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Car Loans F.A.Qs

Car Loans F.A.Qs - Top Image

How Car Loans Work

GENERAL CAR LOAN

Can everyone get approved for a car loan?

There's only one way to provide you with an honest answer, and that starts by filling out our credit application. Why? Because every credit situation is unique, and while almost everyone can get approved for a car loan, not everyone comes to the table with the same credit history and life situation.

Successfully navigating the approval process requires a partner that's committed to understanding your unique circumstances and finding a solution that works for all parties.

These five factors determine whether you will get approved for a car loan: credit history; work history and income; debt and monthly expenses; money down; and the vehicle you choose.

We'll walk you through each one to help you better understand your starting point on the path to approval. And, if you're ready, we'll work with you to get to the finish line, when you drive away in your next vehicle.

1. Credit history

Your credit history helps a lender learn more about previous loans and bill payments. What many people fail to realize is that it's not the only factor. Too often, borrowers assume that a few bad marks in their credit past exclude them from any chance of car loan approval. It's simply not true.

A summary of your credit history is obtained through your credit score, which looks primarily at your debt-to-income ratio and bill payment history. There are other factors, too, like the average age of your bank accounts (longer is better) and any collections or judgments against you in the past.

Canadian credit reporting agencies (Equifax and TransUnion) provide the credit scores that lenders rely on to determine credit worthiness of a borrower. Your credit score may fall anywhere between 300 and 900, with the best auto loan terms available to those with a credit score of 700 or higher. A score in the 600s may mean that you'll pay slightly higher interest rates, while anything below 500 makes approval more challenging.

Bankruptcy results in the lowest possible credit rating, and the history of your bankruptcy stays on your credit report for up to seven years after your first bankruptcy. Still, it is possible to secure a car loan after bankruptcy. Lenders are most interested in seeing whether-before, during, and after bankruptcy-you've been able to keep up with your car payments. Repossession of a vehicle is far more damaging to your chances of approval than a general bankruptcy.

Remember: Your credit history doesn't typically lead to a yes-or-no answer from a lender. Rather, it places you along a spectrum-a higher score means better interest rates and lower monthly payments, while a lower score may limit the amount a lender will offer or make borrowing money more expensive.

2. Work history and income

As with your credit score, your work history and income don't immediately determine whether you will be approved, but they do inform the loan terms a lender is able to offer.

For the lender, this is about more than just how much money you make. Lenders prefer to see borrowers who have had the same employer for at least two years. If you just took a new, better, higher-paying job at another company, a lender isn't going to penalize you. But if you've bounced from job to job every few months with gaps between employment, that presents a greater challenge.

Most car loans are for at least three years, which means the lender needs to predict the future of your income, and the most accurate way to estimate future earnings is by looking at your past work history and income.

How much you make influences how much money a lender will offer more than it influences the final yes-or-no on your loan application. If you're early in your career or working part time, you may need to bring money to the table to finance a high-end ride, or, alternatively, need to wait until your next car to get that dream vehicle and stick with something more practical in the interim. (The best advice from financial experts suggests that your total vehicle expenditure should not exceed 10 percent of gross income.)

Before you head to the dealership, gather recent pay stubs to prove your declared income. Often, a lender will call your employer to verify your current employment, too.

3. Debt and monthly expenses

Your existing debt and monthly expenses are the flip side of a lender's efforts to understand your income. After all, it's not just about how much you make but also how much you spend. By pulling your credit scores, the lender will have already learned a bit about your debt-to-income ratio.

All monthly expenses come into play when applying for your loan, including less commonly considered expenses like alimony or child support. While it may seem a bit odd for your lender to ask whether you've been divorced, it's common sense if you put yourself in their shoes: Would you loan someone $20,000 without learning about all their existing financial obligations?

As with income, there's no set amount of debt that precludes your approval for a car loan, but your expenses may affect how much a lender will offer or the terms on which they're willing to offer a loan. In general, fewer expenses and less debt put you in a better position to be approved for more money on better terms.

To think of it another way, a lender is interested in learning whether your income exceeds your expenses (including debt) and, if so, by how much. Your lender needs to verify that there's a sufficient, positive gap between income and expenses to allow you to carry the added debt. So if you know that a promotion or raise isn't in your near future, lowering your expenses or paying off your prior debts can manufacture that financial breathing room without requiring additional income.

4. Money down

Will you need money down? We've already written about this extensively, and the short answer is “No.” However, if we change the question slightly to ask whether it's better to put money down, the answer is almost always “Yes.”

If you're unable to get loan approval for the full cost of your vehicle or for the vehicle you want, a down payment can bridge that gap. Additionally, putting money down can ensure you always have equity in your vehicle, from the moment you drive it off the lot to the time you trade it in.

Money down is also a positive sign to a lender, as it demonstrates your ability to save money and your commitment to paying for your vehicle. A borrower who provides a down payment of 20 percent for a new vehicle (or 10 percent for a used vehicle) has backed up their end of the agreement but adding hard-earned money to the signed paperwork. Even if you can't reach the 20 percent mark, any down payment boosts your likelihood of approval.

So, money down can have a positive impact on approval, but that's not its only benefit. Beyond protecting you from the dreaded upside-down position, it will help you earn better loan terms, if only because you'll be borrowing less money. Getting approved for a car loan is good. Getting approved for the right loan that fits your budget and your life is much, much better. And a down payment is a critical part of that process.

5. The vehicle

Approval for a car loan starts in one of two ways. For some, they know the car they want and work toward approval for a specified amount to cover the purchase a particular vehicle. For others, especially those in less-certain credit circumstances, getting approval is the first step. Finding out how much you will be able to borrow informs the type of car you plan to purchase.

Every car lot has its share of temptations, many of which come with soft-tops, grumbly engines, and a glossy, candy-apple-red finish. But there are also abundant choices that can help you work toward your long-term financial goals and solve your immediate transportation needs.

As you work with a lender to gain approval, make sure the lender is just as committed to you are to building a stable financial future. That means getting the right loan for the right vehicle.

Final thoughts

It's a simple equation: A lender assumes risk when loaning money in the same way that you assume risk if you lend a friend a few bucks. The difference, of course, is that the price of a car means a loan amount far greater than the casual exchange of dollars between friends.

The principles, however, are unchanged. The more a lender learns about your income and past debt management, the better informed the lender becomes. A good lender uses that information to come up with a solution that works for all parties, limiting the risk to the lender while also helping you solve your transportation needs and build (or rebuild) your credit worthiness.

We believe that just about everyone can be approved, but not everyone will be approved on the same terms. And no one can be approved until they begin the application process, so why not start today?

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How do I know if I qualify for a car loan?

Can't wait to drive off the lot in your shiny new vehicle? Not sure what it will take to make that happen? We've laid out each factor to consider to help you learn whether you'll qualify for a car loan, as well as each piece of personal and financial information you'll need on-hand throughout the process.

How to know if you'll qualify-and for how much

As you may imagine, the key determinants in qualifying for a car loan are your personal finances-everything from your current income to credit history. The amount of money available to you depends on several factors, notably your work history and income, outstanding debt and monthly expenses, and your credit score.

1. Work history and income

When it comes to work history, most loan providers look to see whether you've had the same employer for at least two years. Being in a new job doesn't mean you won't be approved, but having demonstrated a stable, multi-year work history certainly counts in your favor.

To verify your income to a lender, expect to bring recent pay stubs and bank statements that offer clear proof. Some lenders may call your employer to confirm your work status.

2. Outstanding debt and monthly expenses

Determining how much you can afford to borrow is a task for you and your lender. Before applying for a car loan, assess your ability to purchase a new car and what type of car fits reasonably within your budget. You can calculate many of the same variables the lender uses to determine your eligibility.

For your own internal calculations, remember to include rough estimates for aspects beyond the initial car purchase, such as gas, maintenance, insurance, and interest. While you may not be able to budget hard numbers until after purchase, you can better predict the overall expenses associated with the new vehicle.

Most financial experts recommend that your total expenditure on cars-no matter how many you own-should not exceed more than 10 percent of your gross income. To give an example, the median family income in British Columbia is about $72,000, or about $6,000 per month. Ten percent of that amount is $600, so your car payment should come in at or under that figure.

When you complete a full credit application, anticipate deep research into your financial history, including whether you've filed for bankruptcy within the past seven years. Some lenders will also ask about your marital status in order to determine whether you owe alimony.

Whether you're filling out an online application or providing in-person responses, be open and honest with all of your answers. Intentionally misleading the lender on your credit application is illegal and, even if it goes unnoticed, will result only in your possession of a vehicle you cannot afford.

3. Your credit score

Your credit score is a product of your debt-to-income ratio and bill-payment history. Other factors that contribute to it include the average age of your bank accounts and any negative events, such as charge-offs, judgments, or collections. Canadian credit reporting agencies (Equifax and TransUnion) provide your score, which ranges from 300 to 900.

A higher credit score gives you the best chance to receive the lowest offered rates. At one time or another, you've probably seen advertisements for low-even zero percent-interest rates. These rates are not mere gimmicks, but they typically are available only to those who have credit scores of at least 700, in addition to other positive factors in their financial assessment.

A credit score in the middle range, around the 600s, usually means you will pay a slightly higher interest rate, while a score of 500 or below could mean significantly higher rates or the inability to get approved. A cosigner for your loan-someone with a stronger credit history to assume responsibility for the loan in the event of a default-can help with approval and interest rates.

Higher interest rates mean higher monthly payments, which should be factored into your calculations for the type of car you can afford. Consumers are entitled to one free credit report each year, which is a good way to monitor your credit and ensure no major blemishes or mistakes exist. At the very least, knowing your credit score-good or bad-helps you plan for your upcoming car purchase.

Other factors that influence your loan approval and interest rate

One of the best ways to increase the odds of loan approval is to bring a down payment of 10 to 20 percent of the purchase price. A down payment reduces the total amount of your loan, which in turn reduces the degree of risk for the lender. Lower risk means a greater chance of approval, as well as smaller monthly payments for you. Further, demonstrating your ability to save money for a down payment reflects positively for approval of your loan.

