21

I went to the car dealership and was planning to finance a car under my brothers name, but since his credit is new AND he just financed a car 2 months ago, the salesman said it probably wouldn't work.

The car I'm buying costs $15,550 and I'm putting in $5,500 as a down payment, because I'don't have much credit history. I have a credit score of 690 according to Credit Karma, but for some reason the salesman told me I had no credit score.

Questions:
Do you guys think it's a good idea to put that much down on the car?
What interest rate is reasonable based on my credit score?
Do you think I'll get approved?

  • 16
    Do not place a downpayment until the terms are worked out and the paperwork is signed. – ChrisInEdmonton Mar 23 '15 at 13:55
  • 19
    Can you clarify? It sounds like the car is $13,981 and you are putting a $5,500 downpayment, leaving $8,481 to be financed. If the dealer is expecting you to pay $251 for 72 months to finance that, you are getting ripped off something fierce, bad enough that they are figuratively slapping you in the face. – ChrisInEdmonton Mar 23 '15 at 13:57
  • 16
    Check other sources of financing -- banks -- before assuming the dealer-offered financing is at all reasonable (never mind your best option). And never discuss financing until the dealer has committed to a price. – keshlam Mar 23 '15 at 15:45
  • 11
    OT: are you sure you need to buy a new car? – o0'. Mar 23 '15 at 20:39
  • 31
    Whooah 19% interest rate. That's more than a face-slap, that's something else that can't be described on a website suitable for a family audience. Ask the dealer to at least buy you some flowers and take you out for dinner first. – A E Mar 23 '15 at 22:33
101

If you are going to finance a used car, it is frequently best to arrange financing before you even pick out the car. The easiest way I recommend is to talk to a local credit union or two. They'll be able to tell you your interest rate and terms without having to talk to the dealer at all. Most likely, they'll be significantly better than the dealer at getting a good interest rate.

As far "what is a good rate?", check out bankrate for average loan rates: http://www.bankrate.com/auto.aspx

Today's numbers look like 2.87% is the average for a 48-month used car loan. That means if the bank comes back with something ridiculous like 9% or 10% you know they are way overcharging you. I know someone who got a first-time-buyer rate from Ford and ended up with a 19.99% rate. I could literally buy the car on my credit card and end up in a better spot.

Honestly though, if you are 18 and have $5500 to put towards a car, I'd buy a $4500 car and save $1000 for repairs and maintenance. After you have the car, put $250 every month for a "car payment" into a savings account for your next car.

  • 47
    100% agree with this post. The best advice is in the last paragraph. You can buy a nice car for what you have for a down payment. – Pete B. Mar 23 '15 at 17:07
  • 5
    Wish I could up vote this more than once. If you can't find anything decent for less than $5500, you should follow the advice in the first paragraph--get pre-approval from a bank/credit union, and try to avoid 72 month loans. I know that is now typical, but think about those payments: 250*72=18000, which is nearly double what you're borrowing. There's a lot of opportunity cost buried in there. – Rick Goldstein Mar 23 '15 at 18:28
  • 14
    I'd go a little further: buy a sub-$2500 car and save the rest. Even if it craps out on you the next day (unlikely, especially if you buy e.g. Honda or Toyota), your net loss is likely less than dealer's markup & finance would cost you. – jamesqf Mar 23 '15 at 20:59
  • Keep in mind that a car is an expense (especially in places where weather ins't always sunny) and that it will drop in value faster than you pay for it in most situation over 60 month. – ROunofF Mar 24 '15 at 18:29
  • Lost it at "buy the car on my credit card" - but I suppose, imagine the reward points! – corsiKa Mar 24 '15 at 19:37
24

It sounds like you're basing your understanding of your options regarding financing (and even if you need a car) on what the car salesman told you.

It's important to remember that a car salesman will do anything and say anything to get you to buy a car. Saying something as simple as, "You have a low credit score, but we can still help you." can encourage someone who does not realize that the car salesman is not a financial advisor to make the purchase.

In conclusion,

Don't take financing advice from a car salesman.

