Options for a Person Buying a Car With Negative Equity & Limited Credit

If you've paid your current car loan on time, you can likely pursue another car loan, although negative equity might be an issue. Depending on your credit, the bank may allow you to carry over all or part of your old loan. You may have to put money down.

Loan-to-Value Ratio

Banks determine your loan amount based on your credit and vehicle value, known as a loan-to-value ratio. The vehicle's loan value is based on its options, mileage, year and make. Using your credit score and history, the bank determines your loan value at roughly 60 to 120 percent of the vehicle's value. If you have a positive borrowing history with your current loan, you may obtain a high enough lending percentage to carry over money, despite having limited credit.

Apply for a Loan

Apply for a loan to see if you qualify for the amount you need to borrow. Call your bank to obtain your car's payoff amount, and apply for a loan at any bank you want. Check rates at bank websites or call for details. Most banks offer an online application process, but you can benefit from calling in to discuss your credit and negative equity concerns. Have your vehicle information handy, such as its VIN (vehicle identification number), payoff amount, year, make, model and options.

Co-signer

If you can't obtain an approval because of your credit history, a co-signer can help. A co-signer uses his good credit to secure your loan. The bank uses the co-signer's credit information to determine the loan-to-value ratio, so you may obtain an approval for the total amount you want to borrow. If you cannot find a co-signer, consider putting money down. The bank you apply to should let you know how much it needs you to put down if it doesn't approve you for the requested amount.

Other Options

Consider selling your current car. You can possibly start a fresh loan without negative equity this way. Your car may sell for thousands over the bank's determined market value. If you make a profit, you can use the extra money to put it down toward a new car loan. Or, you may not have to come up with as much money to pay off your loan amount. If you have paid your loan payments on time, you are likely to obtain another loan approval, despite having limited credit.

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How Does a Simple Interest Car Loan Work?

Simple interest financing is the most common setup for a car loan. According to Vertex 42, simple interest loans require "paying interest only the principal." With a car loan, you pay interest on the principal balance of the loan at the time of payment.

Basics

Car loans, like home loans, have payoff periods. Car loan terms commonly range from 36 to 72 months. Your original loan balance is what remains when you add the sales price, taxes, registration and other purchases fees and deduct any down payment.

Payments

Car loan payments are set up on an amortized schedule, similar to home loans. Your monthly payment includes principal and interest. The total payment is based on the assumption that if you pay the same amount each month for the loan term, you will reach a balance of zero. Initial payments have higher interest amounts, while later payments have lower interest amounts since the principal balance reduces over time. This is why you benefit from paying extra on principal each month.

Interest Formula

You can determine your total interest payments on a simple interest loan using the standard formula Interest (I) = Principal (P) times Rate Per Period (r) times Number of Periods (n). For instance, a $10,000 loan at a 7 percent interest rate paid over 60 months would cost $3,500 in total interest without any extra principal payments.

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Do I Pay Tax on a Lease Buyout?

Drivers who lease an automobile for a set term must make a decision when the lease is up: Turn in the car to the dealer or leasing company, or purchase the car as a lease buyout. A lease buyout can be an economical way to buy a car with a history you know, depending upon the residual rate you agreed to at lease inception. Because a lease buyout is different from a lease, you may be faced with paying sales tax on the agreed-upon price.

State Sales Tax

When you lease a car, you may pay a small monthly use tax on the lease depending on your state or local tax rate. When you purchase a car, you pay sales tax on the total price of the vehicle. Since the lease buyout is a purchase, you must pay your state's sales tax rate on the car. As of September 2011, Oregon, Alaska, New Hampshire, Montana and Delaware do not assess a sales tax on consumers, but if you live in one of these states, you may be subject to local taxes.

Residual Value

To calculate the sales tax on your lease buyout, look at your lease to find the residual value of the car. This is the price you negotiated when you signed the lease, and is an estimation of its value at the end of the term, including depreciation. Multiply your state sales tax by the residual price. The sales tax you pay on your buyout will be less than if you purchased your car initially, but it could still be hundreds of dollars depending upon the sales tax rate.

Finance Issues

If you cannot afford to pay for the car in cash, with good credit, you can arrange a lease-buyout loan from either the original lender or another financial institution that offers loans for used cars. The sales tax and any other fees, such as registration, can be added to the loan amount. Be aware that you will pay interest if you finance the car and roll in the sales tax, but if you don't have the cash to pay for the car, this may be your best option.