Getting your loan approved also relates to your specific history with car loans. A successfully repaid car loan in your past can go a long way in the approval process.

Another factor in the process is the planned length of your loan. Generally, any loan duration over 60 months may include an increased interest rate.

If necessary, existing assets may help serve as collateral for your loan. These may include a home or other car; in most cases, however, the car you purchase suffices as collateral against your loan.

Before applying, make sure you have…

1. Proof of identity

Any inquiry into your personal finances, for the purpose of approving your car loan, requires proof of identity. Many financing institutions require multiple forms of photo identity, frequently with your signature, but at the minimum you should have a valid driver's license.

Other commonly accepted forms of primary and supplementary identification include government-issued passports, existing vehicle or home titles, and bank statements (with a name and address that match your driver's license and other paperwork).

2. Proof of residence

When applying for a car loan, you'll need to provide the potential lender with proof of your residence. This is so the lender can get in touch with you via mail, and also so the lender has a physical address on record in the event of a loan default.

Proof of residence is most often verified with a recent utility bill, although a lease agreement or mortgage paperwork may also be used in many circumstances.

3. Trade-in documentation

Your existing vehicle, if you have one, affects your loan application, as its remaining value may lower your overall purchase costs, which, in turn, may affect your loan approval and rate. If you're planning on trading in a vehicle, make sure you have your vehicle title and registration with you when applying for a loan.

4. Proof of insurance

It's not absolutely necessary to have proof of insurance when applying for a car loan, but it helps with the process. Taking the time to get a quote for insurance from several insurers will help you better understand the total cost of a new (or used) car and allow you to comparison shop for insurance. Waiting until the moment of purchase will put added pressure to complete the process quickly, lessening your ability to shop for the best plan to meet your needs.

Starting the loan application process

The easiest way to find out if you qualify for a car loan is to give us a call or follow the directions on our secure online credit application. Once we have received your application, we will call to confirm receipt and discuss possible options.

We will do everything we can to approve your application, even if you have imperfect credit history. If we are unable to qualify you now, we will consult with you or your credit bureau to provide ideas on how you may qualify down the road. After all, we're here to help!

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What is a sub prime car loan?

Subprime car loans-as well as subprime mortgages and credit card lending-do not have a firm definition. A subprime loan is in contrast to a prime loan, which is a loan given to an exceptional borrower on a lender's best terms. Subprime loans are loans offered to borrowers who have some challenges in their credit history.

Because these loans represent a greater risk to the lender, they typically come with a higher interest rate. However, subprime loans also offer financing to borrowers who would not otherwise qualify for a loan.

What would classify a borrower as subprime?

When a lender considers a loan application, the primary focus is determining the likelihood of loan repayment. If a lender believes a borrower is less likely to repay a loan, it represents a greater risk, and the loan will have a higher interest rate, or not be approved at all.

Common reasons a borrower might be classified as subprime include:

History of late or outstanding payments on other debt. Late payments on credit cards, mortgages, and other loans may be reported to credit bureaus. These late payments have a negative effect on your credit score, which is one metric a lender uses to judge creditworthiness of a borrower. Late payments in your recent credit history have a greater impact than those from years' past.

Bankruptcy. Personal bankruptcy can occur for many reasons, from irresponsible borrowing to an unforeseen medical expense or job loss. Borrowers with a bankruptcy may still be able to obtain a subprime loan. An important factor is whether failure to repay an auto loan was part of the bankruptcy, or if the bankruptcy led to repossession of a vehicle. Subprime auto lenders are most interested in your history of maintaining on-time car payments.

A high debt-to-income ratio. Even if a borrower has made payments on time, a lender may not offer a prime rate because of a high debt-to-income ratio. This ratio compares a prospective borrower's total debt to current income. If a lender feels that a borrower is overextended (typically when the debt-to-income ratio exceeds 50%), the lender may offer a subprime rate because additional debt could tip a borrower over the edge.

Unemployment or inconsistent work history. Some borrowers may not have outstanding debt or a history of late payments but still qualify as subprime borrowers because of an inconsistent work history. Lenders know that a stable income is a major factor in likelihood of repayment. A consistent, two-year work history is a general guideline lenders use when determining the stability of employment.

Specific factors for subprime auto loans

Subprime lending occurs for home mortgages and credit cards as well as auto loans. In the subprime lending industry, subprime mortgages represent the least amount of risk to the lender because the house acts as collateral. Home values generally rise over time, protecting the bank from losses caused by default or bankruptcy.

A subprime auto loan offers some collateral to the lender, in the form of the car used for the loan. However, cars are depreciating assets-their value decreases over time-meaning lenders take greater risk. Credit cards offer consumer financing with no collateral, placing lenders at greatest risk.

While your credit history many not qualify you for prime rates, financing through a subprime auto loan may still be possible. If you're able to find a car and payment plan that works for your budget, a subprime loan can solve your transportation needs and start the process of rebuilding your credit-so that your next auto loan comes on near-prime or prime terms.

Find out where you stand by filling out our simple, free online credit application.

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What interest rate can I expect to pay?

Lenders take a risk with each loan they provide. The greater the risk the borrower represents, the higher the interest rate that borrower can expect to pay. The best-case scenario is a 0% interest rate. But, as the saying goes, 0% rates are for zero-risk borrowers. At the end of the day, interest is the premium paid for the privilege of borrowing money.

We'll walk you through all the factors that affect your interest rate, so you know exactly what to expect-before arriving at the dealership. But before we do that, there's one final caveat worth covering.

How the Bank of Canada affects your interest rate

Modern monetary policy is the effort of nation-states (or, in the case of the European Union, multinational organizations) to maintain currency stability. This is achieved by balancing the need to encourage economic growth while also limiting inflation.

The Governing Council of the Bank of Canada sets an overnight rate for lending, also called the Key Interest Rate, that establishes the daily (overnight) lending rate between financial institutions. Since 1991, this rate has had an inflation control target of 1–3%. This target is renewed every five years by the federal government.

Most economists agree that 2% inflation reflects an appropriate balance to encourage economic growth while avoiding damaging inflation. As the economy “heats up” and inflation increases, the Bank of Canada may raise interest rates to make borrowing money more expensive, thereby slowing the economy and stemming inflation.

During times of weak economic growth, the Bank can cut interest rates to make borrowing money cheaper, thereby incentivizing lenders and borrowers to lend and borrow more money. As of October 2016, the overnight rate was 0.50%, the lowest in Canadian history. Rates increased slightly to 1.25% as of January 2018. They peaked at 21% in the early 1980s.

Why does this matter? Because the Key Interest Rate sets the stage for individual lenders. The less it costs lenders to borrow, the less they can profitably charge individual borrowers for auto loans, home mortgages, or other loan products.

So while your personal credit history affects where along the interest-rate spectrum you'll land, the Bank of Canada-guided by national and international economic factors-determines the far ends of the spectrum.

The four factors that affect your interest rate

Remember that your interest rate does not include all non-principal payments on an auto loan, which may also include document preparation fees, title fees, filing fees, and warranty charges. The more complete figure is the annual percentage rate (APR). The APR includes all finance charges associated with your loan, expressed as an annual rate.

As you apply for a loan or visit a dealership, ask for the APR-rather than just the interest rate-to gain a complete understanding of all out-of-pocket expenses.

1. Credit history

Your credit history is more than just your credit score. This is a fact we bring up time and again to clients. That said, the purpose of your credit score is to provide lenders with a number that reflects your credit history and serves as a reasonable predictor of your future credit worthiness. Credit scores, which range from 300 to 900, are determined by two major credit-reporting agencies: Equifax and TransUnion.

Credit scores are based primarily on a borrower's debt-to-income ratio and bill-payment history. Your credit score also takes into account other credit events, including charge-offs, judgments, or collections. There's a strong correlation between your credit score and the interest rate you can expect to pay for an auto loan. A higher score means a lower rate. Zero-percent interest rates are reserved for those with the highest credit score, 700 and higher.

Slightly higher rates are available to those with mid-range scores in the 600s. A credit score below 500 likely means higher interest rates and may negatively impact your ability to get approved for a loan. Borrowers emerging from bankruptcy start with the lowest possible credit score.

Some potential borrowers with a low credit score may benefit from a cosigner on their loan. A cosigner is a person with a higher credit score, perhaps a family member or close friend, who agrees to take responsibility for your loan if you default. This added security for the lender can result in lower interest rates for the borrower and help with approval.

If you're looking for other ways to improve your credit score and lower your interest rate, take a look at your credit mix. Most lenders like to see a blend of revolving (e.g. credit card) and installment (e.g. mortgage, student loan) credit. Repayment of past loans certainly works in your favor, but lenders focus on the potential risk of lending to you in this very moment, which is why active, up-to-date credit accounts can help you secure a lower interest rate.

2. Loan term

In general, most auto loans longer than 60 months carry an increased interest rate. This is because a longer loan term represents greater risk to the lender, who must depend on your credit worthiness and repayment over a longer period of time.

A shorter loan term-even if the interest rate stays constant-means less total money dedicated to interest payments. However, shorter loan terms also divide principal payments by fewer months (36 instead of 72, for example). This means higher monthly payments. It's a sound financial strategy, but only if you can afford it.

In short, if you want the lowest possible interest rate, choose a shorter loan term. Just know that your monthly payments will be higher, even though you'll save money in the long run.

3. Down payment

Having a down payment is an easy way to lower your interest rate. Why does it lower your interest rate? Because a lender is lending less money, decreasing their risk. But there's another reason, too. A down payment shows a lender that you're serious about your commitment to repay your loan and that you had the forethought and discipline to save money for a down payment.

A cash down payment isn't absolutely necessary-the trade-in value of your existing vehicle, if you have one, may suffice as a down payment-but any down payment puts you in a better position to receive a more favorable interest rate. (At the very least, it reduces the amount you owe, making your monthly payments smaller simply because the principal of the loan decreases.)

