." "Why?" he asks. "With money down, the amount needed to borrow will be lower and result in a higher likelihood of an approval. With a cosigner, there are now two people liable for the money borrowed which means the lender has more insurance." Your next steps will be to take some time to reestablish your credit or improve your credit. "If that's the case," Tony Arevalo, from Carsurance, also suggests, "consider improving your credit score by paying off existing debt, paying bills on time, and avoiding new applications until your credit score is improved." "Over time," explains Todaro, "your credit will increase and a pre-approval and new car will be possible!" "If you don't have time to wait for that," suggests Arevalo, "you can also apply for a loan from the car dealership. But, be aware that the interest rates at a dealership are much higher than at a money lending institution." If you do go that route, you may want to see if you can get pre-approved through the dealership’s in-house financing online, before making "Tim's" mistakes. You need a budget before you shop, or you may be wasting your time. No matter your credit situation, getting pre-approved for a loan has benefits. Even if you have a bad track record with the major credit bureaus, you should still try to pre-approved. This process gives you options and helps you know what monthly payment you can afford, whether you have good credit or not.

1. You need more than 60 months Jake McKenzie, Content Manager, Auto Accessories Garage “You know a car purchase is out of your league when the loan terms exceed 60 months. A lot of dealerships eager to make a sale will convince you that anybody can buy any car as long as they finance over a long enough period of time. But ultimately in these cases, you’ll end up paying so much in interest that you could have bought two cheaper cars in the same amount of time, and you’ll never make back that amount of interest when you try to sell the car. If you can’t find an affordable monthly payment that will allow you to pay a car off in 60 months or less, you can’t afford the car.” 2. Loan payments exceed 10%–15% of your monthly pay Becky Beach, Finance Blogger, MomBeach“You know a car purchase is out of your league when the monthly payment is your entire paycheck!” Igor Mitic, Co-Founder, Fortunly“You know a car purchase is out of your league when you need to spend more than 10 percent to 15 percent of your net monthly pay solely on the loan payments. Add the monthly expenses of insurance, reparations, and gas, and all these expenses combined should not exceed 20 percent of your monthly paycheck.” Valerie Coleman, Automotive Sales, 5miles“The generally accepted rule is that you spend no more than 15 percent of your pre-tax income on your monthly car note.” 3. The downpayment is too much Laura Gonzalez, Marketing Manager, Audi Peoria “[It’s out of your league if] you barely have enough money for the downpayment. Unless it’s an emergency situation and money is extremely tight, it's a smart idea to save some cash to more than cover the down payment and associated fees.” Coleman“You can’t put down a significant downpayment. Be prepared to put $1,500 down on a vehicle that costs between $23,000 and $34,000 (good buys like Chevrolet Malibu, Mazda 3, Nissan Rogue, Subaru BRZ, Toyota Prius).” 4. The cost-to-own is too much Coleman“The ancillary costs add up (and up, and up). Gas mileage, maintenance, etc. are not things to be taken lightly. Cars can look great and still be prone to mechanical issues. Educate yourself by researching consumer reports and user ratings/reviews.” Evan Reeves Alonzo, Certified Public Accountant“You know a car purchase is out of your league when...you would have to take out a loan to cover a major repair.” Eric Anderson, Co-founder and Organizational Development Manager, elMejorTrato.com"You know a car purchase is out of your league when you can't put 10 percent of your gross monthly income toward car expenses. The moment you own a car, you are taking up new monthly car-related expenses. There are a lot of fees when it comes to buying a car that people don't take into account. These costs (like gas, insurance, repairs or fines) come attached to your new car." 5. Insurance is crazy expensive Coleman“The cost of insurance = more than 10 percent of your gross income. Interest.com recommends that you limit your total monthly vehicle expenses to 10 percent of your gross income to include your insurance.” 6. You lose perspective with monthly payments Beach"You know a car purchase is out of your league when you can buy a home instead with the money! I have a friend that paid $150,000 for his Lambo. I could pay off my home with that amount of money." Robert Barrows, R.M. Barrows, Inc. Advertising & Public Relations "Over the years, I’ve handled the advertising for a lot of car dealerships. One time, after going to an auto show, the dealer asked me if I saw anything I liked. I said 'Yeah, the Bentley and the Lamborghini.' (Both of which would be way, way, way out of my league…) So...to fill in the blank...I know that purchase is way out of my league when I have to ask 'How much is that a month on a Bentley. Or...How much is that a month for that Lambo?'" 