How To Get an Auto Loan During the Credit Crunch

Part 1: Credit Is Available and Pricing Incentives Abound

You want to buy a new vehicle. You've determined that you can handle the monthly payments because your job and personal finances are going to be OK. And certainly, car dealers will be eager to see you come in and shop their nearly empty showrooms these days.

But one concern is holding you back: Can you really get the auto loan you need to complete a purchase? The answer is an enthusiastic "Yes!" — though with some strings attached. This four-part series from Edmunds.com will guide you to that goal.

A broad "credit crunch" related to the global financial meltdown is squeezing auto lending these days. News coverage implies that you don't have a prayer of qualifying for a vehicle loan unless you've got the bank balance of an NFL quarterback or the financial savvy of a CPA. And it's true that many lenders are raising the hurdles to auto loans.

But most Americans can still get credit to buy a vehicle.

To see how much it will cost you, check out the Auto Loan Rates chart below. It gives you a rough idea of the current terms for borrowers in various tiers of creditworthiness as measured by credit score. Keep in mind that these rates are only estimates, and that your actual rates will vary depending on the individual characteristics of your personal financial situation and credit history.

Auto Loan Rates
Tier 1 (720+)
  Dealer Buy Rates Bank Rates Credit Union Rates
48 months 6.14% 6.50% 5.95%
60 months 6.24% 6.54% 5.95%
72 months 6.74% 7.24% 6.95%
       
Typical downpayment required 0% 0% 0%
Tier 2 (700-719)
  Dealer Buy Rates Bank Rates Credit Union Rates
48 months 6.44% 7.57% 5.95%
60 months 6.64% 7.64% 5.95%
72 months 7.19% 8.32% 6.95%
       
Typical downpayment required 0% 0% 0%

Tier 3 (670-699)
  Dealer Buy Rates Bank Rates Credit Union Rates
48 months 6.94% 9.01% 6.95%
60 months 7.24% 9.15% 6.95%
72 months 7.69% 10.03% 7.95%
       
Typical downpayment required 10% 10% 0%

Tier 4 (630-669)
  Dealer Buy Rates Bank Rates Credit Union Rates
48 months 9.44% 10.99% 8.95%
60 months 9.74% 10.99% 8.95%
72 months 10.89% 12.46% 9.95%
       
Typical downpayment required 15% 15% 0%

Footnotes
Dealer Buy Rates are the average of several national lenders' wholesale rates to dealers as of November 6, 2008.

Bank Rates are the average rates of more than 900 lending institutions as of October 9, 2008. Source: Informa Research Services, Inc., Calabasas, CA.

Credit Union Rates are the average of several prominent credit unions as of November 6, 2008.

Note: These rates are estimates, and actual rates will vary. In addition, factors such as employment stability, household income, explainable credit troubles (i.e. bankruptcy due to medical bills) and an unusually high down payment can make a significant difference in lenders' loan decisions and the rates they charge.

In general, people's hesitation to venture into the market is more a reflection of the nation's collective lack of consumer confidence than lenders' refusal to take them on.

"There are likely many customers sitting on the sidelines now — not wanting to make a big-ticket purchase," said Mike Groff, group vice president of sales and marketing for Toyota Financial Services. "But we have the means to support creditworthy individuals."

Jesse Toprak, Edmunds.com's executive director of industry analysis, agreed. "Consumer confidence has fallen to historic lows," said Toprak. People are avoiding all big-ticket purchases, including cars. But this doesn't mean you can't get an auto loan if you want one.

And with dealers and factories desperate for sales, it's a wonderful time to be a credit-enabled buyer. "If someone needs a car, they know the market is down, and this is a great buying opportunity," said Toprak. The National Auto Dealers Association said that "for many people this may be the best time to buy a car in years. There are plenty of incentives to lower costs."

Three-Step Plan

While clearly these are unusual times, moving from consideration of a new vehicle purchase to signing the loan papers is a three-step process. First, optimize your creditworthiness. Second, lay out a purchase strategy. Finally, engage dealers and lenders in getting a vehicle — and a loan. Read the other three parts of this series to guide you through each step.