4. Other financial factors

Not all financial variables are accounted for in your credit history, loan duration, and down payment. Quality lenders take other factors into consideration that may affect your interest rate.

One influence is your current job status. Most lenders like to see someone with a steady employment history of at least two years. Stability is important because a lender must project your credit worthiness now and several years into the future. (Be prepared to provide evidence, such as recent pay stubs, to verify your employment. Your lender may call your employer as well.)

If you feel that your work history is a bit unstable, or you're just starting out in your career, providing a larger down payment may offset the impact of a limited work history, helping you secure a lower interest rate. Similarly, finding a vehicle that doesn't strain your budget may make a lender more confident and lead to a lower interest rate.

The impact of your income is balanced by existing debt and regular monthly expenses. The amount of your paycheck is less important than the relationship between your paycheck and your expenses. Plenty of borrowers making good money spend too much, and plenty of frugal borrowers have sound finances despite modest incomes.

Another factor unique to car buying is the added incentive for on-site auto loan providers to find a solution that works for you. Unlike banks, dealerships are motivated to sell a car and benefit by finding a financing option with an interest rate that works for your budget.

The Takeaway

The interest rate a lender offers takes a number of factors into consideration, which makes it impossible to provide a simple, accurate interest rate calculator.

And while you may not want to wait until you apply for financing to find out what interest rate you'll pay, you should also be glad for this flexibility-a multitude of variables means that, if you fall short on one, you have the opportunity to compensate with another part of your financial picture.

So take the first step. Fill out our quick online application to find out what interest you can expect to pay.

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Will I need a cosigner?

Getting a cosigner is the financial equivalent of calling in reinforcements. Cosigners offer prospective lenders more than just a “vote of confidence” for a borrower from a friend or family member. That friend or family member becomes a second party to sign on the dotted line for the auto loan.

There are two reasons an applicant might want or need a cosigner. The first is to get loan approval; the second is to get a better interest rate. Here are some considerations for all parties involved.

Using a Cosigner to Get Loan Approval

What makes someone more likely to get approved for an auto loan? The answer is more than just a good credit score. It's also a broader perspective on personal economic stability-a lengthy history of making on-time payments and gainful employment are two major components, for example.

Local lenders often are better at taking your entire credit history into account, but past handling of a loan (especially handling of a loan in the recent past) is how lenders judge risk. For those with gaps in employment or past credit mistakes, this risk recipe may not work in your favor.

But it can also be challenging for others, especially young, first-time borrowers. For those getting started in professional life, the absence of credit and employment history can make loan approval almost as challenging as it is for prospective borrowers with a negative credit history. After all, while you may be a future holder of perfect credit after years of successful, on-time payments, your prospective lender needs hard evidence, regardless of how trustworthy they might believe you to be.

Both of these scenarios are opportunities for cosigners to play an important role. A cosigner can be any person-related or not-who is willing to sign on to your loan. From a lender's perspective, gaining the signature of an established buyer with a strongly positive credit history (cosigners with poor credit history won't provide much help) gives them more confidence that the loan will, in fact, be repaid.

Using a Cosigner to Get a Better Interest Rate

Even if you feel confident you can win loan approval, it may come at a significant cost. Borrowers with low credit scores (or no credit) could pay double-digit interest rates to make up for their perceived risk to the lender. From a lender's perspective, this risk is mitigated by a cosigner.

A consigner may save you ten percentage points on your interest rate, which adds up to thousands of dollars saved on interest payments over the duration of the loan. If having a car is a necessity but also a stretch on your budget, securing a lower interest rate may make owning a vehicle more manageable.

Simultaneously, a lower interest rate and lower monthly payments increase the chances that you'll be able to pay off the loan in full, boosting your own credit score and making it more likely that, the next time around, you'll be able to get a better interest rate without the support of a cosigner.

Considerations for a Cosigner

For a borrower, a cosigner often sounds like a dream come true-a way to take advantage of a friend or family member's long credit history to make your goal of car ownership possible. Just remember that from the cosigner's perspective, this is a big step. And while it has a positive impact for you, the cosigner assumes the risk for a loan from an unproven borrower.

A few things to keep in mind if you are cosigning another's loan:

  1. You are financially responsible for repayment of the loan.
  2. The amount borrowed will be factored into your credit score as part of your total debt.
  3. You will be asked to provide proof of income and other evidence of creditworthiness, just as if you were the primary borrower.

Other Benefits of a Cosigner for a Car Loan

What other role might a cosigner have? For one, bringing your cosigner to the dealership could help you make a reasonable choice of vehicle-one that best fits your current financial situation. Someone cosigning on your loan may not be willing to splurge for the sports car of your dreams and encourage you to make a more practical decision while you build or repair your credit. Additionally, a cosigner provides added incentive-and, perhaps, occasional reminders-to stay on track with your loan repayment.

If you're unable to find a cosigner, there are other ways to increase your chances of loan approval. Bringing a down payment to the table reduces the overall amount of money borrowed, decreasing the risk for the lender and increasing your chances of approval. Less money borrowed also typically leads to lower interest rates and shorter loan duration, all positives for a borrower.

If you have a close friend or family member committed to helping you but unable or unwilling to cosign for your loan, they may be able to help you with your down payment. If they can afford to spare the cash, this offers a lower risk way for them to help you toward your goal of car ownership.

Final Thoughts

No one in lending likes surprises-the lender, borrower, or cosigner. Stability and predictability work best for all parties, and that's where the cosigner can play an important role.

Whether you're recovering from past credit issues or just starting out, a cosigner provides a lender with greater confidence that a loan will be repaid. That confidence, in turn, is reflected in a greater rate of approval and lower interest rates, which help borrowers stay on track. And if you have a cosigner who's committed to helping you navigate the process and ensure repayment, everyone comes out ahead.

Want to know where you stand today? Fill out our simple online credit application.

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What if I've had a repossession?

Many people in Canada have had a previous repossession. And, yes, a repossession makes securing an auto loan more difficult. But it is possible, especially when you work with a lender that considers the unique factors affecting your financial situation.

Has it been years since your repossession? Did you face repossession because you lost your job or had unforeseen medical expenses but are now back to work and back on track?

You can obtain an auto loan after repossession, but it's essential to find a lender who is willing to ask these questions and who cares about your answers.

What is a repossession?

A repossession occurs after a buyer fails to repay a loan. A repossession agency retrieves the vehicle (boat, RV, etc.), which is then sold at auction.

While a repossession technically may occur as soon as a single payment is missed, most lenders offer a grace period. After all, repossession entails costs to the seller, who must pay a repossession agency to recover the vehicle, then store the vehicle until it can be sold at auction-at a price that may or may not be profitable for the seller.

Sometimes, following a repossession, a buyer may have the opportunity to catch up on payments and reclaim the vehicle. If this is still a possibility for you, it may be your best bet to secure access to a vehicle in the near term. However, if the cost of payments, insurance, gas, and potential repairs still exceeds your budget, it may signal that you have the wrong car for this point in your life.

If your vehicle has already been sold at auction, make sure that there is no deficiency balance-that you don't still owe money on the car after its sale at auction. You may still owe money because the vehicle sold for less than the balance of your loan, or because the added costs of repossession, which can be passed on to the buyer, have not been met by the auction sale. If you still owe money, clearing this balance is the first step toward securing another auto loan.

How to get a car loan after repossession

The most important thing to remember about your ability to obtain an auto loan is that your credit worthiness does not depend on any single factor-it is a combination of many factors. And while a repossession has a significant negative impact, you can offset that impact, in part or in whole, through other elements of your credit.

Here's how to give yourself the best chance to obtain a car loan after a repossession:

Give it time. A repossession stays on a credit report for seven years. Still, it doesn't have the same impact for all seven years. Credit worthiness is always about lenders assessing the risk of lending money to you right now-not two years ago or two years in the future. If you've just endured a repossession, consider waiting, if possible, until the repossession is a bit farther back in your rearview mirror.

Find a cosigner. If you can't wait, the quickest way to improve your credit worthiness is with a cosigner. A cosigner reduces risk to the lender by promising to step in and repay the loan if you're unable to do so. Since your cosigner's creditworthiness supplements your own, make sure your cosigner has a solid credit history.

Bring a bigger down payment. As we noted above, your credit worthiness is a combination of factors. The more money a lender provides, the greater amount of risk they take on. That's why a bigger down payment can reduce the risk to a lender-it decreases the amount of money financed. Remember, it's not just about getting approval. It's about getting approval at an interest rate you can afford. You want to present the best possible credit scenario to minimize your financing costs and make car ownership affordable.

Open an account for a secured credit card. If your current credit situation doesn't allow you access to regular credit cards, a secure credit card can help rebuild your overall credit, putting you in a better position to secure an auto loan. Secure credit cards require a security deposit equal to the credit limit. The card is used like a regular credit card, with the balance paid off each month. The security deposit protects the creditor from risk, while the cycle of monthly payments helps reestablish your credit worthiness.

Get on schedule with your other debts. Because a repossession is one of several pieces in the credit puzzle, getting your remaining debts and payments in order helps lessen the impact of the repossession. If your credit profile includes a repossession as well as a number of behind-schedule payments and high debt burden, it makes it more difficult to earn approval.

Be honest and open about your credit past. When it comes time to apply for a new loan, bring a written explanation from your previous lender that explains why your vehicle was repossessed. This provides concrete evidence to your prospective lender about what happened and may corroborate your own story about a sudden, unexpected financial event. You won't help the approval process by evading important questions about your credit history. Remember: Lenders connected with automotive dealerships have an added incentive to find a credit solution because it allows them to move a car off their lot.

No matter your situation, there's no reason not to take the first step today. Fill out our online credit application to see where you stand, and to find out how we can work together toward a credit solution.

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CREDIT SCORE

What is a Credit Score?

