Tell me the basics of auto loans
May 1, 2019 6:46 AM   Subscribe

Every car I've purchased in the past has been a beater I've paid cash for from someone I knew. I'm old and I have cancer, so I need to buy something more reliable now, thus the need for financing. I don't know what I'm doing. Please help.

For reasons I won't go into, I belong to three credit unions. They all list slightly different interest rates, and of course, you don't know your actual interest rate until you apply. I also have a savings account at Capitol One, which does online auto loans, and NerdWallet gives high ratings to a company called LightStream (side question: how reliable is NerdWallet?). I have a high credit rating (750), but a too high debt to income ratio, so I don't know what kind of interest rate I'd be eligible for. (Please no scolding on getting out of debt first- my financial situation is very weird and complicated in ways I can't share here. Trust me on this.) It looks like the car dealer has "deals," but I understand it's better to go in with financing in hand.

So how does this work? NerdWallet says it's fine to apply for a bunch of loans in a limited amount of time. Do you need to know in advance how much you want to borrow? Do you have to know if you want to buy a used or new car? Do you choose a lender, then go in to buy the car, then change your mind about the lender if the dealer gives you a better deal? Have you used Capitol One or LightStream? Is getting a lease with the intention of buying the car later ever a good idea?

Please share anything that might be useful.
posted by FencingGal to Travel & Transportation (26 answers total) 2 users marked this as a favorite
I went with Capital One and Ally with loan offers at a fairly not-so-great interest rate (this was a number of years ago when I had worse credit than today) and the amount that I could use those loans for. This informed my decision on what car I could go shopping for. The dealerships then used a lot of high pressure tactics to talk me into loans with them (I think they make a lot of money on financing, but I'm not an expert on this stuff), and I wound up going with a lower interest rate loan with the dealership. They probably would have rejected me if I didn't have loan approvals in-hand and said I'd have to get a lower-priced car if they couldn't give me a good deal, so keep that in mind.
posted by xingcat at 6:51 AM on May 1, 2019

My experience is similar - go in pre-approved and the dealer will often try to talk you into a lower rate loan with them (which will then often be sold to whichever large evil bank is buying this year). Get the pre-approval from Capital One or one of the credit unions, because whether or not NerdWallet is willing to lend the money, your dealer isn't going to care. Your credit union may well offer better rates than the dealer though.

Have a good idea what extras they offer and what you're willing to pay for, so they aren't able to talk you into extended blah blah blah and etc.

Do you have to know if you want to buy a used or new car?
You mentioned getting out of debt. You want a new-ish, practical used car, because it will retain value after you drive it off the lot. There is a very good reason Honda sells a lot of Civics.
posted by aspersioncast at 7:00 AM on May 1, 2019 [1 favorite]

1) Research: What's your budget? What kind of car do you want that's in your budget?
2) Get a loan for that amount at the best rate you can. The longer the loan term, the higher your interest will be, but individual payments will be lower. A used car, similarly, will be cheaper but for some reason they charge higher interest on it. The bank or credit union may literally give you a paper check.
3) Find a car that is within your budget, and buy with the loan (see above re paper check).
posted by chesty_a_arthur at 7:02 AM on May 1, 2019 [1 favorite]

Take this with a grain of salt because it's my only experience with a car loan, but I'd recommend going into Carmax. I went into Carmax, traded in my old car, and got a loan on a previous year's model the same day. It was technically "used" but it had less than 100 miles on it. They were really low pressure and they spelled out every aspect of the loan in detail. They not only gave me the interest rate, but told me how much total I would pay in interest with each payment plan.
posted by runcibleshaw at 7:13 AM on May 1, 2019 [2 favorites]

Yeah, Carmax is good value (you'll pay pretty much exactly blue book) and a really good experience. You can totally get some quotes from your bank first, but I found that Carmax was quite competitive, rate-wise. (I've bought three cars from them now, and will happily go back the next time I need one.)
posted by restless_nomad at 7:16 AM on May 1, 2019 [1 favorite]