Many consumers have gotten used to leasing over the last 10 or 20 years. But one irrefutable fact is that the credit crunch has greatly reduced the automotive leasing market. Carmakers also have moved to restrict leasing because they're trying to buttress the value of vehicles when they come off their leases in two or three years. Even luxury-carmakers such as Mercedes-Benz and BMW have cut back, and they're encouraging more customers to take out auto loans to buy their vehicles. And certainly for the least creditworthy consumers, said Bank of America Dealer Financial Services President Ellsworth "Ellie" Clarke, "the leasing option probably is eliminated."

"These new restrictions on leasing are bringing consumers back to reality," said Philip Reed, Edmunds.com senior consumer advice editor. "In the past, leasing allowed people to get into cars they otherwise wouldn't have been able to afford. Now consumers just have to be more realistic about their auto budget."

Used cars and certified pre-owned cars (late-model used cars that have been refurbished and warrantied by manufacturers) also are options, of course. Less creditworthy consumers, especially, "might consider less expensive cars in order to qualify for more attractive finance rates," Reed said. Used cars, for example, often are available with financing provided by the dealership itself.

But if you have your heart set on buying a new car, there's no need to screen yourself out of the possibility by worrying — probably needlessly — that you won't be qualified for credit.

"Despite all the reports flying around about the credit freeze, there are still hundreds of lenders providing auto loans," Toprak said. "Even consumers with marginal credit can get a loan."

Part 1: Credit Is Available and Pricing Incentives Abound

Part 2: Know the Score: How's Your Credit?

Part 3: The New Reality: Higher Rates, Stiffer Terms

Part 4: Go to the Source: Captive Arms, Banks and Credit Unions

Part 2: Know the Score: How's Your Credit?

Your first step in landing an auto loan is optimizing your creditworthiness. Find out your credit score. Improve it quickly, if possible. And use this self-appraisal as the linchpin of your strategy.

Lenders insist that every car loan deal is as individual as we are. But they've got to start somewhere in evaluating your creditworthiness. And that place is your credit score, usually known as a FICO score.

The acronym stands for Fair Isaac Corp., the company that came up with the most commonly used credit scoring system. Your FICO score reflects every transaction you've made for the last several years involving credit and your record of paying it off.

FICO scores range from 300, which is awful, to 850, which is excellent. Americans' average credit scores are around 675.

These scores divide consumers into three basic categories: prime borrowers, whose scores usually range from 700-850; typical or "near-prime" borrowers, the largest category, whose scores usually range from 620-700; and subprime consumers, whose scores are below 620. (For more, see "How To Read Your Credit Score.")

You can raise your FICO score. But the first step is finding out what it is.

Three companies — Equifax, Experian and TransUnion — compile credit reports and scores and sell them to lenders. You can get one copy of each report per year for free as a result of the Fair and Accurate Credit Transactions Act, although you'll have to pay to obtain your actual credit score. Free reports are available through a dedicated Web site. You may order by telephone at (877) 322-8228 or by mail. For a copy of the mail-in form, download a pdf from the Web site.

More often than that, you can still get free copies of your credit report and free information about your credit score through online promotions — which, of course, usually have strings attached — or for a fee from the three companies. Your local bank also will run a credit report for you, but usually that costs more.

Yet amazingly — even after years of increasing news media attention to the importance of credit scores — 63 percent of Americans didn't know their FICO scores according to a 2007 survey by TransUnion.

Nudge Your Number

While you can't dramatically improve your FICO score overnight, you can nudge it upward almost instantly. And with a little planning and foresight, you can move it significantly higher over time so that you're more creditworthy for an auto loan.

In the short term, for example, resolve to make payments on time. "Even a few months of prompt payments can improve your credit reports," said Lucy Duni, vice president of consumer education for TrueCredit.com, a unit of TransUnion.

You can also boost your FICO score quickly by paying off credit cards with high balances, leaving yourself way under your approved credit limits. Also, refrain from closing open credit tabs, such as credit cards from specific retailers, just because you haven't used them in a while.

"Unused credit is one of the keys to getting a loan," said Edmunds.com Senior Consumer Advice Editor Philip Reed. "The more available credit you have, the more money a lending agency will be willing to loan you."

Over a longer term and in general, also avoid running up huge bills on your credit cards — even on corporate cards that might be listed on your credit report. Pay all your bills on time. Avoid opening up any new credit cards. Don't charge over the credit-card limits. And be certain to correct any discrepancies with creditors over past payments.