Your credit score may feel like a mystery or, in some cases, a burden. But the first step toward improving your credit is understanding the components in your credit score, what events affect it, and how it does-and does not-influence your ability to secure a loan.

In short, your credit score is a quick way for any lender to estimate the likelihood of your repayment of a loan, whether that's a line of credit through a credit card, an auto loan, or a home mortgage.

Credit reporting agencies compile and report your credit score. There are two main agencies in Canada-Equifax and TransUnion-that both draw on the same information from your credit report. These agencies use complex algorithms (mathematical equations) to balance each factor in your credit report and provide the most accurate assessment possible to a potential lender.

In Canada, credit scores range from 300 to 900. A higher credit score, one of at least 700, gives you the best chance to receive the lowest offered rates, which may be as low as 0.00%. A score in the middle range, the 600s, means you will pay a slightly higher interest rate. A score of 500 or below will result in a notably higher interest rate, and may affect your chance of approval.

Still, credit agencies do not provide a numerical cutoff for loan approval. And that's an important qualification, especially for those with a rocky credit history. Your credit score gives your potential lender an idea of where you fall along the spectrum of borrowers-it does not pass a yes-or-no judgment on approval. Getting to that final answer requires much more information than what your credit report contains.

Consumers are entitled to one free credit report each year. This can help you monitor your credit and know more about how your credit score may impact a loan application before you begin the process. Because you get one score from each of the three agencies, you can spread those three reports throughout the year to keep a close eye on your credit.

That covers the basics. To become fully informed, here's what you need to know:

The components of a credit score

Payment history. Your on-time payment of bills is the single largest factor in your credit report, but it still accounts for a minority of your score. A late bill payment may stay in your credit score for up to seven years, but not all late payments are the same. Were you thirty days late on a payment? Sixty days? Ninety days? Did this late payment occur last month, last year, or five years ago?

These nuances are all taken into account when calculating your score. Not surprisingly, being thirty days late on a single payment in 2013 is not as damaging to your credit score as having multiple payments ninety days past due this calendar year.

Amount you owe. Your credit score is a snapshot of the current state of your finances, which is why your score can change significantly from month to month as your checking account balance grows or credit card debt declines. The second most important factor, this component looks at your debt-to-income ratio. Your debt-to-income ratio compares outstanding debt to present income and should stay below 20% to win the highest rating in your credit score.

The focus of your debt-to-income ratio is your “revolving credit,” mainly credit cards. Lenders are interested in seeing not just how much you owe but how close you are to maxing out your line or lines of revolving credit. Even if your debt-to-income ratio falls within an acceptable range, having all your credit cards near their limit every month signals to a lender that you're operating at the fringes of your creditworthiness.

Length of credit history. In short, longer is better. Just as you trust a long-time friend more than a recently met acquaintance, lenders take comfort in seeing a long, stable credit history. This is why many financial experts recommend hanging on to your oldest credit account-it provides the most complete picture of your credit history.

Being new to the credit world is not a black mark, but the absence of a long credit history makes it difficult for a potential lender to reward your track record. Borrowers often fret over negative factors, but your credit score is equal parts reward for a positive credit history and negative marks for credit issues. If you're just starting out, you shouldn't expect to have a high credit score. It takes time to accumulate a solid history of repayment through various credit channels to earn the top rating.

New lines of credit. Everyone expects to open or close lines of credit from time to time. Credit agencies become wary only when they see closely timed, repeated “hard inquiries” on your credit report. Why? Because to the credit agency, it suggests a borrower that's overly anxious to increase their debt, which may be a sign that they're spending too much or haven't demonstrated sufficient restraint to take on-and pay back-more debt.

Checking your own credit or other “soft” credit inquiries will not negatively impact this portion of your credit score. Still, apply for new credit only when you need it.

Types of credit. Many potential red flags in your credit report relate to taking on too much debt. But one positive factor is having active accounts across several types of credit. A diverse array of well-managed credit accounts demonstrates to lenders that you have experience managing credit and are more likely to pay back additional loans. It's a case when something is definitely better than nothing.

A good credit mix might include a credit card (revolving), a home loan (secured), and a student loan (installment)-all with strong payment histories and, in the case of the charge cards, moderate balances.

What affects your credit score

We've already touched on some elements that may impact your credit score, but there are also cases when credit issues extend beyond high balances and late payments. These more serious credit challenges may result in collections, charge offs, lawsuits, or even bankruptcies.

Potential lenders are able to see the specific details of these more serious credit issues, which can help add clarity, and exemplifies why your ability to secure a loan depends on more than just a number. For auto loans, the most important factor a lender considers is whether you've had a previous repossession of a vehicle. Since the focus of the auto lender is repayment on your car-not a home entertainment system or, given the financial crisis of the late 2000s, even mortgage payments-seeing a successfully repaid vehicle in your credit history is one of the strongest signs for those with less-than-perfect credit.

If you're emerging from bankruptcy, you will start with the lowest possible credit rating. A note in your credit report about the bankruptcy stays in place for about six or seven years following your first bankruptcy. Additional bankruptcies may stay on file for up to fourteen years. While a bankruptcy in your credit report presents a challenge to securing additional credit, it's not an impassible hurdle and highlights the importance of other factors in determining your eligibility.

What is not part of your credit score

Your credit worthiness is about more than just a number. The five primary factors your credit score considers leave out important information. After all, the purpose of the score is to help a lender determine whether you're likely to pay back a loan, and your credit past is not the only variable.

For example, your credit report does not include your income or current employment status. Nor does it report the interest rate on your credit card, or whether you've completed courses to learn more about financial planning or credit management. (Alternatively, it doesn't include information about additional financial obligations, like alimony, either.)

By law, your credit report cannot contain information about your race, religion, national origin, gender, or marital status, or report on any public assistance you may be receiving or have received in the past. Some credit reports may include information about your age, but that information cannot be used to discriminate against the elderly.

This is why connecting with a lender personally gives both parties the opportunity to create a fuller picture of your credit situation-you are more than your credit score.

Let's work toward a credit solution together. Start by filling out our fast-and-easy online credit application today!

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Will credit inquiries hurt my credit score?

Hard inquiries will; soft inquiries won't. What's the difference? That's what we're here to help you understand. Read on to learn about the different types of inquiries and how they affect your credit score and ability to secure a loan.

What is a credit inquiry?

A credit inquiry is a request to pull an individual's credit report from one or both of Canada's credit bureaus, Equifax and TransUnion. There are two types of credit inquiries, hard inquiries and soft inquiries.

What is a hard credit inquiry?

A hard credit inquiry occurs when you authorize a potential lender to pull your credit report. Hard inquiries occur when you seek financing for a car or house, open a new credit card account, or apply for student loans.

Typically, each hard credit inquiry has a small negative impact on your credit score, regardless of whether the resulting loan application is approved. That doesn't mean you should avoid all hard inquiries-creditors expect occasional inquiries. Exactly how many inquiries are “too many” is up for debate, and depends on your credit situation. For most borrowers, dropping your credit score by a few points will not have a meaningful impact on your ability to secure a loan.

Hard inquiries have a slight negative impact because they reflect your desire to increase your access to financing and, as a result, potential debt. Multiple hard inquiries suggest that a borrower may be living beyond their means or desperately seeking another avenue to repay outstanding debt.

Credit bureau research support this, with data showing that borrowers with six or more inquiries on their credit reports are up to eight times as likely to declare bankruptcy as those with no inquiries. Still, inquiries are a minor component of your credit report, which is one piece of your overall credit worthiness.

Keep in mind that multiple inquiries and more new financing will reduce the average age of your accounts, which is another factor in your credit score. Taking on debt slowly over time makes sense financially, and that disciplined approach is reflected in your credit score.

What is a soft credit inquiry?

A soft inquiry may occur without your permission and does not come from a potential lender. This includes when you check your own credit report, which does not have any impact on your credit score.

Other common soft inquiries may be part of a background check or employment process, as well as those by credit card companies that send out mailers with special offers to prequalified individuals.

Some inquiries may register as hard or soft depending on how they're requested. These include

  • car rental
  • apartment rental
  • television and internet service
  • new bank accounts

Ask the business checking your credit whether the inquiry will be hard or soft. Periodic monitoring of your credit report will help identify unexpected or inaccurate hard inquiries.

How long do inquiries stay on your credit score in Canada?

In Canada, the length of time an inquiry stays on your credit report varies by credit bureau. Equifax retains the information for three years; TransUnion keeps the information in your report for six years.

The impact of those inquiries is not constant, however. As with all aspects of your credit, recent events are weighted more heavily than those in the distant past.

Will shopping for the best credit rate impact your score?

It's a logical question: If multiple inquiries have a negative impact, wouldn't shopping around for the best rate have the same effect?

Not exactly, as long as you rate shop in a short time frame. The Financial Consumer Agency of Canada recommends keeping all hard inquiries for a single loan within a two-week period. Credit bureaus typically combine these inquiries into a single inquiry.

According to Equifax, they are required by law to post each inquiry-so all inquiries appear on the credit report-but those inquiries are scored as a single inquiry.

Will applying at different dealerships help?

If you go to several dealerships and apply several times, you are just applying to the same banks over and over. Most dealerships access the same financial sources, and once a bank has made a decision on you at one dealership, it won't change when you go to another.

The bank makes a decision based on you and your credit-not the person or dealership submitting your application. Automotive banks get frustrated if they see the same application come from different sources and may decline your application because they're worried you're trying to get more than one car or aren't being honest.

What should I do next?

Even though the lending institute will make the decision on terms and rates, you need a finance manager who understands the non-prime market and has a good relationship with buyers at these banks. A strong finance manager will work between you and the bank to negotiate and plead your case.

Langley Auto Loans has a team of experts dedicated to helping you make the right decision on your next vehicle and obtaining a financing plan that works for you.

Ready to get started? Fill out our free online credit application today.

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How can a car loan help rebuild my credit?

