As a companion article to our Beginner’s Guide to Auto Financing, we’re offering more expert advice for our readers. We reached out to auto financing expert Sonia Steinway, president and co-founder of Outside Financial, a company that saves you money when buying a car through education and loan offers independent of dealerships. Her advice will help first-time and novice buyers know what to expect when financing their new or used car.
What kind of personal information do people have to provide to get a financing quote?
Every company is a little different, but in general, most ask for information about the vehicle (year, make, model, trim, options). It helps to have the VIN because the price of a vehicle can vary even at that level. Most lenders will give a pre-approval that’s good up to a certain amount with certain restrictions (for example, no Hummers or exotic vehicles), but the more you know about the vehicle, the more tailored the financing quote can be.
Lenders also need to know basic information about the borrower, including name, address, contact information like email and phone numbers, employment information (employer name, how long you’ve been with that employer, and income), and information about other debts (especially rent or mortgage). Most lenders will run at least a soft credit check, although some do a hard pull upfront. Some sites (like ours) ask for social security number because it’s the best way to make sure you’re finding the right person during the credit check.
Do car loan companies do a hard or soft credit check?
It depends on the lender. Eventually, almost every lender will need to run a hard check before making a final underwriting decision. At Outside Financial, we do a soft credit check to match our borrowers with lender offers, and the lender only does a hard check after the prospective borrower has decided to apply for that loan offer. Lenders are required to disclose whether they’re doing a hard or soft check — that is, you the applicant have to authorize the lender to run the hard credit check, so make sure that you understand what you’re agreeing to before you apply. Multiple hard checks for an auto loan within a short period of time (for FICO, it’s 45 days) only count against you once so you’re not penalized for shopping around.
What are good and bad terms for financing a new and used car? Any tips for knowing the differences?
It’s hard to generalize because everyone’s credit situation is different, but I would watch out for any term over 60 months. I would also make sure to shop around so you know what rates you are eligible for before you step foot into a dealership. Dealers typically mark up a borrower’s interest rate by 1-2 points without disclosing that fact to the borrower. The average markup for a new car loan is almost $1800 — a record high. In fact, dealers now make more money from selling financing than they do from selling cars. Here’s the math.
Is there an industry average depending on your credit score?
Unfortunately, no. Each lender weighs their underwriting criteria differently, so there can be huge variation in rates, especially the further down the credit spectrum you go. You can look at sites like Bankrate or Credit Karma to get a general sense for the rates that are applicable for your credit score, but auto lenders typically use scoring models that place more emphasis on your history with auto loans.
That’s why I strongly recommend using sites like Outside Financial to pre-qualify for a loan based on your vehicle and your credit history. If you have a credit union or bank you like, it’s also a good idea to check their rates first, before going to the dealer.
If you are trying to build a good credit history, is it helpful to finance a car?
Car loans are often one of the first loans that people take out as a way to build credit. It can be helpful to find a co-borrower to apply with you — just make sure the lender will report the loan to the credit bureaus for both borrowers. Because car loans are secured, the interest rates are typically lower than for unsecured debt. That’s because the lender can repossess your car if you don’t pay to recoup some of their money.
Making your car payments on time each month is a great signal to future lenders that you’re responsible with debt. If you pay off the loan quickly, it can actually decrease your score at first, because credit scores include the age of all of your credit accounts (the older, the better). Your credit score also factors in credit mix, so it can be helpful to have multiple types of accounts, including revolving debt like credit cards and installment debt like car loans.
But I think people focus too much on a few points on their credit score; for most people, it’s not worth paying, say, 18 percent interest to avoid a 5 point decrease in your FICO score. You would be better off looking into alternative ways to improve your credit. Personally, I would recommend checking out Self Lender and Experian Boost.
Any car financing red flags to look out for?
First, never answer the dealer’s favorite question: How much do you want to pay per month? Car loan terms have crept up over time because too many dealers try to hide big markups by stretching them out over longer terms. “It’s just $10 a month” times 84 months is a lot of money.
Second, always do the math on your own. Dealers can make honest (or less honest) math mistakes, and it’s important to take out your phone’s calculator and double-check the numbers for yourself.
Third, if it sounds sketchy, it probably is. Too many car buyers feel trapped at the dealership, and will sign anything to get out of there. Give yourself enough time to think about the deal, read through the paperwork, and make sure you know what you’re agreeing to. There are about 10,000 dealerships in the United States, so if you aren’t being treated appropriately, walk out.
Are there any hidden fees when it comes to auto financing?
First, the dealer has no obligation to disclose that they’re marking up your loan, let alone by how much. The typical loan markup is nearly $1,000, but that can be much higher if you have “near-prime” credit (approximately 600-700). How does it work? Let’s say the dealer gets loan offers from Bank of America for 5 percent and from Wells Fargo for 7 percent. The dealer can then turn to you, the car buyer, and say, “Great news! I’ve found you a loan from Wells Fargo for 9 percent.” The dealer doesn’t have to tell you that there were competing offers, or that Wells Fargo’s offer was much lower without the dealer’s markup added in.
Second, dealers also add hefty markups to a variety of “ancillary products” that are often bundled into the loan. We believe vehicle service contracts and GAP waiver can be valuable, if you buy them at the right price and understand what you’re getting, but too many products come with such high markups that they’re not worth it. For more on ancillary products, we have a whole library of content.
Is getting a co-signer a good idea?
If you’re just starting out with credit, especially with auto loans, getting a co-signer can be a good way to increase your chances of being approved or of lowering the rate on the loan.
As a side note, co-signing and co-borrowing are two different things. A co-signer is often a parent, helping out a teenage child; the co-signer agrees to pay off the loan if the primary borrower doesn’t, but doesn’t own the collateral (i.e., the car). By contrast, a co-borrower (often a spouse) will also be on the car’s title and will be considered another owner of the vehicle.
Any other tips you can think of to help first-time or novice buyers?
We’ve compiled our top ten tips for car buyers here, but the short version is this: take your time! Buying a car, especially for the first time, can be intimidating. There are so many options and so much (often conflicting) advice on the web. It’s really smart to get as many offers as you can, but make sure you understand what each offer is. If the lender hasn’t run a hard pull, chances are the offer is subject to change when they do. If you’re “pre-qualified” or “pre-approved” for a loan, that means the offer isn’t final (that’s typically called “approved”).
Thanks so much to Sonia Steinway for helping answer all of our questions. We appreciate her expertise and advice.
Related pages and articles:
BestCompany: BestCar Finders
BestCompany: Outside Financial Review
BestCompany: Best Car Loans
Are You Ready for Auto Loan Debt?
What Is an Interest Rate?