Car Loans: New Rules for Buyers

By: Jeanne Lee

(MoneyWatch)

Banks, car companies, and especially credit unions are now fairly keen to lend — if you're creditworthy and have cash for a down payment. But no more trading in a vehicle worth less than you owe and walking out with that negative equity rolled into a new loan. "If you're in that situation, you won't get approved no matter how good your credit score is," says Greg McBride, senior financial analyst at Bankrate.com.

Here’s a guide to today’s market for car loans:

Credit Availability

Moderately tight

What It Takes to Get Approved

A high credit score: Most borrowers with scores of 750 or higher (on the FICO scale of 300 to 850) can get loans. If your score is 620 to 750, you’ll have a much harder time getting a car loan than a year ago. Borrowers with scores below 620 will only be approved about 20 percent of the time, says John Prinz, content editor of Carseek.com.
A rich down payment: A 20 percent down payment is now considered the right amount, says Prinz. Lenders will jack up the rate if you put down less.

What You’ll Pay

The national average for a 48-month new-car loan is 7.3 percent. Figure on paying a rate closer to 8 percent if your credit isn’t pristine. Of course, car companies and dealers often hawk low-rate financing on particular models for creditworthy customers. Edmunds.com tracks all the current incentives; you just need to plug in your zip code and the models of interest.

Advice

Credit unions are lending in a big way, often now charging low rates of 6 percent or so. Some even will lower your rate by another 0.25 percent or 0.50 percent if you have your loan payments automatically debited from your credit union account. If you’re not a member of a credit union, see if you can join one.

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