Which goals in your life require access to credit? For most, two quick answers are car and home ownership. But if you're rebuilding credit and trying to atone for past credit mistakes, those two goals may seem far off. And, you may think, the logical starting point is a secured credit card or other minor move toward credit worthiness.

You may be right. Certainly, it doesn't make sense to take on added debt you can't afford. But, if your income allows, a car loan can provide unique value to help you rebuild your credit and achieve your goals.

Revolving vs. installment credit

Understanding the potential value of a car loan requires understanding how credit agencies view the two main types of credit: revolving and installment. Both play a role in your credit report.

Revolving credit, most often, refers to credit cards. It's called revolving credit because monthly balances and payments rise and fall cyclically. Just because your credit card bill was $250 this month doesn't mean it will be half that or twice that the next. Nor are you required to pay the exact, full balance. A minimum payment may be just $25, but you may also decide to pay the entire bill to avoid finance charges.

For credit agencies, this flexibility seems less applicable for securing financing for a car or home, which are installment loans. With an installment loan, you borrow a fixed amount, with set payments and no ability to borrow more or pay less each month. Because of this, installment loans are sometimes called “closed-end” accounts.

Also, installment loans usually are for larger amounts than revolving credit. This means you may be able to build your credit faster with an installment loan. A $25,000 car loan can establish your capacity to manage $25,000 worth of credit in just a year or two, compared to the slow-and-steady accumulation of credit through low-limit credit card. If home ownership is your ultimate credit goal, a car loan provides a parallel framework for a home loan.

Most credit reporting agencies reward borrowers for managing multiple types of credit, including a mix of revolving and installment credit. Additionally, credit agencies value active loans more than closed loans. Certainly, a successfully completed loan bodes well for your credit worthiness, but lenders are most interested in how risky it is to lend money to you right now. (For this same reason, older credit mistakes matter less than more recent ones.)

Making sure your car loan rebuilds your credit

1. Assess your financial situation

Using a car loan to rebuild your credit is a sound financial decision-if you can afford the car. If you can't afford to take on more debt, getting a car loan will not be the answer. Focus instead on paying down existing debts until you can afford a car. Otherwise, you may end up making car payments only to fall behind on credit card debt. At best, that's a zero-sum game for your financial and credit future.

If you are financially ready to take on a car loan (and perhaps a revolving line of credit, too), don't open multiple new accounts at once. Three or more active credit accounts are enough for most credit agencies to see a diverse credit stream. Opening several accounts within a short time period can be a warning flag to credit agencies, which interpret those as actions of someone too eager-perhaps even reckless-to expand their access to credit.

2. Choose the right vehicle

If your credit is only recently on the mend and money is still tight, it may not be time yet to splurge on your dream car. After all, steady payments on a used car get reported each month just as they do on a new car. (Be aware that some “Buy Here Pay Here” car sellers will not report your payments to credit bureaus-make sure your dealer reports payments so that you benefit from the car loan.)

One of the reasons that a car loan is more accessible for many with shaky credit is that dealerships benefit from selling cars, and they may be willing to take on slightly more risk than a traditional bank, which doesn't benefit from a car moving off a dealer's lot. Dealers also work with many lenders, increasing the chances of finding a lender who not only will approve your loan, but will approve it with an interest rate you can afford.

As you rebuild your credit, remember that you're unlikely to get the best offered rates from a lender, simply because you represent higher risk. To help reduce the financial burden of higher interest rates, consider bringing a down payment to the table, which, while not essential, always helps with loan approval and your ability to pay back the loan.

3. Make your payments on time

Once you've secured your auto loan, nothing is more important than making on-time payments. Consistent, on-time payments are the best way to reinforce your credit worthiness and build your credit score. You can ensure on-time payments by setting up an automatic withdrawal through your checking account. You'll save time and stress, and guarantee that you'll never miss a payment.

Even within six months, a history of on-time auto loan payments can begin to show progress in your credit score. While paying off your car loan early may be an option-and seem like a good way to show responsibility-each month you make an on-time payment is a valuable addition to your credit file.

If you pay off a 36-month loan in 8 months, it doesn't provide as much history to credit bureaus. Of course, you will save on interest payments by paying off your loan early. It's a balancing act based on your financial situation and the need to build credit with your auto loan.

If you decide to pay off your loan early, by any amount of time, make sure there is no prepayment penalty in your loan agreement. Also, remember that part of the evaluation of your credit is how much of your available credit you're using. For example, if you pay off the remaining $7,000 on your car loan, you reduce your total debt by $7,000, but, by closing the loan, you also drop your total available credit by the original amount of the loan, which could quickly push your credit utilization rate higher.

If you're wondering whether you qualify, or would like to get advice on your unique financial situation, just contact us, or fill out our online credit application.

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BANKS

Will I need money down?

Will you need money down? In a word, “No.” But that doesn't tell the whole story.

While money down on a car loan is not always necessary, it is always recommended. Why? That's what we're here for. So take a few minutes to learn what's best for you and your situation. We're sure it'll save you a few headaches-it may also save you thousands of dollars.

What is a down payment?

If we're starting from the very beginning, we should start by defining a down payment. A down payment is something of monetary value that covers the gap between the cost of your vehicle and the amount of financing you receive. For example, if you plan to purchase a $20,000 car and finance $15,000 of that purchase, you'll need a $5,000 down payment. Simple, right?

In most cases, your down payment will be made in cash. However, there are other alternatives. If you're trading in an existing vehicle, the value of that vehicle can count toward your down payment. Just know that the Canadian Black Book value of your car may be more than a dealer can reasonably offer, especially if your car is in sub-optimal condition. Selling your car privately and bringing the cash as a down payment may be a better option.

Some lenders accept other items of value, from home stereo equipment to power tools. These exchanges are less common, but the principle remains the same: The dealer needs something that can be readily converted into cash.

The purpose of a down payment

If you can obtain financing for the full amount of your vehicle, why shouldn't you take it? The answer requires a bit of explanation. For some customers, 100 percent financing is their only opportunity to drive away in a car-they have no cash reserves or other items of value to exchange.

Risks

But a no-down-payment car purchase opens the door to other, negative possibilities, namely the potential to become “upside down” on your car loan. This occurs when you owe more money than your car is worth. It is the greatest risk of no-down-payment auto loans.

It's easy to get upside down on a new car loan because the moment you drive off the lot, your vehicle loses its value (depreciates) by almost 20 percent. So, returning to our earlier example, a new car purchased for $20,000 is worth just $16,000 as soon as you leave the dealership. (You can calculate a more specific depreciation by dividing the trade-in value of your car after one year of ownership by the purchase price.) So, if you finance the entire purchase, you'll still owe $20,000 on a vehicle worth $4,000 less.

If your car is stolen or totaled in an accident, most insurance companies reimburse you for the current value of the car, not its original purchase price. (Some policies offer new-car replacement within the first few years of ownership.) Likewise, if you lose your job and need to sell your car, you may receive a fair market price without being able to pay back your lender fully. You'll be upside down on your car loan.

Benefits

On the flip side, a reasonable down payment may provide near-immediate equity in your vehicle, allowing you, at any point, to trade in your existing vehicle for a new one without significant out-of-pocket expenses.

Lenders like to see a down payment, even a small one, for several reasons. Most obviously, it decreases their risk-they're lending a smaller amount of money. But it also shows commitment on the part of the buyer, as you've invested your own cash into the new vehicle. This commitment, in turn, has been shown to reduce the risk of default, making the lender more likely to provide a better interest rate. Combine an improved interest rate with a smaller loan amount, and you may save hundreds if not thousands of dollars over the term of your loan!

If you have poor credit history, a down payment may be required to obtain a vehicle. Still, every situation is unique. A steady place of residence and work history may allow you to qualify despite blemishes in your financial background.

How much money should you put down?

Most financial experts recommend a down payment of 20 percent to cover the initial depreciation of your new car. As you drive off the lot, the amount of money financed for your car purchase will equal your vehicle's value.

Still, recent history has shown that the average car buyer puts down less than 20 percent on a new vehicle, with average down payments in 2013 hovering around 12 percent for car buyers. There are two theories on why the down payment has fallen short of recommendations. For one, the cost of a new vehicle has risen faster than the median wage, making it difficult for many families to keep pace. Second, national fiscal policy has maintained low interest rates to help the global economy recover from the financial crisis of the late 2000s, making financing more attractive.

Because used cars have already experienced this immediate depreciation, they can be a much safer alternative for any car buyer, especially for those financing 100 percent of the purchase. You're less likely to be underwater with a used car purchase, and, even if you are, your financial exposure will be less. Experts agree that a down payment of 10 percent is sufficient to protect yourself when buying a used car, which may seem more feasible.

GAP insurance provides a third alternative. For a few hundred dollars, GAP insurance insures you against the difference between what insurance companies pay for in the event of a damaged or stolen car and what you may still owe your lender.

So, if you have plenty of cash, why not increase your down payment to 30 or 40 percent? Or even pay for the car outright? For some people, that may be the right decision. Debt always incurs risk, even in stable financial circumstances. But cars are also depreciating assets. Unlike a home, they continually lose their value. Car buyers able to obtain the best interest rates may find that investing unspent cash in stocks or bonds returns greater value than sinking that cash into a car.

Additionally, if money is tighter, saving cash for your emergency fund makes more sense than locking it into a vehicle, where it remains inaccessible unless you sell your car.

Lenders, down payments, credit scores, interest rates, and loan duration

You shouldn't consider a down payment in isolation of other financing factors. At the end of the day, getting the right financing depends on your lender, down payment, credit score, interest rate, and loan duration.

The lender

The first aspect, the lender, is simple to understand. You need a partner that understands your situation and has your best interests in mind. Also, like any other purchase, shopping around makes sense. Take the time to find the best lender to meet your needs.

Compared to banks, dealerships often are more willing to extend credit to buyers because they have the added incentive of selling a car. Additionally, local businesses, whether dealerships or banks, will have a better understanding of the local economy and the ability to empathize with local hardships, like large-scale job layoffs at a city factory.