7. Your mileage limit is too low Coleman“There may be strings attached. If you have good credit, you may get a lower payment for a higher-priced car (but not necessarily). If leasing, remember that you have a limited number of miles you can drive, so a lease may not be a good deal for you if you are, for instance, a heavy commuter.” 8. You are already in deep on a car loan Jeff Rose, Certified Financial Planner, author, and self-proclaimed numbers geek, GoodFinancialCents "You are upside-down on your current vehicle (meaning you owe more than it's worth). It's not that dealers won't sell you another car. They will. But that deficit you still owe on the previous car (if you trade it in, for example) will just be added into your new car loan. It doesn't go away. So now, you owe more than your new vehicle is worth, too. And that's on top of the fact that you likely didn't get a good deal and paid full price. Why? Because the dealer already took a car off your hands that can't be sold for the price owed on it. They aren't going to pay off your debt for more than they can get out of the vehicle and then also give you steal on the new vehicle. To fix this, you need to pay down the debt on the car you own before buying another one. You won't financially recoup the fact that you paid too much but at least you won't be dragging a deficit into the next purchase with you. Plus, you'll regain a stronger position when negotiating your next vehicle purchase." 8. You have to prioritize car payments over savings Rose"You can make a car payment but not save toward retirement. Car loans are one of the biggest killers of retirement savings. They are so large and for such a long time these days, people are finding themselves unable to save toward retirement. They have car payments instead. If you can't do both, you shouldn't be buying a new car. To fix this, you need to figure out how to cut expenses so you can both save toward retirement and replace an old car. You may need to take on a side gig to supplement your income to make the new car happen." Matthew Woodley, Founder, UpgradedDollar“Your monthly car payment exceeds your monthly savings amount” 9. You haven’t a clue what your budget is Rose"You don't have the extra every month to consistently save toward a new car. Before actually shopping for one, you should be working your budget every month. Money should be set aside toward a down payment and other costs, such as starting new insurance. If you're not able to currently set aside money every month, you can't afford it in the near future either. If you're already paying for a car loan and figure that you'll just be trading in and have the same payment, you need to check some facts before moving forward. Things such as current interest rates, loan terms and lengths, and the true value or your current vehicle can alter what kind of monthly commitment you'd actually have. To fix this, you need to rework your budget and figure out how you can afford to set aside money every month. Then consistently do it for at least a few months. That way, you can test the new budget and know if you can stick it out for the long haul." Marco Baatjes, personal finance blogger, Bottom Line Cents"You know a car purchase is out of your league when you simply can’t afford it! The best way to determine if you can or can’t afford that new shiny car purchase is by doing a budget analysis and putting the things you need first over the new car you want. Most people don’t like creating budgets; instead, they would rather have a “wing it” personality thinking that they can afford something they can’t. This kind of mentality could lead you spiraling into debt quickly, without you knowing it, and that new car that you may have bought could get repossessed quite easily. Budgeting will allow you to see into your personal finance and provide more insight into whether the car purchase is out of your league or not." 10. You’re tempted to lease, just for the decreased monthly LeeAnn Shattuck, The Car Chick “You know a car purchase is out of your league when... you are considering leasing the car because that is the only way you can afford the monthly payments. If you are leasing a car only for the lower monthly payments, you are looking at too much car.” The bottom line Consider this advice from Woodley: “Whilst it can be very tempting to purchase your dream car, it's important to remember what Warren Buffett famously stated “If you buy things you do not need, soon you will have to sell things you need.” And this is certainly true when it comes to buying a vehicle. In fact, Warren Buffet, one of the richest men in the world, drives a Cadillac XTS worth only around $45,000.”

