Auto Special Financing
You can get special financing on an auto. You just have to be diligent and realize that you may not get the best possible rate. Special financing is usually for borrowers that are considered high risk. High risk carries higher interest rates and loan terms that are less than desirable.
Special finance, in regard to auto lending, is usually broken down into two groups:
Bad Credit Borrowers
The biggest mistake that bad credit borrowers make is to let lenders take advantage of them. Yes, you will have to pay a higher interest rate. Yes, you will probably have to put up a large down payment. But having bad credit doesn’t mean you have to take any deal that is thrown your way. Don’t be afraid to negotiate. Don’t be afraid to haggle on the price of the automobile. You are the customer and you are the one that is making the purchase. You are in control and free to walk away from any deal at any time.
What you can do to get the best possible deal:
- Come up with the biggest down payment you can. The larger your down payment the more you will be able to negotiate. If you can’t afford a large down payment, you should put off a vehicle purchase until you can afford a large down payment. When you put a lot of money down on a car you reduce the amount of risk the lender is assuming. This means the lender is able to offer you a better interest rate.
- Haggle with that dealer! Try to get as much taken off the purchase price as possible.
- Try to get pre-qualified, then go to a dealer. It’s difficult with bad credit, but try to negotiate with prospective lenders first. If you can walk into a dealership with a letter of pre-qualification you are then a cash buyer. You’ll be in a better position to haggle and get a lower price on the car. If the dealer won’t haggle when you go in with a letter of pre-qualification in hand, go to another dealer.
- Avoid Buy Here, Pay Here dealerships if at all possible! These companies try to make the buying process easier on you (a person with bad credit), but they do not have your best interests at heart. Many of these companies have been classified by the Federal Trade Commission as predatory lenders. They sell vehicles at inflated prices, at inflated (often the state allowed maximum) interest rates. If you are late on your payment by as little as 1 week they may repossess your car. Avoid these companies if at all possible.
Self-employed Borrowers
If you’re self-employed but have good credit you may be in need of special financing. If you can provide at least 2 years of tax returns (that show enough income) you shouldn’t have trouble securing traditional financing. If you can’t, your only option is special financing.
The points that apply to bad credit borrowers also apply to self-employed borrowers with good credit. Get a big down payment together. Try to get a letter of pre-qualification if at all possible. However, self-employed people with good credit have one other option: state income loans.
Stated Income Loans
A stated income loan is exactly that, a loan where you state your income and the lender doesn’t verify it. This type of loan is only available to people with very high credit scores. You’ll usually need a FICO score of at least 750. Depending on the economic climate, you may require a score of 800 or higher.
These loans are a great alternative for people with good credit, but who have trouble verifying their income. However, stated income loans always carry a higher interest rate. Expect to pay an annual percentage rate of 1% – 4% higher than what a traditional loan would carry.