Down payment

Your down payment is the second key factor. In addition to preventing you from becoming upside down on your loan, your down payment reduces the total amount you need to finance, which may help you secure lower monthly payments. It's intuitive: Your monthly payments are the amount of the loan (plus interest) divided by the period of repayment. Financing a smaller portion of the purchase price leads to lower monthly payments. On average, every $1000 you put toward a down payment reduces your monthly payment by about $20.

Likewise, a shorter loan duration means paying less overall interest to the lender. However, be aware that a shorter term also results in higher monthly payments because the loan amount is divided by fewer months. Ultimately, however, it creates a lower total cost.

Credit score, interest rates, and loan duration

Your credit score affects your interest rate, and a higher credit score will give you access to the lowest interest rates, which may be as low as 0.00%. The interest rate you receive depends on your personal financial history as well as broader economic policy. Ultimately, the interest rate is the price you pay the lender for the privilege of borrowing money.

However, it's important to take into account the annual percentage rate (APR) of your auto loan, not just the interest rate. The APR is the total finance charge of your loan expressed as an annual rate. It provides a fuller understanding of out-of-pocket expenses, which may include document preparation fees, title fees, filing fees, and warranty charges, rather than focusing on the interest rate alone.

This is also where interest rate and loan duration intersect. A lower interest rate means you'll pay less interest, but monthly payments may be high, depending on the duration of the loan. A longer loan duration means a higher interest rate and greater overall expense but smaller monthly payments. Let's break it down:

1. The interest rate is higher because it represents an extended risk to the lender.

2. The overall expense is greater because you're paying monthly interest for a longer period of time.

3. The monthly payment is smaller because you're dividing the amount of your loan by a larger number of months.

This final point is key because many buyers simply see a smaller monthly payment in a financing offer and jump on it-even as it locks them into thousands of dollars of additional interest. Most auto loan durations are for 36, 48, or 60 months. Some may be as long as 72 or 84 months, but these should be avoided, if at all possible.

Why? Here's an example. A $20,000 loan for 72 months at 7 percent interest would cost you about $4550 in interest. That's almost three times the interest you would pay for a 3-year, 5-percent loan. If you need a 72-month loan to pay off your car purchase, you should probably consider a less expensive car.

Apart from a higher interest rate and greater total interest, you may also expose yourself to the risk of looking for a new car before paying off your existing vehicle. Most North Americans keep their cars for about 4.5 years, and it doesn't make any sense to pay back a loan for months or years after discarding a vehicle.

Some lenders allow car buyers to roll an existing loan into their next vehicle purchase, but this can put you upside down in a hurry-and for longer. Remember: No matter how you set up your loan, you will pay for the car one way or another. Don't let a low monthly payment obscure the fact that a vehicle may still be out of your budget.

Is a long-term loan ever a good idea? Only for those with current financial stability but an uncertain economic future. Securing a long-term loan at a low interest rate can provide protection down the road. In the near term, pay off the loan as quickly as possible. Then, if your income later declines, you'll have a lesser burden of monthly auto payments. Even adding $20 or $30 to your regular monthly payment may save hundreds in finance charges over time.

If you are taking out a long-term auto loan, make sure you choose a car that has high reliability and longevity. That way, you give yourself the best shot at avoiding car replacement before the loan is repaid.

When no down payment may be the right choice

There are best practices when it comes to financial planning, and then there are life's unexpected events. We know that even savvy, spend-thrift people can run into financial trouble. And that's why we recognize that there may be a time when no down payment is the right choice-because it may be the only choice.

So when is it the right choice?

  • 1. When your current vehicle has become unusable
  • 2. Personal transportation is still necessary
  • 3. You have no way to provide a down payment on your next vehicle
  • 4. And you're willing to assume more risk with your car loan to preserve emergency savings for repairs to your home or medical expenses-the inflexible, urgent needs.

But, as you may have already noticed, a no-down-payment loan is a way to manage a difficult situation, not an ideal scenario for borrowers. Remember, too, that “no down payment” doesn't mean no cost to the buyer. Some lenders lure buyers to their businesses with promises of no down payment only to add fees and closing costs to the purchase. These costs can be particularly onerous because, unlike a down payment, the out-of-pocket money goes straight to the lender rather than paying off your vehicle.

It's another reason why taking a few months to save up money for even a small down payment can be well worth the wait. It protects you from being upside down on your loan or falling victim to unfavorable, even predatory lending practices.

When you're ready for a detailed analysis that takes into account your unique financial situation and transportation needs, just get in touch or take a moment to fill out our credit application. Find out how we can work together to find a solution that works for your life and your budget.

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What if my own bank turned me down?

It happens. You applied for a loan with your bank, expecting to get approval to purchase a much-needed vehicle. However, instead of financing, you received a rejection letter. Take a deep breath-this isn't the end of the road.

If your bank turned you down for an auto loan, you still have options. Start by finding out why your bank turned you down. Then, with that knowledge in hand, consider your other options to get the vehicle financing you need.

Find Out Why

If your bank turned you down for a car loan, they should provide some insight as to why you weren't approved. Car loan approval rarely boils down to a single event in your credit history or a single metric, like a credit score.

Most borrowers think about their credit score first, and, indeed, it plays a role in approval. But it's not the only factor. After all, your credit score is a number that attempts to summarize all other aspects of your credit history.

Additional important factors are your work history and current income, whether you'll be able to put money down (and how much), and which vehicle you seek to purchase. We've written about each of these elements extensively and encourage you to read more.

From a lender's perspective, two major credit events can affect approval: bankruptcy and repossession. A bankruptcy in your recent past is an important but general warning sign for creditors.

(As with all elements of your credit report, banks and other lenders are most interested in what's happened recently because they're assessing the risk of lending money to you right now, not ten years ago.)

A more specific and challenging note in your credit history is a vehicle repossession. Even though, from a financial perspective, it represents a “smaller” credit event, it's more specific to your immediate request of car loan financing.

Every borrower is entitled to one annual free credit report from Canada's major credit reporting agencies, Equifax and TransUnion. Request each agency to mail you a copy of your report here and here. This report will give you a better sense of your current debts and any late payments on your record.

Compare your free credit report to information you receive in your bank's rejection notice. Once you know why you were turned down, you'll have a better sense of your options for securing a loan.

What to Do after Your Bank Turns You Down

1. Try another Bank or Credit Union

If you're on the fringe of securing an auto loan, another bank may offer approval. In general, larger commercial banks are less likely to approve your loan than smaller, local banks. That's because local businesses have a better sense of local economic events-like a recent factory layoff-that may affect the superficial creditworthiness of otherwise reliable borrowers.

Alternatively, try a local credit union. Credit unions exist to serve their members, and they're another good option if you're running out of luck at local banks. Because helping members is their primary goal, they usually are more willing to take time to listen to your specific situation and, in many cases, can offer a better rate than major banks.

Be aware, however, that getting financing is not as simple as rejection or approval. Every borrower falls along a spectrum, and you may get approved-but only at an intolerably high rate. It makes sense to shop around and find out who is willing to offer not just approval but the best terms as well.

2. Seek out Financing from a Dealership

As part of a dealership, Langley Auto Loans may be uniquely positioned to help solve your credit needs. Unlike banks, dealerships have an added incentive to find a credit solution for applicants: They get to move a car off their lot.

With that added incentive, you may find dealerships are more willing to work out a financially viable solution for a wider range of borrowers. We urge caution, however, as there are unscrupulous lenders-at banks and dealerships-that offer short-term teaser rates or engage in other opaque lending practices.

No matter where you secure financing, take the time to understand all the implications of the paperwork you're about to sign. If your credit history has a few bumps in the road, an unfavorable loan will lead only to more credit challenges in the future.

3. Hold off until Your Credit Improves

While dealerships often have creative solutions to gain approval for almost any lender, a few situations-like a very recent repossession-may make it difficult to secure a loan. As noted before, not all loan approvals are equal, and securing a loan on manageable terms is just as important as getting initial approval.

Credit-building opportunities like secure credit cards give borrowers a chance to build a steady payment history without putting financial institutions at risk. If you can afford to wait a few months or a year to build up some credit (and let some credit mistakes fall further into your past), you may save thousands of dollars over the course of your loan.

If you're still not sure where you stand, Langley Auto Loans has car loan experts that are happy to discuss your situation and provide professional advice. Start by filling out our online credit application. We'll take it from there.

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What if I owe more on my trade than it's worth?

A car, especially a new car, depreciates in value as soon as you drive it off the lot. That makes it easy to end up “upside down” on your car loan.

Being upside down means you owe more money on your car than it's worth. If you're looking to get a new car, this poses a dilemma: What do you do with your current vehicle? How can you pay off your current loan? Can you fold the remainder into your next car loan? Should you?

There are plenty of details to sort out, but let's start with some basic truths:

Truth 1: You borrowed money from a financial institution. You have to pay this money back.

Say, for example, you still owe $10,000 on your current car, but that vehicle is worth only $7,500. You need to cover that $2,500 gap, one way or another.

And this is where we go from simple truth to financial details. There are multiple paths to that $2,500, from taking a second job to selling your childhood comic book collection to taking out a home equity loan to rolling your debt into another vehicle.

All of these options have pros and cons. Some allow you to solve your debt issue immediately; others let you delay full repayment until months or years down the road.

Truth 2: You can improve your situation by reducing your loan amount, improving your loan terms, or stretching the duration of your loan.

The best case scenario is that, one way or another, you're able to pay off your debt in full. However, that may not be possible-or even the best option-depending on your financial situation. That's why another way to relieve the pressure from your upside down car loan is to transfer your debt to another, lower-interest loan, or refinance (plenty of details on those options below).

Think about your debt as water left in a faucet. Assuming you've stopped taking on debt, the supply of water left in the pipes is fixed, but it still needs to come out before the all clear. If you open the spigot fully, you'll flush the water out in a few seconds-drain all your debt at once.