  • 10
    +1 for "Don't take financing advice from a car salesman." – Sean W. Mar 24 '15 at 18:50
  • 1
    I'm not sure I'd call a 690 a high credit score. Not a horrible one, but not 'high'. 687 is the 'average' US credit score (I assume that means the mean score). – Joe Mar 24 '15 at 19:41
  • 2
    The problem I have with this answer is the sunk-cost fallacy. When you buy a new car, it depreciates by 10% no matter what amount you put down on it -- 0%, 35%, or 100%. – Snowbody Mar 25 '15 at 18:53
9

If you know that you have a reasonable credit history, and you know that your FICO score is in the 690-neighborhood, and the dealer tells you that you have no credit history, then you also know one of two things:

  • Either the dealer is incompetent at finding credit ratings, and thus is incompetent at finding good loans for people like you, or
  • The dealer is lying to you. Sadly, many used car dealers have a reputation for ripping people off in the back room.

Either way, you should walk away from the deal. If the dealer is willing to lie to you about your credit score, the dealer is also willing to give you a bad deal in other respects.

Consider buying a cheaper used car that has been checked out by a mechanic of your choice. If possible, pay cash; if not, borrow as small an amount as possible from a credit union, bank, or even a very low-interest rate credit card. (Credit cards force you to pay off the loan quickly, and do not tie up your car title. I still have not managed to get my credit union loan off of my car title, ten years after I paid it off.)

8

I somewhat agree to Alex B's post. I was a finance manager for 7 years both prime and sub-prime(special)(in other words bad).

The parts he's 100% right on. Hit up you local credit union then your bank. Get your financing done first if you can. Now 690 credit score is one of 3 bureaus, not all banks and lending institutions use all three or the same one. Also the score isn't everything. That could be good or bad. The 2-3% range is normally for the 720+ crowd unless its a manufacture. (GM, Ford, so on)

With rates capping out at around 30% depending on state laws. However 690 should not be 19% on a new or late model car. At 690 at 19% you would have be going for a 70,000+ mile 6 year or older car if I had to guess. Assuming you have no BK's and repos.

Some times dealerships have to pay banks to get people financed. Its hidden in the cost and they by law are not allowed to tell you about it because it cannot be passed on to you. However the banks don't just fund any crazy amount of money either say like 115% of book and that it. That is where and why they want that big down payment because that is used to off set the finance amount and what you pay. Making the dealership money. and i can go on and on and on...

But you should always try to get the funding prior. Your credit union won't charge the hidden fees and they only care about your down payment to see that you are making a commitment. If you are buying used. Save out 1500 for future repairs and tires and such. Don't buy paint protectant and such. If you finance thru the dealership and put less than 20% down DO buy Gap Insurance but thats it. I can go on and on but I won't. Feel free to ask though.

And to answer your original only question with not context. "Is there any reason not to put a 35% down payment on a car?"

Yes if the money is better served paying off credit cards or long term mortgage, assuming you don't need the write off.

  • 1
    I got the car, 9.3% interest, $209 monthly payments for 72 months, im paying off the car early as I can afford it though, came with 75k mile warranty and all. – Julian C Mar 24 '15 at 3:14
4

I am going to give advice that is slightly differently based on my own experiences.

First, regarding the financing, I have found that the dealers do in fact have access to the best interest rates, but only after negotiating with a better financing offer from a bank.

When I bought my current car, the dealer was offering somewhere around 3.3%, which I knew was way above the current industry standard and I knew I had good credit. So, like I did with my previous car and my wife's car, I went to local and national banks, came back with deals around 2.5 or 2.6%. When I told the dealer, they were able to offer 2.19%.

So it's ok to go with the dealer's financing, just never take them at face value. Whatever they offer you and no matter how much they insist it's the best deal, never believe it! They can do better!

With my first car, I had little credit history, similar to your situation, and interest rates were much higher then, like 6 - 8%. The dealer offered me 10%. I almost walked out the door laughing. I went to my own bank and they offered me 8%, which was still high, but better than 10%. Suddenly, the dealer could do 7.5% with a 0.25% discount if I auto-pay through my checking account.

Down-payment wise, there is nothing wrong with a 35% down payment. When I purchased my current car, I put 50% down. All else being equal, the more cash down, the better off you'll be. The only issue is to weigh that down payment and interest rate against the cost of other debts you may have. If you have a 7% student loan and the car loan is only 3%, you're better off paying the minimum on the car and using your cash to pay down your student loan. Unless your student loan balance is significantly more than the 8k you need to finance (like a 20k or 30k loan).