Many millennials find themselves without much credit to their name, even after graduating from college. Recently, the number of consumers younger than 25 with established credit has decreased. The 2017 report CFPB Data Point:Becoming Credit Visible states that 8.9 percent of people establish credit with an auto loan, though a high percentage of those needed a co-signer. Is this a good opportunity? Or a bad idea? It turns out that the answer isn’t so cut and dry. We asked finance experts for advice about how Millennials can use a car purchase to build credit, without messing it up. What are you building credit for? "First, we really need to understand what the reason behind building credit is in this case,” says Mike Scott, Senior Mortgage Loan Officer with Independent Bank. What are your motives? Scott says, “Are you looking to buy a home in the near future, or are you simply looking to build a long-term credit rating?” If you are purely looking at buying a car as a way to establish and build your credit, this might not be the best route. Instead, Scott advises: "To build credit, I strongly suggest starting with a secured credit card (assuming you have absolutely no credit) from a local credit union. The credit union cards will typically have a lower interest rate than those from other banking institutions. The first month that the card is active, use it to pay for everything that you would normally pay cash for, until the balance on the card is within $50 of the limit. When that happens, stop using the card and wait to receive the statement. When you receive the statement, pay the card off in full to avoid paying interest charges. From that point on, ensure that your card balance on the statement is no more than 10 percent of the available credit. Once the card has been in place for six months, the next step is to apply for two other credit cards that are not secured cards. Some factors that impact a credit score include proportion of the current balance reported to the available credit limit and how long accounts have been established. For the first year or two, you can expect that the new accounts will bring a credit score down some. For this reason, avoid closing credit card accounts, as closing the account can lower your credit score. Now, to an average person, $500 owed on credit card means that they owe $500. To a credit bureau, if they owe $500 on a $500 card, they are maxed out, a poor credit risk, and the score goes down. If they owe the same $500 on a card with a $5000 limit, they are a good credit risk and the score goes up. As a result, if someone tends to pay the card off every month, it would actually behoove them to pay the card twice a month: once when the statement billing cycle is about to end, and again after the bill comes out, making sure that the balance showing on the bill stays at under 10 percent of the available credit limit. Once credit has been established slightly, adding a car loan into the mix can be a good thing." Is a car loan a good way to boost your credit history? If you can afford to pay for a car in cash, then do it. Financing a car purchase is not a golden credit-building opportunity. ***“Saddling yourself with unnecessary high-interest debt is a bad way to build credit,” explains Credit Industry Analyst, Sean Messier with Credit Card Insider. While it's possible to finance a car with limited credit, Messier says it's not necessarily the right course of action: "If you’re dealing with limited credit and can avoid financing your new vehicle, you should absolutely do so, because any loan you’d be able to secure would likely have frustratingly high interest rates. If possible, pay for your vehicle with cash, and consider alternative credit-building methods, like secured credit cards and credit builder loans, which can cost you much less than a traditional loan while still bolstering your credit scores.” If you are in a position to pay cash for a car, but just wondering if a car loan is a good way to boost your credit history, it’s not. Can you finance a car with limited credit? Not every Millennial wondering about using a car loan to establish credit can pay in cash for a car. “The unfortunate reality,” says Messier, “is that you won’t always be able to cover the price of your vehicle with cash, so it might simply be necessary to use financing. The good news? There are ways to finance a car without descending into crippling debt.” In this case, he has three suggestions: “If you can find a co-signer that you trust, and who has better credit than you, you’ll likely have access to loans with much better interest rates.” “Make a large down payment, if possible, to keep the amount that you’re financing to a minimum.” “Shop for loans carefully, and examine all your options. More favorable terms are often available through credit unions and online lenders, rather than big-league banks. " How can a car loan help your credit? Edith Muthoni is Chief Editor of the investing education site Learnbonds.com. Prior to that, she worked in the banking and the Fintech industries for 16 years. She explains: “A car loan can help build your credit in several ways. First, the average price tags of most cars require financing, which can be done in installments of two to five+ year plans. By making payments on time, you can build your credit score which will, in turn, help build a positive credit history. Lenders look at your credit history when deciding whether to give you a loan or not. In fact, up to 35 percent of your FICO credit score is derived from your payment history. Besides helping to improve on your payment history, auto financing contributes to your credit mix and new credit which, when combined, constitute 20 percent of your credit