I think you should hold off on the loan issue, you'll be able to get a decent loan with your credit score. But the specifics of that loan will change a lot depending on whether you buy a new or used car, and how much you'll be borrowing. I'd first try to figure out how much of a monthly payment you can afford, then use some online autoloan calculators to figure out if it makes sense to buy new based on what you can pay monthly and overall. Once you know you want to buy new/used, go to some dealerships and figure out what kind of car works for you, let them know you're not interested in buying right now, just want to look at cars and sticker prices. Once you've narrowed things down, it'll be easier to go through your bank because you'll know what you want. This whole process doesn't have to take more than a couple of days. I strongly recommend not getting dealer financing, even thought it probably will have a lower rate than you can get from a bank. But everything you do with a dealership that makes the transaction more complicated helps them mask the actual price you are paying.

As runcibleshaw suggested, Carmax is a pretty appealing option for many people. You will pay a premium over what you could theoretically get from a dealership or private sale, but that premium is worthwhile to a lot of people, and you have a much lower chance of being ripped-off. I'd even consider getting financing through them if you buy there.
posted by skewed at 7:20 AM on May 1, 2019 [1 favorite]

Nthing a dealer like Carmax who has a "pay what you see on the window" policy. Typically, their salespeople don't make commission. We have a dealer up here in New Hampshire (shout out to Grappone!), and they're fantastic to deal with.

A car loan is like any other loan -- unless you simply don't care about losing some $$, borrow as little as you reasonably can, and shop around for the best interest rate. The above advice is great.
posted by nosila at 7:24 AM on May 1, 2019 [1 favorite]

Have you considered leasing? I understand that many people reject it out of hand, but in certain situations it can be a good solution. I just did a very quick Google and found a 2019 Honda Civic for $750 down and then $249 / month. So for about $10,000 over three years you get a new, reliable car. And, at the end of that time, you’ve got nothing (although at the end of the lease, you can typically buy the car outright - essentially buying a used car but you know firsthand what kind of shape it’s in).

I’m not trying to sell you on the notion. But I once took a serious look at it and discovered that it can be worthwhile in some circumstances.
posted by doctor tough love at 7:25 AM on May 1, 2019 [2 favorites]

Seconding dr tough love. In a situation in which a low, predictable cost was more important to me than equity, I leased a 2015 Civic. It was not necessarily a great deal; I traded in a much more expensive car in which I had a couple thousand dollars of equity and got a $179/mo 12k/year lease. It was base model and I was happy to be rid of it at the end of the lease, but it was a really good solution for my specific needs at the time.
posted by chesty_a_arthur at 7:33 AM on May 1, 2019

Being reductive, an auto lease is a bet with the financing company that the car will hold less value at the end of the lease than the financing company thinks it will. Since they set the rates, it's basically like gambling at a casino: you're almost always a straight up loser. The only time a lease makes sense financially is if you can write the lease off as a business expense.

That said, leases are very, very convenient, and if you foresee a future a couple years down the line where you may not have a lot of energy or time to deal with selling or trading a car, it can be worth the financial penalty of the lease to just have it be dealt with.
posted by seanmpuckett at 7:33 AM on May 1, 2019 [1 favorite]

I've bought a lot of cars, and financed several of them. The good news about auto loans is that they are super-easy to get, because it's so easy to repossess cars. And there are no closing costs with car loans like there are with home loans. What that means for you is that you can always refinance an auto loan to get a lower rate if you don't end up with a good rate at the time you buy because it costs you nothing to refinance except a little time for paperwork.

So, my advice to you is that yes, you should talk to your credit unions and get pre-approved so you know basically what you'll qualify for and set your budget and payment parameters. And then you can go look at cars. But here's the thing: your focus should be on the OUT THE DOOR PRICE of the car, not interest rates, and not monthly payments. So you will have done a little research to find out what a good price is for the car you're looking at -- goal is probably going to be a bit below MSRP and closer to invoice price, unless you're in a high-demand market.