Also remember that a car is a depreciating asset. I pay off cars as fast as I can. They are terrible debt to have. A home can rise in value, offsetting a mortgage. Your education keeps you employed and employable and will certainly not make you dumber, so that is a win. But a car? You pay $15k for a car that will be worth $14k the next day and $10k a year from now. It's easy to get underwater with a car loan if the down payment is small, interest rate high, and the car loses value quickly.

To make sure I answer your questions:

Do you guys think it's a good idea to put that much down on the car?

If you can afford it and it will not interfere with repayment of much higher interest debts, then yes. A car loan is a major liability, so if you can minimize the debt, you'll be better off.

What interest rate is reasonable based on my credit score?

I am not a banker, loan officer, or dealer, so I cannot answer this with much credibility. But given today's market, 2.5 - 4% seems reasonable.

Do you think I'll get approved?

Probably, but only one way to find out!

1

Do you guys think it's a good idea to put that much down on the car ?

In my opinion, it depends on a lot of factors.

If you have nothing to pay, and are not planning to invest in something that cost a lot soon (I.E an house, etc). Then I see no problem in put "that much down on the car".

Remember that the more you pay at first, the less you will pay interest on.

However, if you are planning on buying something big soon, then you might want to pay less and keep moneys for your future investment.

I would honestly not finance a car with the garage as I find their interest rate to high. Possibilities depends a lot of your bank accounts, but what I would personally do is pay it cash using my credit margin with the bank which is only 2.8% interest rate. Garage where I live rarely finance under 7% interest rate.

You may not have a credit margin, but maybe you could get a loan with the bank instead ? Many bank keep an history of your loan which will get you a better credit name when trying to buy an home later. On the other side, having a good credit name is not really useful in a garage.

What interest rate is reasonable based on my credit score?

I don't think it is possible to give a real answer to this as it change a lot around the world. However, I would recommend to simply compare with the interest rate asked when being loan by the bank.

0

I suggest you to apply for a car loan in other banks like DCU or wells fargo, you might get the loan with not the best rate, but after a year you can refinance your loan with a better rate in a different bank since you are going to have a better credit as long as you make your payments in time. I bought a Jetta 2014 last year, my loan is from Wells Fargo. Like you, my credit was low before the loan because I didn't have too much credit history. They gave me the loan with a 8.9% of interest.

  • Well I got the car, 9.3% interest with $209 monthly payments. I'm gonna pay off the car early, keep it for atleast a year and just pay it off. – Julian C Mar 24 '15 at 3:08
  • @JulianC As your credit rating goes up don't hesitate to refinance the loan at a much better interest rate, that is still a lot of money to are paying that you might not have to. – draksia Mar 24 '15 at 13:50
  • @JulianC your loan may have a prepayment penalty -- please check the terms. if you see anything about "sum of years digits" or "refund of charged interest" those also mean prepayment penalty. – Snowbody Mar 26 '15 at 20:30
  • @Snowbody it says "you may prepay" you may prepay all or part of your principial balance at any time. If the contract is paid in full within six months after thr date you sign it, we may impose an acquisition charge, not exceeding $75. If you prepay, you must pay the earned and unpaid part of the Finance charge and all other amounts due up to the date of your payment. – Julian C Mar 28 '15 at 1:15
  • so the question is, when is the Finance Charge "earned"? Was it earned when you took out the loan, or is it earned on a monnth-by-month basis? – Snowbody Mar 30 '15 at 13:18
-1

I suggest you buy a more reasonably priced car and keep saving to have the full amount for the car you really want in the future. If you can avoid getting loans it helps a lot in you financial situation.

-1

Makes sense so long as you can afford it while still maintaining at least six months living reserves. The sooner you own outright a decreasing asset the better which should be considered when selecting your loan term. However, with today's low rates and high performing stock market you may want to consider allowing that money to be put to better use. It all depends how risk adverse you are. That emotional aide of this decision and emotions have value, but only you can determine what that value is. So - generally speaking, the sooner you own an asset of decreasing value the better off you are, but in exceptionally low interest rate environments such as today there are, as mentioned, other things you may want to consider. Good luck and enjoy your new ride. Nothing better then some brand new wheels aye.

protected by Chris W. Rea May 6 '16 at 12:01

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