A Complete Picture

There are other components to your creditworthiness "package," including your occupation, proof of current employment and a stable and sensible job history, as well as home ownership. Be prepared to present proof of each and to explain credit problems due to divorce, illness or loss of job.

"Blemishes that didn't used to be problems are problems now," said Mark Edelman, partner in McGlinchey Stafford, a Cleveland-based law firm specializing in consumer finance. "Mortgage payment problems on a credit record, for example, set off alarms in the underwriting world at auto-finance companies and lenders."

Also, know your income. The more the better, of course. Edmunds recommends that your car payment equal no more than 20 percent of your take-home pay.

But don't count on robust or even fast-growing paychecks to make you a prime borrower singlehandedly.

"Paychecks are overrated with regard to credit scores," said Reed. "Factors like your credit history and payment records are much more critical.

Speaking Green

Having a trade-in vehicle, of course, will help you negotiate a better rate with lenders.

And one more thing: Accumulate as much cash as you can.

"If you can put substantial cash down on a vehicle, like 30 percent or more, a subprime borrower can actually get the interest rates reserved for prime borrowers," said Jesse Toprak, executive director of industry analysis for Edmunds.com.

This isn't as easy for many Americans as it used to be. For many homeowners, such "cash" for big-ticket items used to come out of seemingly bottomless troves of credit called home-equity loans. The rates were cheap, and home-equity interest is tax-deductible. But since the housing bubble burst, lenders have shut the lid on further home-equity outlays for many consumers.

Nevertheless, given how credit has tightened for many borrowers, the more greenbacks you can actually take to the dealer, the better position you're in to land favorable terms for the amount that you're going to finance.

Part 1: Credit Is Available and Pricing Incentives Abound

Part 2: Know the Score: How's Your Credit?

Part 3: The New Reality: Higher Rates, Stiffer Terms

Part 4: Go to the Source: Captive Arms, Banks and Credit Unions

Part 3: The New Reality: Higher Rates, Stiffer Terms

The second step in getting a new-car loan is to lay out your purchase strategy. This requires understanding how lenders will treat your creditworthiness and being ready to purchase the vehicle that's right for you.

"The most important thing is to know how good a loan you should get," said Lucy Duni, vice president of consumer education for TrueCredit.com, a service provided by Chicago-based TransUnion.

Right up front, you're going to have to swallow hard and realize that obtaining a loan has gotten more expensive for nearly everybody. Just about every borrower now is going to have to pay higher interest rates, for shorter terms, and otherwise cope with stiffer lender requirements for auto loans than they might have had to a year ago — or even a few months ago.

Interest rates had eased a bit through this year since 2007, in part reflecting the success of automakers' cut-rate loan incentives last summer in keeping the market from derailing completely. But now, typical "prime" borrowers might encounter interest rates around 6 percent to 7 percent for an auto loan, said John Ulzheimer, president of consumer education for Credit.com. Buyers with average credit scores could get rates of 9 percent to 11 percent, and "subprime" borrowers might have to pay around 16 percent.

Come With Cash

Almost every borrower outside the top credit tiers will have to make a down payment, or a bigger down payment than before — on the average about 10 percent higher than they would have had to make a year ago. Lenders are requiring this to improve their own "loan-to-value" ratios by boosting the quality of the auto loans on their books.

The typical loan in August was for only 88 percent of a vehicle's value, compared with 95 percent in July, according to Federal Reserve data. In 2006, some loan-to-value ratios got as high as 101 percent, when buyers could wrap taxes, fees and even some of their old car loan into the new financing, according to RDQ Economics, a New York-based research firm.

Also, lenders are restricting the length of loans. They believe that term lengths got away from them during the recent heady days of loose credit — when consumers could get as long as seven years to pay off a car that they likely wouldn't be driving that long.

And now, your application will be fly-specked for anything that might prompt lenders to tighten the screws even more. These could include problems with mortgage payments, recent interruptions in employment and other hiccups that could raise red flags with loan officers whose No. 1 priority these days is to make only loans that are exceedingly safe.

New Rules for Every Class of Borrower

Here's how the situation has changed for each of the three basic categories of borrowers.

