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Dealer Can Finance New Car But Not Used Car?

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I've been working on my credit score and finally got all my FICO scores above 700 after getting some paid medical collections off my credit report.

So I decided to try a local dealer for an auto loan on a used car. Funny thing is that they kept trying to sell me a new car. I didn't think my credit would be good enough for a new car and to be honest I didn't want to take on too much debt at the moment. I figured something around $12,000 would be perfect.

But every time I expressed an interest in a used car they went away and came back saying the bank wouldn't approve the loan on a used car and suggested a new model as an alternative.

To me it didn't make sense that the bank would approve a higher value loan but refuse a cheaper used car loan. When I asked them why they said that I was more likely to default on a used car because it is more likely to break down etc.

The other thing is that although my credit scores are reasonable I don't have a long credit history as I moved here from the UK around 6 years ago. I only have credit cards on my credit report and no installment loan history or mortgage history. My oldest credit card account is 4 1/2 years old.

I have no collections, missed payments or anything else bad on my credit report other than a short history, lack of installment credit and a few hard pulls for credit card applications.

My FICO scores are EX: 724 EQ: 733 TU: 761

The salesman said I might be able to get a lower interest rate on a new car of around 10% but an older car would have a higher interest rate. That was before they ran any figures however.

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New car has a bumper to bumper warranty. If the engine blows up after you've had it for 5K miles, you take a new car back to the dealer and let them put a new engine in it. Your 5 year old, out of warranty car has the engine go out after 5K miles, you leave it on the side of the road.

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I think that is correct. New cars have lower interest rates and, depending on your credit, some lenders will approve for new cars and not for older vehicles.

Now for some unsolicited advice. Your credit is good. You should join a credit union and get financing at 5% not 10%. That's absurd...do not do it. You will upside down from day one and you will be upside down three years from now because you'll be paying massive amounts of interest until year 4 or 5. It is financial suicide. You are best off to buy an old Honda or some other gas sipper with cash or a small loan from family or credit union, but that's up to you. If you do that, you will be thanking yourself five years from now. But again, not everyone can deal with driving a beater.

Join a great credit union. There are a ton of them. They'll finance you at much lower rates. Then my suggestion is:

1) get pre-approved at credit union. Know what your limit is and interest rate.

2) then shop for a vehicle at dealerships. Don't discuss anythign but price of vehicle. leave out financing/payment amount, etc. Drive the best deal you can. Shop around and pit dealerships against one another. I made a 30 second phone call to another dealership and he told me if I bought the car the same day they'd beat the price of the identical vehicle at the dealership near me by $1300. And that's what happened.

3) Once you have a agreement on the price of the car, don't let them junk of the closing statement with documentation prep fees, etc. The price + taxd + tags is the price. They like to slip in a few hundred for profit under official sounding titles.

4) Then when you have an agreement, let them know you are open to financing with them but they have to beat the credit union by 1%. They may work with you. You have good credit. Dealerships make a killing on financing (they get kick backs from the lenders).

Please do not let the dealership bully you on absurd interest rates like they are quoting you. In a world where some credit cards are now 8-10% interest rate and mortgages are 3-4%, no one should ever pay a vehicle loan above 6%. here's how it goes down- dealership shops your loan out. Lender says, "wow OP has good credit, probably 5-6%." Dealership says, "I already sold them on 10%, so close the OP at 10% and then kick back $1500 to dealership". The finance office at many dealerships work like mortgage brokers, "middling" borrowers to pay themselves with the spread between what they should qualify for and what they can sell you at.

I know because my buddy sold auto loans to hundreds of dealerships. He would spend his days negotiating rates with dealerships based on borrowers credit, type of vehicle, how much kickback the dealership wanted. Nothing wrong with it because that's business. But please get a rate that you are deserving!

Edited by jq26
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That dealer is pulling the classic car dealership scam. Local small dealerships are notorius for pushing you into a much higher payment. Your credit is good. Is your debt to income ok?

Listen to jq26 above - get your financing from a CU before you go shopping for a vehicle.

When you get outside financing, then you turn into a "cash" buyer and can shop anywhere. CU's are the best place to get your financing as you will get a good interest rate and they will tell you what terms and conditions apply (loan to value for example). For the most part, you don't want to finance more than the trade in value anyway.

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I used to sell Acura...learned some interesting stuff along the way. There are a couple of issues, and a lot of confusion here. First, dealerships make more money (higher percentage) off selling used cars than new ones. Overall, it's in the dealership's best interest to push the used cars, even when the new ones cost more. Sometimes, the manufacturers will subsidize the new cars to help dealers find their motivation to push them harder, and with the right subsidies, it may temporarily be in the dealer's best interest to push the new cars.

A trick often employed during these subsidy periods is for the dealership to load all the new cars on the lot with expensive extras. They try to tell you that the stuff's already on the car, so you'll have to pay for it. Feel free to tell them to take it right off. Usually, they will then sell you the options for a fair price, but if not, insist that they remove the optional stuff. Was the new car they were trying to sell you loaded?

New or used, the real money in a car deal is in the "back end": finance and AMOs: add-on stuff like Mop & Glo, Lo-Jack, Stereo, extended warranties and option packages. As a side note, all of these items are negotiable in price. Document fees are not. If you argue about the doc fee, they will simply agree to remove it, then add that money somewhere else in the deal. Arguing over it is a waste of time, because you WILL pay that fee one way or another, and if you are annoying enough about it, they will PITA Tax you, too. They can do this by slipping a little ".2" onto your interest rate, or by adding on an extra $10 here and $50 there that you will probably never catch. Negotiate for a fair deal: don't be annoying by arguing for stuff you can't have, like their trunk money or no doc fees.

Credit union financing is by far the best option if you have good enough credit to get it. It's very rare the a dealership would match their rates.

If a dealer is pushing you away from a used car and toward a new one, there are a number of possible reasons. It could be as simple as the salesman wanting his daily spiff. It could be more serious, like the dealership is in too deep on the used car you were looking at, and they can't sell a finance deal on it for a high enough selling price to come out ahead. I say this is serious because the most common way dealerships get "in too deep" is by paying for a used car on the assumption that it is in good shape, then finding some huge problem with it that they had to pay to fix. What else is wrong with the car? Who knows! They are stuck selling those cars to cash customers, because in that case, there's no lender to limit how much they can charge. Sadly, cash customers are less likely to buy extended warranties, so they wind up paying for hoopty care out of pocket. Ouch.

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