In conversations with experts in the lending industry, CR discovered that there are several ways to save money, even if you have a suboptimal credit score.
Know your credit score. Experian recommends checking your credit score at least once a year. This way, you’ll know where you stand so you can manage expectations around loan eligibility and know what you need to do to increase your score. You should also check for errors in your credit report, which can affect your score, Bell says.
If there is time left, improve your score. A credit rating can be improved in many ways, primarily by paying bills on time. Always pay your credit cards and other bills when they are due, even if it is only the minimum payment. This is good advice for any loan: the more you pay up front, the less you will pay in the long run.
Bring a bigger down payment. “Having a larger down payment reduces the amount of loan you need, and a smaller loan means less interest,” says Amy Wang, associate director of Credit Karma Auto. “A down payment can be in the form of cash, an exchange vehicle, or a combination of both.”
Get prequalified. Much like knowing your credit score, being prequalified for a loan with your bank helps manage expectations of what’s possible.
Talk to your financial institution and see what’s available. Nana-Sinkam says that before you get prequalified, it’s a good idea to review your credit report to see if there are any questionable items. Every little bit counts, and a few corrections are enough to get a better rate. Getting approved for a loan before you go buy a car gives you yet another bargaining chip.
“Have a rate you can present to the dealer to see if they can beat it,” DeLorenzo says. “Dealers may have access to programs that may offer better rates to subprime borrowers.”
See what the dealer manufacturer offers. If you’re looking for a new vehicle, manufacturers such as Chrysler, Hyundai and Kia often have programs for subprime borrowers, DeLorenzo says. You have to dig around on their websites to see what’s out there and keep in mind that this type of offer will be found on cheaper cars.
“Most of the subprime loans you’ll see are for entry-level and economy cars — the bottom end of the product line,” he says. “I don’t think any manufacturer wants to entice a subprime buyer into a high-margin vehicle like a luxury car or a pickup truck.”
Consider buying a used vehicle. In general, used cars cost less and the value of a used car is more likely to remain stable for longer than a new car, which will depreciate quickly. This means that used car transactions pose less risk to the lender and a subprime borrower is more likely to be approved for a loan.
“In our experience, most subprime buyers buy from the used car market because they’re looking for vehicles at a lower price,” Wang said.
Report suspected discrimination. Racial discrimination in auto lending is nothing new. Ally Financial, which handles loans for several automakers, settled an $80 million discrimination lawsuit just a few years ago.
An academic report released in December 2019 found that black and Hispanic borrowers were 1.5% less likely to be approved for a loan and paid 0.7% higher interest rates, regardless of their credit. The study found that although bank lending — which is federally regulated — was much less likely to be discriminatory, more than 80,000 black and Hispanic borrowers were denied loans they would have been approved for if they had been white.
Loans offered by dealers are called indirect loans because the dealer arranges the financing through a third-party company. But the dealer does not have to share with the borrower the loan offers that come from the lender. This is how they mark up loans for profit and, as shown in last year’s study, how dealers were able to charge minority borrowers more. A federal rule enacted in 2013 brought auto loans under the control of the Consumer Financial Protection Bureau (CFPB) and reduced discriminatory auto loans by 60%. But the rule was overturned by Congress months before the 2018 midterm elections.
“Unlike mortgage lenders, who report every application through the Home Mortgage Disclosure Act, auto lenders do not routinely report application or loan data, making it difficult for regulators to monitor discriminatory lender practices. “says Erik Mayer, one of the study’s authors. “We find the strongest evidence of discrimination in the Deep South, the Ohio River Valley and parts of the Southwest. Our estimates of auto loan discrimination correlate strongly with state-level measures of the prevalence of racial bias.
If you suspect discriminatory lending, Mayer suggests filing a complaint with the CFPB or the Federal Trade Commission.