Prime borrowers can still get auto loans with little hassle. And the very cream of this crop can still get the car and the deal they want at terms just as favorable as ever. "But these are the real exceptions now," said Ellsworth "Ellie" Clarke, president of Bank of America Dealer Financial Services.

But required credit scores for the best terms typically have risen to 720 or even 740 from 700, said Jesse Toprak, executive director of industry analysis for Edmunds.com. And prime borrowers may be reduced to deals of no longer than 66 or even 60 months compared with the previous 72 or even 78 months.

Average borrowers are the vast swath of Americans whose balance sheets and financial habits put them squarely in the middle of the population. They have to come up with a 10 percent or even 15 percent down payment now, whereas a year ago, or even six months ago, they may have been able to finance more than 100 percent of the value of the vehicle with no money down, said Jesse Toprak, executive director of industry analysis for Edmunds.com.

"The era of the 72-month auto loan may also be over," said Toprak.

Subprime borrowers have accounted for about 20 percent of new-car buyers in recent years, according to Bank of America's Clarke. But this much-maligned group — whose woes in the U.S. mortgage market have been broadly blamed for knocking the world financial system off its pins — now face lots of extra obstacles as auto companies and lenders pick through their applications much more carefully these days.

"Subprime borrowers can still get loans, but you might have to make other sacrifices," said Toprak. "One way around the problem is to offer up a higher down payment, as much as your budget allows."

For consideration of a purchase loan, the minimum credit scores for these consumers now are around 550, Toprak said. "Otherwise [lenders] won't even look at the application. Most subprime lenders used to at least take a look at the application regardless of the score" a couple of years ago, he said.

So if you're a subprime borrower, you now may have to really scrounge for financing, switch to a less-expensive vehicle than you had wanted or come up with a much bigger down payment.

Clarke said that subprime borrowers now typically are facing 60-month limits on auto loans instead of the previous 72-month terms. (For help, see "Tips for Subprime Borrowers.")

A Dose of Realism

Now is also the time to get realistic about the vehicle you can afford. Don't forget to include hidden factors such as how maintenance and insurance costs are affected by the size and type of vehicle you buy. Use Edmunds' True Cost to OwnSM calculator to figure this out.

Bigger vehicles, for example, typically cost more to maintain. But insurance costs actually can be higher for smaller vehicles because they're riskier in accidents.

In this regard, stiffer down payment requirements and other restrictions imposed by tighter credit may help guide you to the most logical vehicle for you.

"Easy credit allowed consumers to buy cars they really couldn't afford," said Edmunds.com Senior Consumer Advice Editor Philip Reed. "The credit crunch is forcing people to be more realistic about their buying power."

Part 1: Credit Is Available and Pricing Incentives Abound

Part 2: Know the Score: How's Your Credit?

Part 3: The New Reality: Higher Rates, Stiffer Terms

Part 4: Go to the Source: Captive Arms, Banks and Credit Unions

Part 4: Go to the Source: Captive Arms, Banks and Credit Unions

The final step in the vehicle-financing process, of course, is engaging lenders and dealers in getting the car — and the deal — that you want and can afford.

If the dealer's captive-finance arm "doesn't want [your loan], there are another 400 lenders the dealer can send it to for a look," said Rich Apicella, practice executive of BenchMark Consulting International, an Atlanta-based firm that advises consumer lenders. "You may just end up with fewer or different lenders than you're used to dealing with."

Become as aggressive about shopping for credit as you may be about finding a particular vehicle. There are two basic ways to find it: working with a dealer and doing your own research.

Rumors of Their Deaths

General Motors Acceptance Corporation (GMAC) has really fouled public perceptions of credit availability with its recent move to restrict its own auto loans to GM customers only with credit scores of 700 or more. Many Americans, therefore, have presumed that all the car-company captive-finance arms have soured on making loans.

But most other automakers said they haven't cut back their in-house financing at all.

"We're using it as a competitive advantage," said Meredith Libbey, a spokeswoman for Ford Motor Credit. While GMAC long has provided home mortgages as well — which helped lead to GMAC's credit squeeze — "all we do is put people behind the wheel," Libbey said. "And we haven't changed our lending criteria in years — including now."