score. So it is easy to see why buying a car with a loan and making increased monthly payments can impact over 50 percent of your FICO score.To begin with, you will be required to make a sizeable down payment and pay monthly financing charges. Overall, it is always a good idea to finance a car even if you have the cash. You can invest the amount in an interest-bearing account at a much higher rate than the amount you are paying for the car." However, the interest-bearing account will have to beat your loan rate to be worth it. Why would you get approved if you have bad credit? Jake McKenzie, Content Manager, at Auto Accessories Garage explains, “Buying a car is a great way to build credit, because often an auto-loan is the easiest type of loan to get. The reasoning behind this is, the bank or lending institution knows that in the worst case scenario, they could always repossess the car if you stop paying for it.” Is it good to make a big down payment? “Paying your loan on time will help build your credit,” says McKenzie, “but if that is the sole purpose of the loan, you don’t want to be throwing money away either. What you want is the lowest possible percent of interest. If a larger down payment can lower your interest rate, by all means go for it!” “Making a big down payment will give you less to pay over time and decrease your monthly payments,” says Jory McEachern, Director of Operations at ScoreShuttle. Scott says that this depends on your goals. “My advice is to make a down payment big enough to keep the actual car payment at less than 10 percent of your monthly income if you are financing the car for 4–5 years. That gives you flexibility to pay more on the car when you can, without forcing the larger payment.” What kind of rates and terms will you see? "The best case scenario is 0 percent APR,” says McEachern. “The worst is a high interest rate over a long period of time. Your credit score can affect your terms for paying a loan, for example: A borrower with excellent credit may qualify for a lower interest rate on an auto loan, excluding other unique specials each dealership may have to offer. Meanwhile, a consumer with poor credit may see a higher interest rate. When you add up the extra costs over the life of the loan, the borrower with a lower score would end up paying a lot more in interest for the exact same vehicle!" This is the scary part that you want to avoid. If you start your credit from scratch, as Scott suggested, “with a secured card, at the end of six months you should have a score in the mid-600s. As such, you should qualify for terms that are possibly not the best, but should be far better than the worst.” “If you have no score,” he says, “expect to pay 16–21 percent on the car loan, even with a nice down payment.” “Conversely,” he says, “with a score in the mid-600s (650 or so), you should be able to get a rate a few points above prime, and about half or less what you would pay without a score. In a best-case scenario, and with a nice down payment, you may get a rate of prime (currently around 5.25 percent).” McKenzie warns, “You don’t want to go over 60 months on your loan either. Even if you’re building credit, an extra-long loan will be doing more harm than good on your personal finances. Consider 36–48 months as your sweet spot.” Is it worth it to make bigger monthly payments? If credit building is your goal, McEachern says, “Paying increased monthly payments is not recommended.” Scott warns, “What many people make the mistake of doing ... is taking out the loan and paying it off in less than 12 months.” While that may sound awesome to be debt-free so quickly, he urges consumers to “Remember that one of the things that impacts a credit score is how long accounts have been open. The account should stay open at least 18, if not 24 months or longer, in order to positively impact a credit score. Accounts that are paid off in less than six months don't have the adequate time to raise the score and improve it." "Again, we are talking about long-term planning,” he says. “Before paying off a car faster, make sure that you have an emergency fund. Life happens. Also, make sure that you take at least 24 months to pay the car off, so that you are establishing the long-term willingness to repay that the credit bureaus are looking for.” If you are capable of paying in cash, but want to use financing to build credit, what kind of loan should you use? Scott says, “The process should be the same regardless of ability to pay cash.” “For one thing, never tell the dealership that you are paying cash. Financing the vehicles is actually a source of income for them, and they may not discount the car as much if they think you will pay cash.” McEachern suggests, “Speak with your bank or credit union, who may offer you better terms or interest rates on your loan.” Scott agrees that you should check on rates with your bank or credit union before you head out to the dealerships. “This way,” he explains, “you can at least know what your existing options are, rather than flying blind. The dealers can often beat the local bank's options, but you won't know and may end up paying a higher rate simply because you did not bother to check.” If this is your credit building strategy, what dealer add-ons, fees, and financing contract terms should we look out for? “Stay away from almost everything,” says Scott. “This is where the dealers make money.Car warranties are often marked up $1,000–$2,000 over dealer cost. Believe it or not, that is often more markup than there is on the actual vehicle. . . . I do recommend an extended warranty on the car, but not at a ridiculous price. Whatever they quote, expect to be able to get at least $1,000 off that price unless you run into