During our last visit, we discussed the different types of finance institutions that offer retail car loans (bank, credit union, captive (automaker) finance company), as well as how they treat your FICO (credit) score in the form of tiers of credit. During our conversation during this visit, I am going to explore some additional avenues of auto loan financing that may be available to you.
Indirect Lenders – Also known as Wholesale Lenders, the banks, usually large banks with a large national or regional footprint – offer money directly to the car dealers to lend for auto loans. The difference here is that the local F& I (Finance and Insurance) professional at the dealership usually works directly with a number of wholesale lenders to get the best rate and terms. The dealer usually marks up the loan a few percent for profit, depending on your credit score, the need to make the deal and the amount of inventory the dealership needs to sell. Of course there are advantages and disadvantages to this option.
On the upside – The dealer is a motivated seller that directs plenty of business to these lenders. As a result, they can (and often do) act on your behalf in those situations where your credit is less than perfect, and/or when you need a lower downpayment. You benefit from the dealer’s leverage with the lender.
The downside – If you are looking to purchase a popular model that is in high demand, or the profitability of the deal is otherwise lean for the dealer, they could try to make the deal more profitable by charging you a higher interest rate. However, the final say is always up to you, and if you have shopped for a loan the way you shopped for the vehicle, you should have some choices from which to choose the best terms and interest rate.
Buy-Here-Pay-Here – This is a popular solution for smaller independent used car lots. Also known in the past as We-Tote-the-Note, this sort of arrangement carries a higher interest rate and is outlet specific. This is the world of “sub-prime” automotive financing and it means exactly what it says – financing for people with lower credit scores that often will not qualify for a more traditional financing.
On the upside – If you have a steady job (i.e. job that pays at least $300/week that has been held for a minimum of 6 to 12 months and the paystubs to prove it), and meet some other basic requirements – usually no bankruptcies or judgments – they can get you into a vehicle. They will often help build a positive credit profile for you by reporting your on-time regular payments to the local credit agencies.
The downside – Older vehicles, higher mileage, shorter warranties (if any), and little or no tolerance for late or missed payments. Because these lots are smaller and less capitalized, they are also less likely to work with you to resolve problems. This can sometimes result in MORE problems with a vehicle that breaks down, doesn’t run, or has other issues.
NEXT TIME: A primer in automotive financing basics – including the oldest and most effective way of automotive ownership.