Nissan has just introduced new zero-percent financing on its five most popular models. "There wouldn't be the need for this if the consumer out there had so little confidence that they can get financed," said Al Castignetti, U.S. general manager of the Nissan division. "But if you're in the marketplace and you want to buy a car, Nissan is going to make it as easy as possible for you."

Honda Finance "hasn't changed anything," said Honda spokesman Chris Martin. "And dealers aren't having any difficulty financing people. For the majority of people who have a job that pays them, and they want to buy a Honda, they can probably get financed."

And in October, Hyundai announced "a very aggressive series of financing offers" that combine cash incentives and interest rates as low as zero percent, noted Mike Buckingham, president of Hyundai Motor Finance.

Even GM has quickly launched a massive advertising campaign to reassure consumers that, despite GMAC's move, GM dealers want to help customers find "Financing That Fits." To that end, GM began highlighting an online system at its dealerships that helps consumers find financing opportunities at all of the lenders with whom the dealer has relationships.

Financing Sources Galore

Most dealers can tap into dozens of potential loan sources, and they're more motivated than ever to try to find a deal for you.

But you may be able to find your own loan just as easily without a dealer's help. There are more online lenders than ever. Some, including Triad Financial and Road Loans, have pulled out of car lending through dealers and instead are focusing on giving loans directly to consumers. The easiest way to score a loan is to go to Edmunds' Finance page, where you can apply directly online through our partners.

Plenty of major banks and consumer-finance companies also remain eager to lend you money to buy a car, including Bank of America, Wells Fargo, Capital One and Chase; dealers said that Chase even now is approving a strong volume of subprime loans. Many consumer-finance companies, such as AmeriCredit and General Electric, also are keeping the car-credit spigot open.

A good bet for car loans may include tapping into relationships you have established with independently owned local or regional banks. Typically, they were less involved in subprime mortgage and auto lending than the major national institutions, so they're not as poisoned. And now that all of the competition has begun lending more conservatively, these outlets are more competitive than they have been in a long time.

Credit Unions to the Fore

Credit unions may be the single best place for you to look for a car loan. Already, about half the fixed-term loans of the nation's 8,100 credit unions are for automobiles, not including the vast amount of home-equity loan proceeds that also go toward vehicle purchases. Credit unions have plenty of capital and liquidity these days. And nearly 90 million Americans are members. To find credit unions near you, go to the Credit Union National Association.

Credit unions are in a position to step up these days in large part because of their very composition: They are not-for-profit entities formed by groups of employees for the sole benefit of the membership. Among other things, they stayed out of the subprime markets for mortgages and car loans.

"We hold almost everything we originate in our own portfolios," said Michael Schenk, senior economist for the Credit Union National Association. "So we care ultimately what happens to those loans. In contrast, the mortgage brokers and big banks that originated and sold [mortgages bundled as securities] didn't really care what happened to them."

Credit unions' loan rates "are extremely competitive," said Jesse Toprak, executive director of industry analysis for Edmunds.com, "and applications aren't based solely on credit scores." Consumers who have average or below-average credit scores, he said, "especially can get great rates from credit unions if approved."

Get Approved in Advance

Now more than ever, it's a good idea to prequalify for an auto loan. This step will make you more confident when you go into a dealership and ensure that a last-minute financing snag doesn't get in the way of your goal. Preapproved shoppers can also act like cash customers and negotiate hard on a purchase price. A dealer will work hard to beat your approved rate (if it's possible) in order to keep your finance business, and may be able to tailor a package combining the best vehicle with a loan that suits your individual financial situation.

"There are almost always big rebates available on at least a few vehicles, and those deals are particularly important for consumers with marginal credit," said Jessica Caldwell, Edmunds.com manager of pricing and industry analysis. "A big rebate reduces your loan-to-value ratio, which makes any financing deal more attractive to banks.

Overall, "Dealers are getting more realistic and consumers are, too," said BenchMark Consulting's Rich Apicella. "Previously, dealers would find out your monthly payment and sell you right up to that or maybe over it. The reality now is that good dealers aren't doing that."

Part 1: Credit Is Available and Pricing Incentives Abound

Part 2: Know the Score: How's Your Credit?

Part 3: The New Reality: Higher Rates, Stiffer Terms

Part 4: Go to the Source: Captive Arms, Banks and Credit Unions