Loan Source Information
Loan Sources in Your Town and on the Web
You probably have more sources of loans than you think. Here I give you a brief overview of types of loan sources, a few pros and cons about each, and, if applicable, examples of Web sites.
Alert! If you have not read the "Pros and Cons of Internet Financing Web Sites," read it before you even think of clicking on any online financing site, even if it belongs to your hometown bank or credit union.
Uncle Festus Or Aunt Bea
There's no shame in a little family help now and then. And lots of people need to be making $14,000 yearly gifts to tax-shield their estates a bit.
Cash Value In Your Life Insurance
If you're one of the few remaining people with whole-life insurance, you can borrow that cash value for a charge generally less than half of that from any other source. Your insurance will stay in effect, too. Ask your agent for a statement of cash value. If you choose to finance by this method, make arrangements to pay monthly sums back into your policy.
A Home Equity Line Of Credit
If you are a responsible borrower, a home equity loan may have certain advantages, particularly from a tax point of view. But don't use this method to finance a car into the 22nd century-keep the loan as short as you can stand. You may want to check with your tax accountant to see if this option makes sense for you.
Recommended sources: Many credit unions and most banks offer home equity loans. If you have a relationship with a bank or a credit union, go to them first.
What about online or TV-advertised home equity mortgages? In my opinion, forget it. Forget it twice if you are interested because you're worried about your credit or because you already have a high debt-to-value rating on your home or condo (if you owe over 75% of your property's value). Many of these online home equity services are very dangerous. Likewise, the TV hucksters. These companies usually charge dramatically higher rates and fees than conventional banks, and they give you virtually no grace periods before they seize your home. Some of these online companies will issue you a credit card tied directly to your home equity loan. Cut it up. Why?
Read the fine print on that credit card. One lender states, "You may lose your home if you miss any of these payments." How would you like to lose your home because you were late on a credit card payment?
With all their faults, credit unions are perhaps the best place to be and if you don't belong, you probably can.
NOTE: Because I have consulted extensively with credit unions around the country, please hold what I say about the value of credit unions to the highest scrutiny.
I think you will find that in this age of high technology, nanosecond cons and Internet glitz, many credit unions are your cheapest and certainly least deceptive source for a loan. Good credit unions often give you high-quality, unbiased consumer information, too.
The drawback with some credit unions
Unfortunately, a number of credit unions are hurting their members by teaming up with dealership to offer "indirect lending" as they try to compete.
- How do you know it's an indirect loan? You don't have to go to the credit union to get your loan. You do all the credit union paperwork right there at the dealership.
- Why should you mistrust indirect loans? Your credit union--which is supposed to be saving you money--is probably paying the dealership a fat commission for processing your loan: sometimes up to a thousand dollars. Would you drive to the credit union to save a thousand? Or even a paltry two hundred?
- Protect yourself by first calling your credit union and asking if the dealer fee is paid by you or paid by the credit union. If it's paid by you, do the paperwork directly at your credit union. And while you're there, why not find your credit union manager and ask him or her why the credit union had not disclosed their extra charge to you for filling out paperwork at the dealership?
The pros for most credit unions
- Credit unions are non-profit and member owned. Because credit unions are member-owned cooperatives, the credit union has a vested interest in its members financial health. They don't want to see you overextend yourself.
- Credit unions will generally finance persons with little or no credit. If you are a first-time borrower or have very little established credit, most credit unions will make you a car loan. If you've had problems with your credit, but can explain them ("I was run over by a car dealer and missed work."), they will probably work with you. And unlike subprime lenders, credit unions won't take you to the cleaners.
- Credit unions generally have no selling bias. Credit unions couldn't care less if you buy a Ford or a Honda. Their advice, therefore, is generally much more impartial.
- Credit union total loan costs generally beat bank and dealership loan costs even during dealership "rate sales." The key phrase here is "total loan cost," which includes interest, rebates, and fees. And it is only the total loan cost that matters to you. Click on "How 10% Can Beat 0%" to see how.
- Credit unions generally make used car loans at the same rate as new car loans. That alone could save you thousands. Other lending sources often charge ridiculously higher interest rates on used vehicle loans. Many states have no limit on used-car interest rates. What the traffic will bear is the favorite rate. (Maximum Used-Vehicle Interest Rates, State by State ) If you plan to finance a used vehicle, always check a credit union's rate against your other loan sources.
- Credit unions generally charge much less for life insurance and disability insurance, and for service agreements, too. Seventy-two percent of all credit unions provide life insurance at no cost. Compared to dealerships and Web sellers, most credit unions charge about half for disability insurance. Most credit unions offer service agreements for under $500 dollars, while many dealerships and Web sellers charge you up to $1900 for virtually the same agreement.
- Credit unions loan money on a simple interest basis. Some dealerships, Web sellers and other lenders still charge interest in a way that loads the interest on the front of the loan which penalizes you if you play the loan off early.
- Many Credit unions really offer credit counseling. And they build your credit, too. Some dealerships, many Web sites, and lots of manufacturers like to pretend they give sound financial advice, but their main goal is profit.
Finding A Credit Union If You Don't Have One
Ask at work. If your company doesn't actuallyhave its own credit union, it may have a relationship with one that allows you to join. If your company has no credit union, you can find one on the aSmarterChoice website which is a project of the nation's credit unions.
Credit Unions On The Web
If you already belong to a credit union, it probably has a Web site and, if so, definitely will have an auto section online. If you belong to a larger credit union, you can probably get a pre-approved loan online. Find that credit union newsletter you've been meaning to read and look for the credit union Web address.