Focusing on the bottom line price of the car is what your average car buyer does NOT do and what the dealers will try to distract you from. They'll want to talk to you about monthly payments. You don't care about monthly payments. You care about the price of the car. And you'll do whatever it takes to get that number as low as possible. If that means taking dealer financing with a higher interest rate, DO IT (remember, you can always refinance to get a lower rate with no additional cost). Every time they want to talk about monthly payments, refocus the conversation to talk about the bottom line price of the car.

Seriously, you can refinance a car with an hour's worth of work. With your decent credit score, you'll be able to get a decent interest rate, whether that's beforehand or after the fact. Focus on getting the best deal on the actual price of the car, not the best interest rate and monthly payment.
posted by rabbitrabbit at 7:44 AM on May 1, 2019 [3 favorites]

I recently went in with financing in hand, and they were so desperate to handle my loan that they met the rate I had and offered another few hundred dollars off as incentive to go with them.

New car dealers aren’t even really selling cars these days; they prefer to be selling loans, and offer vehicles to get you in the door.

Get pre-approval from whichever credit union you like best, get a “vehicle buyer’s check” from them if possible, that is the best way to pressure the dealer to do better. And if they can’t, you can still fill out the check and walk out with your car.
posted by SaltySalticid at 7:46 AM on May 1, 2019 [3 favorites]

i used lightstream for 2 car loans, and recommended them to friends who used them for 2 boat loans, and a solar roof loan. it's easy, good interest rates, and the money is in your account same day if you finish by i think 2pm? they are the click-and-go loan arm of suntrust (so they have a reputable bank behind them). ally is also awesome.

your debt to income ratio is already factored into your credit score so you are pretty well set there and can expect to get favorable rates.

don't panic too much about interest rates. here's a hypothetical: say you buy a car for $20k sticker. add $900 for dealer fees, and (at 6.5%) ~$1258 in taxes. total financed would be ~$22,228. if you get an UNFAVORABLE rate of say 60 months at 4.5% or an even WORSE unfavorable rate of say 5.5% for 60 months... the difference in interest paid over the term of the loan is only ~$600. ($3200 vs $2600 in total interest paid).

pick a reputable website (ie ally, lightstream etc) and get a loan. get the money in your account and buy a car as a "cash" deal. you will have WAY more bargaining power when you are paying cash outright. when you are using dealer financing they have a lot of opportunities to pressure you, add services and values, and generally fuck about with new math. when it's a cash deal, you can just say "I'm willing to pay $16,000 taxes, tag, title, fees, all in and i drive away in my new car, or else i drive away in my old car". they might accept it (if it's reasonable), they might counter (up to you and your highest acceptable price) or they may call your bluff. but you? you're not bluffing. leave. there are a thousand cars for sale within probably a mile of you right now. you leave and see how fast they change their mind.

you can do it, it's easy.

here, feel free to use my google sheets car payment calculator. (or download it for yourself). i use it to catch dealerships in shady shit (i have caught them adding thousands in horseshit new math where they change value of a trade in and then add back to sale price etc, which is why i shop for a purchase total not a payment!!) as well as to know more or less how much i'm willing to pay in total to get the monthly payment i want. (if you finance for the exact amount)

good luck!!
posted by chasles at 7:47 AM on May 1, 2019 [11 favorites]

Leases are negotiable. The three major factors are the cost at time of lease, the residual value at the end of the lease and the interest rate. Also need to look at the mileage allowance and how much you are putting down. The way to know if they are a 'good deal', or not, is to know the parameters of the lease. The one time I leased (for my wife) the dealership gave me such a high residual value that the lease was a compelling deal. Cheaper than buying. I just knew that I was not going to buy the car at the end of the lease bc of the high value assigned. (As it turned out, at the end of the lease they asked if I wanted to buy it, I said not at that price, they asked what price was I willing to pay, and we settled on a number that was materially lower than the original number.)
posted by AugustWest at 7:51 AM on May 1, 2019

I like working with a credit union because mine is good at working out problems. Great credit score, so don't beat yourself up about debt; you need your energy elsewhere.

