Over the past year, we have discussed many of the aspects of vehicle selection, evaluation and purchase. For the next couple of visits, I plan to talk about the actual components of automotive financing – what you may already know.. and some of the things you may not know, but might help you the next time you are in the market for a vehicle – new or used. First the basics.
Who does the financing?
There are the typical ones that you know about – banks and credit unions – each offering consumers a “retail” auto loan. Are you aware that each automaker operates a “captive” automotive finance company?
What is the difference?
Bank: Will offer you an auto loan based mainly on your credit score (known as your FICO score). While this is not the best avenue for those with less than perfect credit – having other business with the bank – i.e. a mortgage, investments, savings account, checking account and etc – may result in the opportunity to explore other options toward financing the vehicle. A loan secured by a large account balance in a savings account or home equity loan for example.
Credit Union – Usually associated with a place of work or specific community, the credit union is owned by the members. This is better because the credit union is a bit more lenient when it comes to your credit score. Much like a cooperative, there is less of a need to make a large profit on each loan. Generally credit unions are easier to work with because they usually set up a payroll deduction for the vehicle loan – so they get paid when you get paid. The downside is that the credit union has a narrower scope of operations, so your options for vehicle financing may also be more limited than the bank.
Captive Finance Company – Owned by a specific automaker, the captive lender can offer a more focused deal designed to move the metal off the dealer’s lot. This is important – especially for new and used “certified” vehicles. The automaker can offer different financing options that often are tied to specific models – to reduce inventory and/or clear out older models prior to the launch of new ones. The result is that you can often benefit with a combination of a smaller down payment, lower interest rate and/or longer loan terms.
Tiers of Automotive Credit – You should know that when evaluating creditworthiness for an auto loan, that buyers will fall into one of the “tiers” of automotive credit that are based on the applicant’s credit score. The tiers usually run from “A” to “F” , with the “A” tier credit borrowers having the highest FICO score and so on down the line. The reason that this is important is because that as a borrower, the higher the tier you are in, the better terms you are offered – i.e. lower interest rate, lower down payment, longer repayment terms. By the same token, the lower your tier, the higher the rate and the less attractive your terms.
NEXT TIME: Wholesale loans and financing alternatives.