Brand Name Prime Banks
A straightforward bank loan can be your best choice-particularly if you already have a physical relationship with a bank (actually have a branch you deal with), if you have good credit, and if you are dealing directly with the bank-not dealing "indirectly" with the bank through a dealership or online service. Remember "direct" means you go into the bank to arrange the loan. Indirect loans almost always mean the bank is paying the arranger a fee and it is customary in the auto business to pass all fees and expenses on to you, the customer.
How bank rates compare to "captive" rates.
If you are financing directly, a bank is generally cheaper than the "captive" houses used by dealerships (such as GMAC, Toyota Credit, or Ford Motor Credit). That's generally true, even if the captive source is offering 2.9% financing. See "How 10% Can Beat 0%." Bank used-car loan rates are generally much cheaper than "captive" rates.
How banks determine your interest rate.
Your credit is a factor, and the number of months you plan to finance is a factor, too. But many banks also give lower rates to customers who already have checking or savings accounts with them. Banks also negotiate. Don't be shy
Credit life and disability insurance is generally cheaper than that offered by dealerships and more expensive than insurance purchased through credit unions.
Surfing Your Bank On-Line.
Virtually every big bank has a Web site and promotes its auto loans on that site, check your monthly statement for the URL or use your search engine and your bank's name to find it. Use the site for rate comparisons, but remember that the site can't bargain on the rate. Your local loan officer might.
Alert! Many brand name prime banks, either directly or through subsidiaries, are getting deeply involved in subprime lending, which charges very rates to people who have or think they have no, little or impaired credit. Avoid such loans.
On-Line Loan Companies And Services
Hundreds of online services offer to help you get an automotive loan. Just enter "car loans" in your browser and see how many sites you find. They range from "affinity sites" that get their money from fowarding your click to potential lenders to comparison sites to banks and other institutions that actually make the loan. Because the interrelationship of online lending serivces is so complex, your strategy is to go slow and sign and certify nothing until you've done some homework. The average profit per loan of many on-line lending services is often dramatically higher than the profit you would pay at a walk-up source because those on-line pages lull you in complacency rather than stir you to high alert. Shopping rates online can lower your credit. To get an iron-clad interest rate commitment on-line, you will be required to actually apply for a loan. "Estimates" or simple "rate quotes" are meaningless. Each lender that receives your loan application has the right to pull a credit report on you. Unfortunately, excessive credit report inquiries can lower your credit rating from prime to subprime. Some companies will deliberately "shotgun" your loan application so that every single potential lender has to pull its own credit report, your credit rating is lowered, and they get your loan. Responsible companies pull one credit report on you and send that credit report to their lending sources. Those are the only companies to deal with. How to protect yourself from on-line shotgun credit inquiries. Before you fill out any credit application on-line-whatever the site, including one run by the Almighty-send an e-mail enquiry which asks this question: "Does your site pull one credit report and send that credit report to potential lenders, or do your potential lenders each pull a credit report on me?" If you don't receive a direct answer, or if the source says its sources all pull credit reports, don't use them. If you receive an answer, download it or print it and keep it on file.
The "Captive" Sources
Captive sources include manufacturer-related companies such as GMAC and FMCC, their relationship with their dealers, and dealership financing itself. The dealership financing sources themselves are as good or as bad as any. Many times, if you know how to ask, and if you have the toughness of an armadillo's shell plus the tenacity of a pit bull, a dealership may actually give you the cheapest as well as best overall loan rather than lose you as a customer. But don't expect the dealership's "captive" dealership financing sources such as Ford Motor Credit, Toyota Motor Credit and GMAC to help you in shopping captive rates on the Web. The sites sound straightforward but must send you to a dealership for the actual loan. No captive finance company such as GMAC can legally make direct loans to customers
Dealership Finance Gimmicks On The Web.
- Meaningless but enticingly low rate quotes. Many dealer Web sites will quote you an very low rate just to get you to come into the store where they can work you.
- Even when you're dealing with many of the "non-dealer-type" Web sellers such as Greenlight.com, you're generally dueling with dealership finance salespersons.
- The dealer's objective when you visit their Web site is to make you "sticky"-keep you on the site long enough to "tie you down," get a deposit. Don't give a deposit at this stage.
Ever seen those Buy Here-Pay Here automotive sales operations? Loan sources from new car dealerships to prime banks to independent buy here-pay here used car lots are rejoicing in the huge profits to be made in subprime loans. Subprime loans are very high interest loans targeted at poor people and other people who have or think they have poor credit or no credit. These are always a bad deal.
Subprime and BH-PH on the Web
Smiling, oddly spooky cartoons! Guaranteed E-Z Approval! Free $295.00 credit Repair Kits! As seen on TV! Print this now!
Everything that makes the sub-prime business greasy and slick is on the Web, only magnified in its potential to do harm. The slime-balls who use the Internet to hawk these loans know you're embarrassed, know you'd rather keep yourself hidden behind your computer's screen. But don't fall for that. If you have real credit problems, stay away from the Web financers. Go to a credit counselor at a credit union, or go to legitimate non-profit credit counseling Web site for information on a legitimate credit counseling service near you.
Title Loan Operations
These are nothing but pawn operations. If you think you'll get a second vehicle by getting a "title loan" on your present car, I have a bridge I'd like to sell you. The interest rates at these places aren't too high, either, only 264% or so.
So you're paying cash, what can these operations do to hurt you. First, you'll have to fight to be a cash buyer, particularly with dealership, and particularly if you don't have a trade. Financing provides bigger profits than the sale of the vehicles. Sellers will therefore do everything they can to convert you to finance. Expect fancy computer-driven programs which clearly demonstrate that cash buyers are fools or worse.
A smart negotiating tip: Don't tell any seller you're a cash buyer up front.