one of the less snakey dealers.” “Car dealerships often try to add extra costs at the end of the sale,” adds McEachern. “Some may be beneficial to you, such as a security lock, which could lower your insurance rate. It is a case-by-case scenario. Be strategic, be careful about add-ons, be wary of customization.” That’s not to say that all add-ons are a bad idea. “Unless you are putting a large down payment on the vehicle (30 percent or more),” Scott advises to get the gap insurance, but beware of the dealer markup. He says, “When the dealer offered it to my wife and me, they initially quoted a cost of $1,100 for it. I was able to get it for less than half that by the time we were done. They try to quote it as a monthly payment difference, so $20 per month does not sound bad, but they were still marking it way up.” Should you just pay in cash and build credit elsewhere? McEachern points out, "Buying a car will build credit, as it is a large ticket purchase. It will help to diversify your credit profile. Using an installment loan will show a positive payment history." Scott says that this decision all comes down to your long-term goals. He says that if you are planning to purchase a home in the next 18 months, you may just want to pay in cash if you can. He says, “being debt-free may be better, and having a few credit cards may be enough credit to qualify for a home loan.” The bottom line Using a car loan to build credit is certainly an option; however its usefulness will depend on your current credit and your long term credit goals. If you are able to pay in cash and just looking to build credit, there are better ways that are less risky, unless you are ready to finance the car and simultaneously invest in a high-yield, interest-bearing account that makes you more money than you are paying on your interest. This isn’t likely if you don’t have the credit score to get a low rate. If you aren’t able to pay in cash and you do need to finance, try to start establishing credit with Scott’s advice, more than six months before you plan to purchase. Stay in the 36–48 months loan term sweet spot, and don’t pay it off sooner than 24 months. Get a co-signer if you can, and make a large down payment if possible. Lastly, if you plan to buy a house in the next 18 months, the usefulness of a car loan may not be the best idea. Paying in cash for a car may be the best option, considering your bigger financial purchase in the coming months. Check out other credit building opportunities to help get purchase-ready.    

In Part 1 of our series Solutions to Your Car-Buying Anxiety, we covered researching your car purchase, from how much to spend, to what to buy, and where to buy it. In Part 2, we are going to cover the part where you actually leave your house to go buy a car. This is often the most anxiety-producing step in the car buying process. David Weliver, founder of Money Under 30, and a former dealership employee, sums up common feelings behind this anxiety: “As consumers, we have a lot less experience buying our cars than we do, say, shopping for groceries, because we only buy cars every so many years. Also, we’re talking about a purchase that costs many, many thousands of dollars. So you have a perfect recipe for mistrust in the transaction.” “The car buying process is one of the most frustrating experiences on earth,” says Michael Rudge from Rudge Automotive Service and Paytons Auto Body. “The entire experience plays on nothing more than the buyer’s emotions.” No one likes to feel vulnerable like this. So, after you have handled your preliminary research, contacted dealers about available vehicles, how do you handle the stress of actually going out and getting it done? Let’s tackle a few of the common worries that people have, with solutions about how to avoid them altogether, as well as simple steps to handle them head-on. Problem 1: I feel insecure with my car-buying knowledge. How do I deal with a car salesman without feeling belittled or taken advantage of? This worry is a big one, and not uncommon. "[W]omen, in particular, seem to hate car shopping," says Sonia Steinway from Outside Financial, "in our survey of 600 recent car buyers, women were 25 percent more likely than men to report having a bad experience at the dealership." She says that several likely reasons are few women working in sales roles at dealerships, and outdated attitudes of salesmen themselves. One of my favorite portrayals of this in the media is in an episode of FOX’s New Girl, where the main character Jess, a female, invents a husband to make the process go more smoothly. This may seem farcical to some, but this episode felt all too real for many watching. Whether you are a woman or not, getting through the dealership experience is still a pickle that many wish to avoid. This is an option. Weliver says, “[I]f you’re buying a used car and would rather skip the traditional dealership process altogether, there are a few new online dealerships including Vroom and Carvana you might want to check out. The downside is that you can’t test-drive cars before you buy, but you can complete the entire transaction online and they deliver the car to your house in a week or so.” So, if you would like to buy a car with dealership-type assurances while avoiding a visit to the local lot, it is an option. However, if you are willing to stick it out and visit dealerships, research is going to be your best defense. Problem 2: I don’t know anything about cars. What am I supposed to be doing or paying attention to during the test-drive? “After you’ve narrowed your list of cars to two or three, it’s time to test drive,” says Jenni Newman, Cars.com Editor-in-Chief. “To streamline the process, create a checklist of important