Even in slump, loan deals to be had

Buyers with good credit can still find auto financing

Ferit Ulubatli, a business finance manager at Clay Nissan, sells a 2007 Nissan Altima to John Piasecki. (Matthew J. Lee/ Globe Staff)

Jake Mycofsky expected that it would be a hassle to finance his purchase of a Honda Accord through a dealership. He and his wife, Elissa, who live in Wayland, have good credit, but with the banking industry embroiled in its worst crisis in decades, he figured loan options had dried up.

But the dealer, Bernardi Honda in Natick, not only offered him a loan - through American Honda Motor Co.'s finance arm - but beat the deal that Mycofsky secured through his credit union. So the Mycofskys made a 30 percent down payment on the $23,500 car and borrowed the rest from Honda at a 1.9 percent interest rate over three years. That compared with the credit union's offer of 5 percent.

"They really surprised us - there were no strings attached," Jake Mycofsky said.

Lending officers at local banks and credit unions and consumer-finance specialists say the Mycofskys' experience is typical these days. Lenders remain ready to offer money to consumers with solid personal finances, they say. They may be more careful than they were in the past - probably asking for more documentation of personal information such as income and place of residency - but they're still happy to extend credit.

By contrast, people with shakier finances - those with less-than-stellar credit or who can put little or no money down - may face difficulty in qualifying for an auto loan, if they can get one at all. "This is the first time in years that I can remember that there aren't necessarily banks that are willing to take the high risk credits," said Dan Jones, finance manager at Aleksa Auto in Salem, N.H.

Usually in a recession, falling interest rates increase the affordability of many types of loans - lower interest rates mean lower monthly payments. But because of the credit crunch, auto loan rates remain about where they were a year ago. In mid-February, the average rate nationally for a 48-month loan was 7.09 percent, compared with about 7.10 percent a year earlier, according to Bankrate.com, a personal-finance website. Rates fell below 6.5 percent over the summer, but shot up as more banks reported problems with subprime mortgages and other loans.

A key determinant of whether someone qualifies for any kind of loan is his or her credit score. A higher score indicates greater creditworthiness. Three credit-reporting bureaus - Equifax, Experian, and TransUnion - compute scores and prepare credit reports for lenders. Consumers have a legal right to a free copy of their reports annually from each bureau and can request it online.

Scores in Massachusetts average about 700, said Dennis Kelly, chief executive of Bristol County Savings Bank in Taunton. Today, Kelly's bank seeks car buyers with slightly higher scores than in the past, about 750. Otherwise, its criteria haven't changed. "If people have problems with credit or not enough income, we don't do those loans," he said. "But we wouldn't have done them a year ago."

Some lenders, especially credit unions, will consider people with lower scores. Borrowers just need to understand that they will pay higher interest rates and won't be able to borrow as much as customers with higher scores, said Tom Becker, vice president for consumer lending at Hanscom Federal Credit Union on Hanscom Air Force Base.

Hanscom ranks creditworthiness on a scale from A+, for the least risky customers, to E, for the most. Someone with a score of 549 or lower would fall into the riskiest category, Becker said. Besides imposing a higher rate, Hanscom would limit that borrower "to a 48-month loan and a 90 percent loan-to-value ratio," he said. That means the borrower would need a cash down payment of at least 10 percent.

If you're considering financing a car, you should first get a copy of your credit report, said Gerri Detweiler, a credit adviser for Credit.com, a personal-finance website. That way, you can correct any mistakes on the report before you start applying for loans. If you dispute an entry, the credit bureau must ask the lender that submitted the item in question to verify it. If the lender fails to do so, the bureau removes it. When a negative notation disappears, your score improves.

Once you establish the accuracy of your score, you may be able to raise it by paying off debt, Detweiler said. One of the score's components is the percentage that you're using of your total credit available. (If you have one credit card with a $10,000 limit and are carrying a balance of $1,000, then you're using 10 percent of your available credit.)

As you pay off debt, the percentage falls, and your score should rise. Just don't close credit-card accounts you pay off. Doing that can hurt your score, Detweiler said. Keep them open for now, even if you don't use them.

You can also increase your likelihood of qualifying for a loan by raising your down payment or by finding a cosigner - someone who signs the loan contract with you and is obligated to pay off the loan if you can't. "If you have a cosigner, they should live with you," said Ferit Ulubatli, business manager at Clay Nissan of Norwood. "If they live with you, you're more likely to be approved. Even if it's your father or mother, some banks won't approve it unless you live together."

Also, increasing your down payment means you're borrowing less, which makes you less risky for a lender.

Another way to borrow less is to buy a used vehicle. Lenders typically charge higher rates on used-car loans - a 36-month used-car loan recently averaged 7.46 percent nationally, according to Bankrate.com. But the lower price of a used vehicle usually more than compensates for the higher interest rate.

At least one Massachusetts lender, Digital Federal Credit Union in Marlborough, levies the same rate on new- and used-car loans. In late January, Digital Federal's best rate for a 48-month car loan was 6.05 percent.

Tim Garner, the credit union's senior vice president of marketing and strategic planning, said it's requiring slightly higher down payments for some buyers than it has in the past, but otherwise hasn't changed its standards. "For somebody walking in the door, it's probably not going to be much different," Garner said. "We're going to give them a quick answer, usually in less than an hour."

A financing option that's no longer practical for many people is using a home-equity loan to buy a car. With real-estate values dropping around the country, some lenders won't approve new home-equity lines of credit. Others have begun to suspend their existing lines.

Before real estate prices began slumping, many car buyers who claimed to be buying with cash were using money from home-equity loans, said Jones, of Minuteman Volkswagen. Lately, that's changed. "That used to be 50 percent" of loans, he said. "Now it's maybe 5 percent."

For a few buyers - those in the best financial shape - finance companies affiliated with automakers offer loans on which they don't charge any interest.

Gladys and Bill Drohan of Bedford lucked into such a loan when they recently bought a Toyota Tacoma pickup truck at Acton Toyota of Littleton. They're paying no interest for three years. The Drohans, who are nearing retirement, could have afforded to pay cash, but the deal was too good to pass up, Gladys Drohan said.

"It's the first car we've ever financed," she said.