Lease Buyout Considerations

As much as you love the car, a lease buyout may not always be as the best option for you, and you may need to shop around for another car. If your residual payment is much higher than the going market rate for the car, or if your original lease stipulates a large buyout fee, or if you can find a better deal on a newer lease, it may be best to pass on the lease-buyout. Negotiate with your lease holder. Lease-buyout loans may also carry a higher interest rate than new or used cars. Do your homework and weigh the pros and cons before you buy the leased car.

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Giving a Receipt when Selling a Car

The receipt you give when selling a car is also known as a bill of sale. It is optional in some states and required in others. It also serves as a title replacement in some states for transfer of ownership if the car's original title is not on hand.

Types

Depending on the state you live in, an official, state-provided bill of sale may be required along with the title. In such a case, you can download the form from your state's website or find you have to go to a local office to obtain one. Most states allow you to create a bill of sale on your own, either by hand-writing it or printing it from your computer. Before creating a bill of sale, contact your motor vehicle office for any state requirements.

Features

Several pieces of information should be included in the bill of sale. Either the seller or the buyer can create one, listing the name, address, driver's license and phone number of each party, the date of sale and all relevant vehicle information. The vehicle information should include year, make, model, VIN (Vehicle Identification Number), sale price and odometer reading. If the seller is creating the bill of sale, he should include that the vehicle is being sold "as is," or without any warranty. Two documents should be created: one for the buyer and one for the seller. Both parties sign the copies.

Significance

In states that require tax on the sale price instead of the value determined by the motor vehicle department, stating the price serves as the taxable amount that the motor vehicle department will collect. In come states, the bill of sale serves as an odometer statement. If not a requirement, the bill of sale protects both the buyer and the seller. The seller can keep the bill of sale to prove the car was sold, should the buyer not immediately register and title the vehicle, making her liable for tickets, accidents, damage or abandonment. The buyer, having all of the seller's contact information, can rest assured that if something should go wrong at the motor vehicle department (such as an unmentioned lien or notice of salvage title) he can contact the seller by using the contact information on the bill of sale, or by driver's license number depending on the issues that arise.

Misconceptions

The bill of sale should accompany the certificate of title and any other forms required by the motor vehicle department. The bill of sale rarely, if ever, substitutes the official certificate of title. If you are buying a vehicle and the seller states the he does not have the title but can offer a bill of sale, contact your motor vehicle office to confirm that this kind of ownership transfer is possible. even if allowed, you should have the seller go to a motor vehicle office with you before you pay, to ensure that the title is free of any trouble, such as a non-transferable title with a lien on it, or a "salvage," "flood damage" or "fire damage" title, all of which lower the value of the vehicle you're purchasing.

Warning

Even with the bill of sale on hand, some states require that the seller notify the state of the vehicle's sale to avoid liability of actions by the new owner who did not retitle the vehicle. Check with your state's motor vehicle website or call to ensure the bill of sale is enough for proof of sale. Some states allow you to notify the state motor vehicle department online or by phone. Others require you to go into an office to complete the transaction.

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Auto Title Loan Regulations

Auto title loans are short-term loans granted to consumers for the rights to the car title. These loans are often thought of as emergency loans and carry higher interest rates than normal consumer loans. The incentive for unsuspecting consumers is that lenders usually do not check credit--instead, they assume a risk because they can repossess the vehicle if need be. The business of auto title lending has been scandalized after scores of investigative studies report the business is a front for predatory lending.

Federal Regulation

There is no federal government body that controls the distribution of auto title loans. Instead, it is up to the State legislatures to determine guidelines for lending. Beginning in 2004, states began to step up oversight of these loans often setting rate caps and restrictions on lending to those in the armed services.

Illinois

On April 1st, 2009, Illinois enacted a sweeping reform bill for auto title loans. The new regulations include: a loan amount maximum of $4,000; a limit on monthly payments (no more than 50 percent of a borrower's income); creating a database of all title loans on record (which is used to track loans and ensure compliance with the new restrictions); and, a mandate that compels all title loan lenders to inform potential customers with literature about responsible credit and money management.

California

California has looser regulations than many states. While they do enforce rate and monthly payment caps, there are loopholes that allow lenders to skirt the restrictions and charge whatever rate and payment the lender and borrower agree to. (For example, if a lender can persuade a customer to take more than $2,500, he or she can charge any rate.)

Rapid Growth

Before the restrictions started coming down, some lenders were charging as much as 300 percent interest over the course of the auto title loan period. This enormous profit led to a boom in the industry--particularly in the southern states like Mississippi, Alabama, and Tennessee (where there are often more than 100 auto title lenders in a single county).

Interest Rate Caps

Some states (Connecticut, Maryland, Maine --15 in all) have placed an outright ban on auto title lending. Others have simply capped the rates at which these companies can charge. In general, the rate caps hover between 30 percent and 38 percent--a massive decrease in the previous, and highly unethical, triple digit rates.

