Used Car Loan Sources

The easiest way to get information about used car loans is to phone various sources. Provide the pertinent information: cost, description of car and the down payment. After you have discussed the loan length and the amount to be borrowed, find out the APR and what the monthly payment on that amount will be. Find out if there are any restrictions on the amount
of money the creditor will lend for the car you are interested in.

Also, ask about additional fees such as credit checks and the finance charge, which is the total cost of the loan.

The following credit sources should be considered before selecting a used car loan:

Credit Unions usually offer low loan rates, especially for used cars. In addition, credit unions sometimes offer free credit insurance to borrowers as well as low-cost credit disability insurance. Many consumers join to participate in their loan programs.
                                              
Banks sometimes give a preferred rate to persons who have checking or savings accounts at the bank. In setting its loan rate a bank will inquire about a consumer's creditworthiness by making a credit check.

Another factor affecting the loan rate is the number of months the loan is in effect.
Dealerships are not lending institutions. They borrow the money from their own
banks or from local institutions. They may be the most expensive source
of car financing but also the most convenient.

 Sometimes, under special arrangements, they offer loans to young buyers who have no credit history but are employed or to people with poor credit ratings.

NOTE: Sometimes the dealership finance manager will offer to do your paperwork if you getting a loan from another bank or credit union. For performing this service,
the dealership receives payment by the lender who will pass along that cost to the borrower.

Handling your own paper work may mean a trip to  the lending institution, but it can result in a significant saving.

Finance Companies and small loan companies make a point of providing loans to persons with bad credit or no credit history, but they charge the highest legal interest rates and have
exacting requirements for loan security or collateral.
                                              
Parents, relatives and friends can be a good source for young buyers. If you borrow money from a relative or friend, it is important to have a written contract that contains the standard information: the total cost, the amount borrowed, length of the loan, interest rate and
repayment arrangements.

It should be signed, dated and witnessed. Keep accurate records because the Internal Revenue Service may consider large payments to a minor as a gift for tax purposes.

Some consumers knowingly choose to pay high interest rates for several reasons. Buyers with a checkered credit history may be embarrassed to go to a bank or credit union.
They fear being turned down. However, the majority of borrowers who think their credit is poor could qualify for regular loans. Some consumers disregard  their own self interest in money matters. They value convenience and the promised "no fuss" policies of dealerships. If you want to get a good deal, you must investigate all the sources of financing and select the deal that best meets your needs.

Using A Cosigner

Sometimes buyers, who are ineligible to sign a loan contract because they are under age, need a cosigner for a used car loan. The cosigning procedure is a big step  for both parties. A cosigner is legally required to assume all the obligations of a loan if the borrower does not fulfill the contract. In most states, if the borrower misses one payment, the creditor can collect from the cosigner immediately without contacting the borrower first.

Also, the lender is permitted to use all collection methods against the cosigner such as law suits and garnishment of wages. In addition, the amount of the debt may be increased by late charges and attorney fees.

When people cannot make loan payments, they often decide to let the financial institution have the  car. The borrower hopes to end all responsibility for the loan.  However, when the financial institution repossesses a car, it attempts to sell it and apply the proceeds to pay off the loan. But the sale amount may not be sufficient to cover the balance owed. In that case, the original borrower and the cosigner may receive a deficiency judgment which would force repayment of the difference. All of these events will have an adverse effect on the borrower's credit history and may damage the cosigner's credit record as well. In cases where parents are cosigning for their children, perhaps the peril is not so great, but there is still some risk.

Getting Preliminary Information From Creditors

The easiest way to get information is to phone the creditor and ask for the loan arranger or car loan department. The loan officer will ask a few basic questions:

How much money is to be borrowed?
How long?
What year is the car?
What is the selling price?

Potential borrowers may be asked questions about employment, income, credit cards and debts. After you have answered the questions, request the following information from the loan officer:

 APR
 Monthly payment
 Restrictions on the loan
 Additional fees
 Finance charges

The total credit costs depend primarily on three factors: the APR, the amount borrowed and the  length of the repayment period. So if you are considering financing through a dealer, make sure you get separate quotes for the car and for the financing. Otherwise, you will
not be able to compare the credit costs and terms accurately with other credit sources.

Comparison Shopping For A Used Car

 Since the majority of used cars are financed, comparison shopping for the best finance terms and contract is worth the time and effort and can save you a lot of money. Before signing any finance contract, for your own protection, read it carefully. Make sure you  understand every clause of the contract. Also, be sure there are no blank spaces or lines to be filled in later. Do not be afraid to ask questions about clauses that are unclear. You also want to know the
creditor's legal rights for situations such as late payment, default or prepayment. Finally, be sure that you can meet your responsibilities defined in the contract.

Copyright © 1997, National Institute for Consumer Education, Eastern Michigan University. Any person is hereby authorized to view, copy, print and distribute this mini-lesson for information and education purposes.

^{IS THERE ANYTHING IN YOUR CREDIT REPORT THAT WOULD PREVENT YOUR GETTING A LOAN FOR A USED CAR OR TRUCK?}

^{CREDIT SCORES are used by employers increasingly in their hiring decisions.  Many jobs in today's new economy require security clearances in addition to the now normal background investigations,  em- ployers, in light of September 11th, 2001 attacks, now consider your personal credit report and  score as part of their process.}

^{If you think there may be a problem, visit the Institute of Consumer Financial Education's web site at:
www.icfe.info}

^{The ICFE is a wonderful resource for consumers of all ages to learn more about spending, saving and the wise use of credit.}