But that may cause catastrophic flooding across your financial landscape. Extending your loan is the equivalent of opening the faucet just a bit, allowing a manageable amount of water through and preserving your financial landscape. But it may take a while to clear the pipes.

This isn't a perfect analogy. Sometimes extending the length of your loan also incurs more interest (i.e. adds more water to the pipes). It may give you an idea, though, of what's more manageable for your situation, whether it's draining the pipes at the cost of near-term personal pleasures or some of your savings, or whether you desperately need to restrict the flow for the next few months.

Truth 3: If you sell, you need to maximize the resale value of your car.

Yes, it seems intuitive-until you attempt to put the plan into practice. As we'll show, some of the quickest paths to unload your current vehicle simply prolong or expand your indebtedness.

Even as you search for ways to make up the difference between the value of your car and the amount of your loan, remember that your car is still the most valuable piece of the puzzle. It should get you most of the way toward financial solvency.

That's why getting the maximum resale value for your car is so critical. A few percentage points in resale value make a much bigger difference than an extra bid or two for your Blu-Ray collection on eBay, or an extra few tips on your pizza delivery run.

You can walk into a dealership today, and they will cut you a check (or put the value of your current car toward a new one). But if you don't do your homework, you may unknowingly transfer thousands of dollars in resale value to the dealership by accepting a low-ball offer.

How You Got Upside Down on Your Car Loan

There's more than one way to end up upside down on an auto loan. This process is critical to understand if you're exchanging one vehicle for another.

Nothing will be as important for avoiding another negative situation as knowing how you can end up in one in the first place. Don't escape one mistake by making another.

Here are the five ways you can end up upside down on your loan:

1. You Bought a Car You Couldn't Really Afford

Of all the ways to end up underwater on your car loan, this is the simplest one to understand-even if it's the hardest one to resist. Cars have a special place in our psyche, and few of us grew up without some ideal car, whether a bright red Camaro or the more mature luxury of a Mercedes Benz SUV.

Car buyers with the same income may be willing to dedicate varying amounts to a car payment. Certainly, someone who spends the week traveling around British Columbia on business might find more benefits in a comfortable ride compared to someone who hops in the car only for short trips.

Most financial experts recommend that a car payment should not exceed 10 percent of your gross income, no matter what you make. That means if your income is $52,000, your car payment shouldn't exceed $520 per month.

2. You Didn't Have a Down Payment (or Enough of One)

Often, car buyers stretching their budget end up purchasing a car with no down payment. It's the cheapest way to get off the lot without opening your wallet. However, most new vehicles depreciate by 20 percent the moment you drive off the lot, which is why it's so easy to get upside down on a car loan with a new vehicle and no down payment.

Take a $30,000 car as an example. Once those four tires leave the dealership, your $30,000 purchase is worth just $24,000. That's right-you're already $6,000 upside down. Even if you're able to maintain payments, this still presents a risk.

Most insurance companies reimburse clients for damaged or stolen vehicles based on a car's value, not the amount you owe. So if the first turn out of the dealership results in an accident, don't expect your insurance company to come to the rescue. (Some insurance companies offer new-car replacement within the first year of ownership.)

One pragmatic option is to ensure your down payment covers this initial loss in value. Another option is to purchase gap insurance, which, in the event of an accident or theft, covers the difference between the insurance payout and your loan balance.

3. You Had a High Interest Rate

Interest rates depend on many factors, most notably your credit score. Other considerations include your work history and current income, as well as any credit card debt and your home loan. Even alimony and child support may affect your interest rate. Whether you're working with a dealership or a lender, their primary concern is limiting risk.

You may not have qualified for a low interest rate during your last vehicle purchase, and you still may not be in a position to get the lowest interest rates a lender offers. Getting prequalified before getting on the lot-or as soon as you arrive-can ensure thoughtful decision making and prevent signing up for a high interest rate in a rush to finalize a deal.

4. Your Loan Term Was Too Long

Extending your loan term can stretch your budget when financing car. Your monthly payments are the amount borrowed plus interest, divided by the term of the loan. Lengthening your loan term means dividing your loan amount by more months, resulting in lower monthly payments.

However, it also means more months paying interest (and, typically, a higher interest rate). This can result in hundreds and sometimes thousands of dollars in additional interest payments. It can be a strategy of last resort, and we'll tackle that later. But before you sign a 72- or 84-month lease, calculate the total costs, not just the monthly burden.

This factors into getting upside down in another way, too: By the time you get around to year six or seven on your repayment schedule, your car may have depreciated enough to make its resale value less than what you still owe.

5. You Rolled a Previous Car Loan into Your Current One

Rolling over your loan is always a tempting option, and it can provide temporary financial relief while also getting you into another vehicle.

Still, remember that each time you roll an old loan into a new one, your total debt increases. If you're not careful, what may have started as a snowball can become an avalanche, one in which being upside down on your car loan is a permanent state, no matter how long you keep your car.

Some dealers promise to pay off your existing loan-even if you're underwater-and give you a brand new car. But your existing debt will be rolled into your next round of financing. That may mean a higher monthly payment, an extended loan term, or both.

Ways to Get out from under Your Car Loan

First things first: This is not an either–or situation. Some options are mutually exclusive, but the best plan for you may combine several of the strategies detailed below.

Cut and Pivot

Selling your existing vehicle is often the first thought that comes to mind. And it may be the best one. But before you sign over your title to a dealership (or even a neighbor who's long admired your ride), consider some of the alternatives and see if there's a better fit for you and your budget.

Employing some of these strategies in the near term might provide you with temporary relief and better position you to sell your expensive car several months or a year down the road.

Keep Making Payments until You Can Break Even (or Afford the Difference)

Making payments for a longer period of time will bring you closer to breaking even, eliminating the upside-down status of your loan. Of course, if you felt like you could make the payments indefinitely, you wouldn't be stressed financially in the first place.

Still, even a few extra months of payments might lighten the financial burden of your upside down loan. Are there other areas of spending where you could cut back, even a little? Shuffling some of that cash to your car payment might get you closer to the tipping point. Every little bit helps, even if you end up selling your car in the not-so-distant future.

If your financial squeeze is approaching but not yet here (say, it's an eight-pound bundle arriving in about nine months), check to see if there are any prepayment penalties on your loan. If not, throwing an extra $30–50 at your car loan each month while you have the financial flexibility can help you get closer to level when the real cash crunch arrives.

If you can get by without your car for a few months, consider parking it in the garage (or safely on the street) and cancelling your car insurance for a period. This could save a few hundred bucks, which you can put toward paying down your principal. Just make sure you get reinsured before you take it for a drive again. You'll also prevent additional wear and tear on the car, save on gas, and maybe even get some much-needed exercise!

While unconventional, this strategy works well if you've recently become unemployed and no longer need to drive daily to your job. Public transit or a lift from a friend can help fill the gap and get you to job interviews. Similarly, if you've decided to eschew the corporate world in favor of starting your own business, you likely can survive a few months without an everyday vehicle.

Refinance Your Loan

Refinancing your loan starts by contacting the company that owns your car, whether it's a bank or a dealership. If you're able to lower your rate, it means that more of your monthly payment-even if it doesn't change significantly-goes toward paying down your principal, which will close the gap more quickly between what you owe and what your car is worth.

Alternatively, refinancing may simply extend your loan term. This can be tricky, as extending your loan term typically means you'll pay more total interest. However, if lowering your monthly payment is the most urgent priority, refinancing your loan term can provide that immediate relief.

In any scenario, time is of the essence. The quicker you refinance, the quicker you'll get back to even on your car loan. Each payment on poor loan terms is money wasted.

Also, remember that lenders will be more willing to work with you if you come to the negotiating table before you get behind on your loan. If you fall behind, you may not have a car to refinance-vehicle repossessions can happen quickly and make it difficult to secure a car loan in the near future.

Shift Your Debt

Shifting your debt doesn't resolve your issue, but it may make it more manageable. One option is to find a credit card with a balance transfer offer. This may give you the opportunity to enjoy up to a year without interest charges.

However, a word of caution: Introductory periods end, and the following period of interest may quickly balloon your balance. Make sure you know what will happen after the “honeymoon” phase is over with your new creditor. This makes the transfer option better suited to someone who needs a few months of relief to finish off a burdensome car payment; it's unlikely to be a long-term solution. If you go this route, pay as much as you can, as quickly as possible.

For homeowners, a home equity loan is usually a much better option. You may be able to quickly raise the cash to pay off your auto loan while transferring that debt to a lower-interest home equity loan. For those with a good credit history, personal loans also provide the opportunity to transfer your debt to a lower-interest loan product. Your local bank or credit union is the best place to start for that.

Raise Revenue

Cutting expenses and moving your debt to more favorable loan options can provide some relief. However, raising additional revenue may also be necessary to escape your upside down loan. Here's how you can pair frugal spending and better loan terms with some additional cash:

Sell Some Stuff

What's in your garage? How about the attic? Having a manageable debt situation may be more important to you than some old collectibles or heirlooms. Remember, at the end of the day, you're simply looking to balance the amount you owe with the assets you have. And if your car can get you 80 percent of the way there, maybe you can find a way to raise the other 20 percent, or even some of it, with a yard sale or eBay selling spree.

Get a Second Job or Work Overtime

Still need more cash? Taking a second job, just for a short period, may offer a solution. While not glamorous, delivering pizzas or refereeing youth sports can make some extra money while not interfering with your day job. If you have the opportunity, a few additional shifts at your regular work might be the easiest way to get more cash in your pocket and lower your automotive debt.

Sell Your Car

Use Canadian Black Book to get general pricing for your car based on the make, model, year, mileage, and condition. Be cautious about overestimating your standard of care-only a fraction of all trade-ins qualify as being in excellent condition. Also, know the difference between the dealership trade-in and private sale prices.

Use eBay or Craigslist for additional market research. EBay includes filters to display sold listings only, which can also be narrowed by geographic area. It makes much more sense to figure out what a similar vehicle actually sold for, not just what sellers are demanding.