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Can You Go From Buying a Car to a Lease Option?

You cannot go from a vehicle purchase to a lease contract after purchase, although you can buy a lease at any time during the contract term. If you haven't completed the purchase paperwork for your vehicle with your dealership, you may still have an opportunity to lease the car instead.

Before You Purchase

If you haven't signed your new car paperwork yet, inquire about leasing with your purchasing dealer. To view current lease offers, visit the manufacturer's website to find out about current lease terms, mileage allowance, down payment requirements and monthly payment amount. If you don't see lease options online, ask your dealership for details; some vehicles are not available for leasing. Even if the manufacturer doesn't offer a leasing option on the vehicle you want, the dealer may be able to lease you a car using another lease provider.

Lease Process

Leasing differs from a purchase or finance, so not all auto loan providers offer the option. A manufacturer's bank usually offers a lease option. For leasing, the bank bases payments on depreciation. Depreciation is based on the vehicle's price, expected mileage allowance and term. Lessees usually pay for about 50 percent of the vehicle's total price over the contracted term. For this reason, leasing is rarely available for used vehicles. Leasing banks aren't set up to inspect used cars for value or able to accommodate all used car pricing, which differs by dealer and area. New vehicle leasing is based on the car's sticker price.

Credit Issues

Purchase and lease requirements differ. You can finance or pay cash for a vehicle with poor credit, but excellent credit is required for leasing. Even if you change your mind in the beginning of your purchase, you might not obtain an approval without good to excellent credit. You can, however, use a co-signer to obtain a vehicle lease. Otherwise, consider financing or purchasing outright. Subprime lenders, who offer loans to poor-credit borrowers, do not offer a lease option at all.

Other Options

You do not have to wait until your loan is satisfied to get rid of your car. Many loans equal out in payoff amount and vehicle value after around two to three years of payments. If you don't want to keep your vehicle beyond three years, which is a common leasing term, plan ahead to increase your vehicle's equity. Pay more toward your loan's principle during the term of your loan. After several years, check your car's value against its loan payoff amount. You can trade or sell your vehicle as long as you satisfy your loan amount. If you owe less than the vehicle's value, you can keep the profit.

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How to Refinance an Auto Loan With a Bad Credit Score

Credit plays a vital role in American society. Information in your credit report impacts your credit score. Your approval for a mortgage, credit card, car loan and even a job depend upon this score. If you're experiencing credit problems and have a bad credit score, it can be difficult to obtain financing. Fortunately, there are lenders that specialize in providing financial assistance to consumers with less-than-perfect credit.

Instructions

1

Gather your salary information and all pertinent details of your current loan. Know how much you owe, current interest rate, car mileage and the vehicle identification number (VIN). Keep up your current payments while you search for a new loan.

2

Check the value of your car and compare it to the outstanding amount of your loan. Like with home loans, it will be extremely difficult to refinance a car loan if the amount you owe on the car exceeds the value of the car itself. This is referred to as being "upside down" on a car. Several websites, such as the one run by Kelley Blue Book, can help you make that determination. See the Resources section for the link. If you are upside down, make a few more payments until the loan value gets closer to the car value.

3

Purchase a copy of your credit score to see exactly where your credit stands. The Fair and Accurate Credit Transaction Act (FACTA) requires credit bureaus to give you a free credit report but not a free credit score. They're allowed to charge you a fee for that service. According to Fair Isaac, inventors of the FICO scoring model, the FICO score is the score lenders use most. You can order yours at myfico.com.

4

Compare auto loan refinance companies to see which one works best for your situation. Look for a lender that accepts applications from consumers with bad credit; otherwise, you will waste your time and add unnecessary inquiries to your credit report, which may further lower your score. Choose at least two lenders. See the Resources sections for lenders that specialize in bad credit loans.

5

Submit your applications online. This will speed up the loan process and may allow you to check the status of your loan application as it progresses. Be as accurate as possible. The lender will use the information that you submit to determine if you're approved or not. Avoid giving false or misleading information. If you receive a loan based on false information, the lender may consider that fraud. Read its Terms and Conditions policy before you apply.

6

Wait to hear back about your approval. If you're approved by both lenders, then you have the luxury of comparing the two offers to see which one is best. Read the loan details thoroughly and know if there are any added fees involved. Ask questions if anything seems unclear. Once you've made your decision, sign the documents and continue with the refinancing process. The lender will instruct you on what steps to take next.

7

Wait six months to apply again if you're not approved by a lender. Continue to make your payments on time and avoid any late payments on your other accounts. This will help improve your credit score so that you will be in a better position to qualify in the future.

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