When you shop for cars, just say you expect to get a loan and want to find the car 1st. Take any used car to get inspected; there's a garage in my area that doesn't even charge me, but it's worth $50 to learn that the transmission is sketchy. CarMax and maybe some other new companies don't engage in arm-twisting and seem to be be straightforward, but many dealers are sketchy AF. Dealer car loans are very profitable for them.

Be willing to walk away, even just to sleep on it. It's easy to be persuaded. Also, I've left the dealer, thinking I liked the car and just wanted to be sure of it, and gotten a call with a better offer.

I'd go visit a couple used car places, look at cars, and start deciding what you want. I'm mostly a fan of Toyota, Honda, Subaru, Nissan, but currently have a compact American truck, for Reasons. Will be buying a used Prius when a couple tax refunds arrive. I've had pretty good luck on, buying 5 - 10 year old cars from individuals, getting it inspected. Facebook marketplace in my area has lots of listings. Any car I'm serious about, I look up on and Edmunds to get a handle on prices and read reviews. I keep a spreadsheet.

I may buy a Prius with a Salvage Car title. If a car is totaled due to body damage, it probably goes to an auction, where a used car dealer may buy it, repair it and sell it at a good price. This has worked for me, but is a risk.

Cars are built better than they used to be, by a long shot. Good Luck!
posted by theora55 at 8:14 AM on May 1, 2019

Another Nth for Carmax. No haggling/no pressure is great, they offered me better loan rates than my own bank, and gave me decent value on my trade in.
posted by gnutron at 8:41 AM on May 1, 2019

And yet another Nth for Carmax. I am not a car person, I am not a savvy financial person, I just want a thing to drive and to not get ripped off and I don't want to have to think about it.

Carmax is trustworthy, you don't need to do any research other than go online and pick a car and you can even pre-finance before you head in.
posted by yes I said yes I will Yes at 8:55 AM on May 1, 2019

Response by poster: Thanks for all of the responses. Carmax sounds great, but the nearest store is nowhere near me and I'm doing this on my own, so that's out.

Two things I still don't understand. 1. If you have the loan before you buy the car, what happens with the possible price discrepancy between the two? 2. If you're approved for a loan by a credit union, are you given different options for monthly payments/time of loan?
posted by FencingGal at 9:02 AM on May 1, 2019

You don’t actually secure and initialize the whole loan ahead of time, just approval for up to X amount. So in the example I gave of the buyer’s check, it’s good for anything up to that amount, but no more. You don’t have to worry about taking a smaller loan than initially approved for, and you probably aren’t shopping right up against your limit so overage shouldn’t be an issue either.

Yes, you may have some leeway with the payoff schedule, generally you get better rates for shorter term, but you can play with numbers with them, changing downpayment or loan term a bit can help get you to the monthly payment you want.

As others have said, don’t talk monthly payment with the dealer; only talk price. But the credit union doesn’t have the same conflicts of interest, and if you go sit down and chat with them for a bit they will explain all the moving parts and what they can/can’t do for you.
posted by SaltySalticid at 9:48 AM on May 1, 2019

I'll probably get flogged for saying this: Do you have a car-savvy friend who can help you with this task? Buying and financing a car is a bit like swimming in a pool full of sharks. Some of those sharks might be friendly. But others are going to see you as an older woman who doesn't have a lot of experience in this area, and they're going to think "dinner!" Yes, this sucks.

It's not just you - in general I think it's *always* a good idea to go car shopping with a trusted partner. And if you can find a friend who knows a bit about car shopping, this could be an opportunity to learn from her/him.
posted by doctor tough love at 10:05 AM on May 1, 2019 [4 favorites]

Go in with pre-approval, check local credit unions and online for best rates. The dealer will attempt to match/beat it; pay close attention to the total terms (so they don't give you a seven-year loan with low payments, for example) and be ready to walk. Know what you do and don't want when you go in the door.

