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Bank vs. Dealer Financing

Bank financing

Whenever possible, it's best to get your auto loan before you walk onto a dealer's property. When you already have an approved loan, you may as well have cash in hand, cash you can take with you and walk away if you don't like the way things are going.

Good Car, Bad Credit • Intro • Know your Credit Score • How Bad is Bad? • Bank vs. Dealer Financing • Look Forward to Refinancing • What NOT to Do --- • FICO At A Glance

What's more, an independent bank won't try to raise the car's price, ignore trade-in credits or lard the contract with extras like credit insurance or extended warranties.

At present, Capital One, Household Finance and AmeriCredit stand out as being particularly aggressive in offering loans to subprime borrowers. Be sure to check the complaints about these and other companies you may be considering. We get our share of hair-raising complaints about each of these companies (as well as most of the others) but they may be the best non-dealer financing options a consumer with bad credit can get.

One good thing about borrowing from banks is that you can sometimes complete the entire application online -- often a good thing if you're embarrassed about discussing your past credit issues with a potentially predatory finance officer.

Capital One, for example, offers an online car loan application at www.capitaloneautofinance.com. The bank promises to respond within three business hours if you qualify for its Custom Finance Program (aimed at borrowers with credit issues).

Dealer financing

If you can't line up a bank loan, you can go to the dealer and see what kind of financing they can get for you. For some people, dealer financing is more or less are the only option.

"The lenders do have cutoff points," notes Todd Kutcher, chief operating officer of lending site Credit.com. "If a consumer's score is below the mid-500s, they're just auto-declined by many lenders. In that case, an individual's best bet is with dealers. They have a lot more flexibility."

Among other options, most dealers have access to what's known as "captive finance companies," finance firms owned and run by auto manufacturers. Often, they're the lenders behind the sweeter low- or no-interest deals that pop up so prominently in car advertisements. Sometimes, though not always, they'll also be the finance company willing to take a chance on higher-risk loans, given that their job is to move cars for dealers.

Virtually any auto dealer you deal with is likely to have a captive they can work with in a pinch. Mazda, for example, finances vehicles through subsidiary Mazda American Credit, GM dealers have General Motors Acceptance Corp., Nissan dealers Nissan Motor Acceptance Corp. and so on.

While there are no guarantees, representatives of several of the larger captive finance companies contacted by ConsumerAffairs.com said that they do offer bad credit loans, though they couldn't be specific as to how low your FICO score could be. "We do not necessarily go out of their way to finance subprime customers, as a captive, they will generally finance deeper than a bank might," says a Mazda American Credit spokesman.

As with the banks, bear in mind that different captives have different business practices, and some are less savory than others. If you're a bad-credit customer, you're going to want to be especially careful about whom you deal with, and captives are no exception. Search the ConsumerAffairs.com site, and you'll find complaints about overcharging, financing trickery and other ills. Go into the deal with your eyes wide open.

Next: Look Forward to Refinancing

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