features to evaluate such as visibility, driver’s seat comfort, acceleration, handling, ride comfort and noise, backseat roominess, cargo space, interior quality, and multimedia functionality. Also compare the standard and optional safety technology, the EPA fuel-economy ratings, and price. Make sure to test drive the contenders over the same day. Even if you can’t drive the cars over the same roads, you’ll still get a sense of the differences between the cars. Test-drive before you buy. When trying to decide which car you want to drive, test-drive the leading contenders the same day — ideally, back-to-back. This will help you discern.” Sarah Lee Marks, founder of MyCarLady.com also suggests that you “Have the salesperson give you the route in advance, and be quiet. Turn off the radio. Listen for road, wind, and tire noise.” Problem 3: I hate that there isn’t just one price for everyone. How do I deal with this? “One of the top reasons people hate shopping for cars is because the price usually has to be negotiated, and nobody wants to feel like they got ripped off,” says Jake McKenzie, Content Manager at Auto Accessories Garage. Keep in mind that over the last few years, “Many dealers have gone to 1-price-best-price on their used cars and some for their new as well,” says Marks. If you want to avoid a loose pricing structure, consider shopping at a TrueCar certified dealer, a CarMax used car superstore, or Carvana, where prices are fixed. However, single-price dealerships won’t always get you the best price. As Marks puts it, “This has taken some of the negotiation off the table, not always to the consumer's benefit. Now the shopper must do more comparison shopping between dealers to know what is the best deal for them.” Problem 4: How do I know if I am getting a good deal? If you are still willing to head out to a run-of-the-mill dealership, how do you make sure you are getting a good price? This is where research on websites like TrueCar, KelleyBlueBook, and Edmunds come in handy. Each has its own pricing tools to help compare purchase prices in the area. “Today it’s not that hard to get a good price on a new car,” says Paul Maloney, owner of Car Leasing Concierge. “The problem is, a good price is not always your best deal. Car dealers have many avenues they can easily steer you down to make up the difference. For example: inflated finance rates inflated lease rates documentation fees processing fees bank Fees undervalued trade-in appraisals So the price they see online or in a newspaper ad is designed to do only one thing — reel you in hook, line and sinker, then drown you in payments. Hence, the bait n’ switch maneuver. Skeptical car buyers know this, but unfortunately, they are very limited on being able to figure out just how much they end up paying because they don’t have access to the factory-to-dealer incentives and buy rates leaving the customer with a very uneasy feeling.“ Ivan McBride, Vice President of Automotive Lending at PenFed Credit Union has some advice. He says, “consumers should do their research and look at car buying services as part of the research. A service like TrueCar will provide consumers a 360-degree look at their pricing options so they can get the best and most fair price on the car.“ However, there are a few things that consumers should know. McBride says, “Two things: 1) Everything is negotiable and, 2) You have to be reasonable.” To keep this advice in mind, he suggests, “When you’re preparing to go in, know the non-negotiables (that could be a monthly payment, new technology, etc.) for you and always be willing to walk away if you’re uncomfortable or your non-negotiables are not being met.” When it comes to McBride’s advice about being reasonable, advertising agency owner Robert Barrows, who has worked in the auto industry, suggests that consumers know, “A dealer can give you a deal on the front end (the new car) or the back end (the trade-in value of your used car), but they really can’t give you a deal on both ends.” Expecting both will probably lead to disappointment. Problem 5: How do I speed up the dealership process? When it comes to the actual purchase process at a dealership, consumers are least satisfied with how long it takes. Autotrader reports that buyers spend about 40 minutes just waiting at the dealership on average, and 64 percent of consumers were dissatisfied with how long it took reported that financing and paperwork took longer than expected. “The worst part of buying a car is probably how time-consuming it is,” says McKenzie. “Between price comparisons, test drives, and the mountains and mountains of paperwork, buying a new car can eat up loads of time.” To avoid mental and physical exhaustion, he suggests splitting the process up. “Go take a test drive with the knowledge that you won’t buy that day no matter what. Making it a multi-day experience will save you that fatigue of trying to do everything in one afternoon. “ In addition, McBride says, “The more familiar you are with the vehicle price, the options available, what you can afford, etc., the better off you’ll be and the quicker the process will go once you go into the dealership,” says Ivan McBride with PenFed. If you wish to expedite all of this, consider a car-buying concierge, like Authority Auto, or having a service help with local pricing quotes, like CarBargains, so that you only visit one dealership. On the other hand, you might select a dealership network that offers express service like CarSaver. Any of these should help to speed up the process. Stay tuned for more of our "Solutions to Your Car-Buying Anxiety" series. Next time, we tackle all the financial decisions that come with a new or new-to-you car. Dreams really do come true.