Because you still owe money on your car, you'll need to get permission from your lender to sell. This is because you don't own your car outright, and the lender still has a lien on your vehicle. You're unlikely to run into any major hurdles, but checking in first will make sure that you fill out all necessary paperwork. In most cases, the total amount of your loan will be due before the title can be transferred.

Dealer Trade-In

As we've noted, the number-one benefit to a dealer trade-in is a check on the spot (or money toward your next vehicle). Dealers may also be willing to extend credit to car buyers because they have the added incentive of moving a vehicle off their lot. This may loom large when rolling your existing vehicle debt into another car lease or loan.

A dealership's new-car incentives, such as rebates, may be enough to offset your upside down status if you owe only a couple thousand dollars. Be aware, however, that incentives typically are for new (and sometimes unpopular) vehicles, which may mean lower resale values.

To avoid getting stuck upside down on your loan a second time, you may need to hold onto that new car with the huge cash-back rebate for a year or two longer than high-demand vehicles.

You may also be able to escape the cycle by trading in your vehicle and taking out a lease. If a dealer offers exceptionally low lease rates, rolling your existing debt into a lease payment may be manageable, and after the lease is up, you'll be debt free, since you don't need to worry about getting upside down on a lease. The downside? You won't have any equity in a car to trade in either.

Private Sale

Choosing to sell your vehicle privately often provides the maximum amount of cash. So why wouldn't everyone do it? Because it takes time, energy, and a bit of know how. From keeping your car clean to advertising it across the Internet to negotiating the final price and title transfer, the process may seem daunting.

In some markets, you may find a third option: consignment. With consignment, you pay someone else to sell your car. Different auto consignment businesses charge different rates, some a flat fee, others a percentage of the sale price.

After you subtract the consignment fee, you may or may not walk away with more cash than if you sold your vehicle to a dealer. It's worth doing the math before you make up your mind.

The End Result

So what makes the most sense for you? Trading in your vehicle? Working a few extra shifts? Taking out a home equity loan? Hopefully, we've provided some answers-or at least given you a picture of all the paths you might pursue.

If you're not sure, get in touch. We're happy to talk through your situation and find a sustainable solution that meets your needs. Or, if you prefer, fill out our online credit application to start the prequalification process today!

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What if I've been bankrupt?

Bankruptcy presents a challenge to car loan approval, but it's not an impassable barrier. Every situation is unique, from the cause of your bankruptcy to the extent of your debt. As we'll explain, a car loan can be the perfect place to start rebuilding your credit, even if you're emerging from personal bankruptcy. Here's everything you need to know.

Bankruptcy in Canada

The Canadian bankruptcy process is governed by federal law through the Bankruptcy & Insolvency Act. While potentially losing some of your possessions or property is a painful process, the goal is to allow you to escape your debts and start again without your existing financial burden. After your debtors have been paid, the remaining debt you owe will be cancelled, with a few minor exceptions.

To file for bankruptcy in Canada, you must owe creditors at least $1,000 and be unable to repay your debts. (You must also live or work in Canada.) If you're in this situation, the process starts with the hiring of a federally licensed bankruptcy trustee, who helps you file for bankruptcy. Trustees charge fees for their services, but regulation ensures fees are reasonable and that the bankruptcy process does not become another major financial burden to you.

The Role of the Trustee

With your help, the trustee catalogs all of your existing assets, as well as any assets you have discarded in recent years. You also are required to surrender all credit cards to the trustee. However, you are no longer required to make payments to creditors, subject to wage garnishments, or liable for lawsuits filed against you by your creditors.

The trustee sells your remaining assets to generate as much cash as possible, which is held in a trust. From this trust, the trustee settles your debts with existing creditors, usually by agreeing to pay a percentage of what's owed. Assets may include your car, house (if you own it outright), or other items of value. If your income exceeds a sliding threshold for a federally defined standard of reasonable living, you may be required to submit “surplus income” to your trustee for distribution to creditors.

Discharge and Debt Cancellation

The process of discharging your bankruptcy takes about nine months for your first bankruptcy. If you qualify as having surplus income, it could take up to twenty-one months as you continue to make payments to creditors. If you are filing for bankruptcy a second time, the discharge process can last for up to three years. Instead of an automatic discharge based on elapsed time, a hearing may be called to confirm or deny your discharge, depending on the situation.

During the bankruptcy period, you must complete certain responsibilities to finalize the process, such as attending two financial counseling sessions and assisting the trustee with the distribution of assets. It is critical that you are fully honest with your trustee and other parties at all times during your bankruptcy proceedings.

After discharge, your debts are cancelled, with some exceptions. You will still owe payments for alimony, child support, student loans, court fees, and debt accrued from fraudulent practices.

Bankruptcy and Your Credit Report

Immediately after emerging from bankruptcy, you have the lowest possible credit rating. A note on your credit report about your bankruptcy remains on file for six or seven years following your first bankruptcy. For subsequent bankruptcies, it may remain for up to fourteen years.

This is a primary hurdle when it comes to securing credit for a car loan or other major purchase, but it doesn't tell the entire story. In many cases, a work-related injury or job loss may have caused the bankruptcy, not irresponsible spending habits. Factors specific to your bankruptcy come into play as you look to rebuild your credit and secure financing.

Getting a Car Loan after Bankruptcy

For lenders, the obvious concern is getting repaid. A bankruptcy in your recent history means lenders face above-average risk if they decide to loan you money. For anyone applying for a car loan, lenders may look as far as ten years into previous credit history, but the most important time period is the most recent two years. If you've already made it through this window post-bankruptcy, it's a positive sign to a lender.

That said, you'll still want to spend time evaluating all your options. While consumers with high credit scores enjoy low interest rates from most if not all lenders, people with a bankruptcy in their past may find it difficult to get a manageable rate-or even approved at all. Make sure you explore your options thoroughly before deciding on a lender.

Factors Lenders Consider

When automotive lenders begin investigating the credit of someone with a past bankruptcy, the single most important factor for approval is a successfully repaid car loan. To the lender, it demonstrates commitment and establishes a positive history. If you're currently up-to-date on payments for an existing vehicle, all the better.

In some cases, this includes maintaining payments during the bankruptcy process. If your debts are not excessive, you may be able to continue making car payments-and keep your car-as you go through bankruptcy. This is a very positive signal to an auto lender. A repossession of a car is far more detrimental to your ability to secure a loan than a general bankruptcy.

Paying your mortgage is another major factor, although the financial crisis of the late 2000s shifted lenders' emphasis away from mortgage status as a leading determinant. During the financial crisis, so many consumers were behind or “underwater” on their home payments (they owed more than their home was worth), that focusing on mortgage status eliminated many legitimate loan seekers.

Often, local lenders provide a better option because they understand local economic situations, like a rash of job layoffs. Additionally, you may find that dealerships are more willing to extend credit as it's mutually beneficial. You get to drive away in a car you need while rebuilding your credit, and the dealership gets to move a car off its lot.

Part of what makes car loans an effective way to build or rebuild credit is that the car you purchase serves as collateral for the loan. You're not required to have a separate asset to secure the car loan. Still, smart lenders should help you find a car that matches your current income level. In general, the more of a financial stretch the monthly payment may be, the more money you should expect to put down in advance. More money down protects the lender in the event of a default or repossession.

Cautions and Alternatives

And while it may be difficult to find a willing lender, be cautious of any lender offering guaranteed loans regardless of your credit, or a lender demanding upfront fees or wire transfers before processing your loan. These are tell-tale signs of irresponsible or potentially fraudulent lending practices.

If you're unable to get approval for a car loan, the fastest and easiest way to build your credit is with a secured credit card. Unlike regular credit cards, secured credit cards require a security deposit equal to the credit limit. You then use a secured credit card like a regular credit card and pay off the balance each month. The lender is protected by your security deposit, which covers any balance you're unable to repay.

Like monthly payments for traditional credit cards, payments on the balance of your secured credit card are reported to credit bureaus to help rebuild your credit. The setup isn't appealing for those with good credit, but it's a useful interim measure to demonstrate your ability to manage credit.

The Lender's Perspective

Because the car serves as collateral for the loan, it represents less risk from the lender's standpoint. However, it's still not without risk. This is in part because some 20 percent of the value of your car disappears as soon as you drive it off the lot. So, if you buy a car for $20,000 and finance the entire purchase, that car is worth only $16,000 the moment you leave the dealership, even though you'll still owe $20,000.

The dealer also takes on risk for potential damage to the car beyond normal wear and tear. That's why, even if you've undergone bankruptcy, a clean driving history without recent or repeat accidents or traffic violations might help you secure a car loan. If your car is repossessed but has no damage, the car will be worth more, and the lender will be able to recover more. All other factors being equal, a good driving record can help tip the balance in your favor. The converse is also true.

Still, the process of repossession represents an expense to the lender. The lender needs to pay a repossession service to obtain and store the car, and cover auction fees for your vehicle. At auction, most cars sell below their “book value,” which also is likely to be less than the amount of the loan.

The Value of a Down Payment

If you're able to provide a 20-percent down payment for your vehicle, it decreases the risk to the lender because after you drive off the lot, your loan amount will equal-not exceed-the value of your car. You'll never be “underwater” on your car loan. In many cases, rebates offered on certain cars can be put toward a down payment, which bolsters the likelihood of approval and makes monthly payments more manageable.

If you're able to provide an even greater down payment, say 30 to 40 percent, it provides added security for the lender and increases your chances of approval. As always, financing a smaller part of your purchase results in lower monthly payments, which may help you stay on track over the long term.

Final Thoughts

As we mentioned at the top, every situation is different. But bankruptcy still leaves open the possibility of obtaining an auto loan. In fact, an auto loan may be the perfect way to help you recover from a troubled financial past.

To find out where you stand, get in touch with a lender that's committed to helping you make the right decision, whether that's choosing an appropriate car or finding ways to build your credit to increase your eligibility. Take the first step today.

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