To finalize my last purchase, I picked the car, got the final out the door paperwork at the dealer, went back to the credit union with that and got the cashier's check for the dealer, then went back to finalize it up. The whole process was relatively straightforward.
posted by oblique red at 10:09 AM on May 1, 2019

to answer your question about the financing amount i have done it 2 ways with lightstream:

1) they don't (and it's weird to type this) ask how much the car is.... so the first one, i just got an even amount (as an example say "$25,000") and then when i didnt quite use all of it, i just made an extra payment immediately (they have no overpay or early pay penalties).
2) you can adjust the loan amount (most easily down, or shorter in term) instantly on your own. if you ask for more (not hundreds but thousands) or longer (adding a year) it might want to re process you. so pick an upper max, (again for argument just say $24k) and then you kind of sit on it (it will hold for 90 days). then when you are ready to have the money go and edit the loan to the exact amount (let's say all in you made a good deal and are driving off at $22,995, you would just move the loan total down from 24,000 to $22,995 and it will recalculate payments etc, just tell the dealer you will be back with case, you have to go into your bank yada yada). as long as you hit the go button by their daily cutoff you will have money in your checking account same day.
posted by chasles at 10:42 AM on May 1, 2019

also, just want to parrot some other great advice here. it's not great, but ya, i'm 100% on board with this:

I'll probably get flogged for saying this: Do you have a car-savvy friend who can help you with this task? Buying and financing a car is a bit like swimming in a pool full of sharks. Some of those sharks might be friendly. But others are going to see you as an older woman who doesn't have a lot of experience in this area, and they're going to think "dinner!" Yes, this sucks.

i'm that friend round these parts. and it isn't just being an older woman. there are the less scrupulous who will essentially try anything with anyone. sorry, but that's been my experience too. at least having someone for moral support if they aren't the negotiator is good. prearrange a little sign where they get to be bad cop (basically you just need a "they say, OK NO DEAL TIME TO GO" signal and then everybody retreat)
posted by chasles at 11:02 AM on May 1, 2019 [1 favorite]

You can go to the dealer and have them run the numbers on site for both buying and leasing a new car. Compare these side-by-side to help assess the overall best offer for the vehicle. With $0 down, 0.99% interest, and fees at end of the lease taking the total cost up another 0.5% for the life of the lease, mine was a really good deal compared to buying. Take a max 3 years lease term, at a 3 year term you want to have a 51-53% residual.

Different manufacturers have different incentives for leasing/buying, so be sure to compare different vehicle makes as well. For example, I costed a VW Golf Sportwagen and Subaru Outback. Their cost structures were quite different.

You can change your mind on the purchasing model right until you sign the paperwork. Explore both options.
posted by crazycanuck at 11:14 AM on May 1, 2019

Sometimes CU’s offer a flat auto rate to all members; one of mine does this. Definitely ask at all of them what the rate would be. And maybe see if they have a car buying service? Sometimes they can get you fleet pricing and it’s very easy/convenient.
posted by OneSmartMonkey at 1:50 PM on May 1, 2019

Former car salesman here. Two-ish year old used cars tend to be the best value.

Your best bet is to find the best rate you can which will likely be at one of the credit unions. You want to pay attention to the APR (annual percentage rate) which is intended by law to be representative of the total cost of the loan so rates can be compared.

Then see if the dealer can either get you a better rate. They don't "sell" the loans to the bank, rather they act as a banker completing the paper-work on behalf of the bank for which the bank pays them a fee based the difference between the rate you pay on the loan and a wholesale or "buy" rate. They have these agreements with many banks the the banks compete for loans so even though the bank is making a profit they can often work the system to get you a better rate than you otherwise could.

Some dealerships also have similar agreements with credit unions so you can sign the paperwork for a loan with one of your credit unions with the dealership's finance manager or closer or whatever term they use in your area.

Whether you end up using financing through the dealership or not you'll complete all the paperwork with the finance manager who will likely have a variety of add-on products to sell you. The main thing to remember is that the prices of these things are negotiable though most are, in my opinion, a waste of money.
posted by VTX at 6:57 PM on May 1, 2019 [3 favorites]

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