Editor’s note: Creditworthiness is crucial to obtaining a loan. When buying a car recently for my 20 year old daughter, she learned some valuable lessons that we’d like to pass onto others.
Shopping for credit is almost as critical as making the right purchase for the majority of buyers. Our bank, with which we had a 15 year long established personal and corporate relationship proved to be a poor choice for auto financing. When banks do not want the business (and used cars can be one example), they raise the rates and makes the terms outrageous. Alternatively, a local credit union, with which we had no relationship, was willing to offer us a better rate, less restrictive terms, and far less hassle than the big bank.
Since my daughter had not yet established credit, we negotiated a deal in which the title and loan were in her name but I deposited cash in the amount of the loan and had payments for a two year loan automatically deducted from the balance on deposit in her “loan account”. This is known as a “cash collateral declining balance” loan.
To insure that the bank was never upside down, I made a 40% down payment using a credit card. The total interest cost for the two year loan was nominal and more importantly, this avenue helped to establish and build her credit.
Even if you have a strong banking relationship and excellent credit, your bank could make the experience so difficult that they drive you to alternative sources. The bank’s reasoning likely has nothing to do with you. They may just not want car loans. One banker admitted as much when I told him his rate quote was more than twice a competitor’s. He then wryly recommended the name of a credit union that we had already seen.
Disappointingly, our regular bank however proved to be a complete farce at customer service. The application in my daughter’s name was denied by some martinet in a data center for lack of income even though we had gone though all the details with the local “personal” banker. When I told this bureaucrat over the phone to rewrite the application with new collateralized loan criteria, he said he could not do that.
I met with the Branch Manager at our bank who assured us he would handle the matter. He could not. He offered a rate 50% higher than the credit union for the same terms. Upon our refusal, he offered to match the credit union rate if I wife cosigned.
Our negotiation position was that we did not need the bank and that they risked losing a customer for such poor performance. Do not be afraid to tango with the big banks. When they are loaning, they are selling and you are the customer. The bank may need a reminder from time to time that you cannot be intimidated.