Part I.I: Qualifying for a loan
How does the loan approval process work in general for financing? What are lenders looking at?
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Lenders are looking at a variety of factors when reviewing an auto loan application. Here are the biggest things:
Income - Prime banks and CUs generally want to see monthly gross (pre-tax) income of $2k/month or higher. Always put down pre-tax income on a finance application unless it explicitly asks for post-tax income (I’ve never seen one that asks for post-tax). Certain subprime lenders such as Santander Consumer USA will approve if income is $1,200/month or higher. However this is usually coupled with higher interest and lower chance of approval. There is a chance some lenders approve with less income, but I don’t know of any offhand (any thoughts guys?)
DTI - The formula for DTI is: (Aggregate minimum monthly payment across all credit cards/personal loans + rent/mortgage + estimated new car loan monthly payment - monthly payment of trade(s)) / monthly pretax income
Generally lenders look for DTI to be lower than 35-45%. As it gets higher, the harder it is to get approved. If you can bring on a co-signor, it can greatly help your DTI.
FICO Score - Should be self-explanatory, but the higher the FICO, the better the terms. The caveat is some lenders use Auto Enhanced FICO, which is influenced more heavily by prior auto loans and to a certain extent, other installment loans and mortgages.
If your FICO for one bureau is higher than another by a significant margin, look for lenders that skew toward using your good bureau.
Collateral - You wouldn’t secure a loan against an asset that’s worthless and neither will a bank. Many banks will not write loans on cars older than x years with greater than y miles. X is usually around 6-8, y is usually between 60k and 85k. Some lenders also exclude entire manufacturers like Suzuki, etc… that have high depreciation.
LTV - Stands for Loan to Value. Equation is Loan/Value. Typically for value lenders use MSRP for new cars and NADA Retail for used. Lenders love to see this below 100%. For new cars, I’ve often seen up to 120% without issues. Some lenders will also do 120% for used, but some may balk at 120% for used.
Existence of simultaneous car notes - This doesn’t really apply to prime customers unless we're talking 3+ simultaneous loans. But subprime lenders hate to lend when there’s multiple open auto loans even if DTI is fine with two loans. If the other car will be traded, no problems. But if 2+ cars are going to be financed at the same time, they ask the question, “Why the second car?” You need to have a good answer. Usually one of way to solve this is to say my [insert family member here] needs a car. Sometimes finance companies will want the other person to co-sign, other times, they'll just accept your story.
I qualify for a loan. What should I do to get the best rate?
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First, don’t walk into a dealership and just apply there hoping for the best rate. The only people who are going to get away with this is those buying a new car with an APR incentive they know of and want, with a solid (740+) FICO with no auto or installment baddies, and whose profile matches all the other things lenders look for solidly.
For the very few of us who don’t fall into the above requirement, get an approval from the local bank/CU first before walking into a dealership. This sets the baseline APR and forces the dealer to compete. Then go to the dealer, and say can you beat the rate I got? I often “round” the rate I got down by 1%-2% (unless it’s already like <2%) and tell that to the dealer. 
If the dealer can’t compete, you can use your pre-approval!
Currently, I'm recommending DCU to prime customers (esp. those with FICOs 680+). I haven't studied DCU approvals in quite a bit, so consider this a recommendation with serious reservations. Also if you have a different kind of credit profile or want a better recommendation for your specific profile, please post your own thread in the auto loans forum using this as a template:
Cool, got the pre-approval. What else should I be worried about?
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A couple things: dealer participation and dealer extras.
Part I.II: Dealer Extras
Let’s discuss dealer extras first...
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So you’ve negotiated your price and have financing from someone like a local CU for a really good rate. What can go wrong?
Watch out for the F&I office. They’ll try to sell you things like GAP insurance and warranties and life and disability protection.
Generally speaking, life and disability tend to be overpriced for the protection you need. Often one can get these from a third party (term life) or through an employer (disability) for MUCH cheaper. Also the unemployment insurance if offered is restrictive in terms. Read it carefully, often self-employeds are exempt making this “protection” worthless for them. Even if employed, it typically only makes so many payments. Weigh it carefully as to whether the premium for it is worthwhile.
GAP also tends to be overpriced. Ask you current car insurance company how much GAP costs through them. I was recently quoted $1/month (not a typo) and the dealer asked for $300 (after I negotiated it down from $500). You can guess which one I took…
Warranties may be worth it to you. I prefer self-insuring for smaller risks such as my car breaking down, but you may be more risk averse. Do know that you can often buy warranties elsewhere on used cars (online sources, though quality of warranty and reviews vary wildly). For new cars, one can often purchase a warranty THROUGH ANY DEALERSHIP after buying the car. For Hondas, for example, it’s almost always cheapest to buy afterwards online from Hyannis Honda! Research this carefully.
Oh great. Now you tell me this. I just bought a car and got ripped off by dealer extras.
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Read your contract carefully. Often you can cancel dealer extras within x days of buying your car (and get the refund applied to the principal of your loan). X is usually between 30 and 60 days.
Any thing else about dealer extras?
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Watch out for the actual price printed. Often dealers change it from what’s negotiated. Why you should negotiate by email and get it in writing.
Also watch out for charges the dealer calls mandatory state charges, but really aren’t. In CT, for example, dealers love to say a “dealer conveyance fee” is mandated by the state. MY A**. The only fees mandated by the state are typically sales tax (look up your sales tax rate online) and registration and titling fees (look these up at the DMV’s website). Destination is a manufacturer fee on new cars and should be included when negotiating for price. Destination itself is non negotiable.
All other fees like Prep fees, Doc fees, Conveyance fees, etc… are dealer fees and go straight to his bottom line. You CAN negotiate this. Don’t forget it’s PURE PROFIT for the dealer.
I save a special paragraph for VIN etching. Some dealers say this is state mandated. Others say it greatly reduces chance of theft. Maybe it does reduce theft a bit (not a lot in my opinion). But a kit costs ~$25 to DIY. Dealers charge like 200 for this. I’ve really only seen this at bad dealerships, but this is PURE PROFIT for a dealer. If they tell you it’s state mandated, ask them to point out the statue which says so. I know of no state that requires it (and if they did, think, wouldn’t the manufacturer have to do it)? Like a manfacturer doesn’t expect the dealer to also install special emissions equipment in CA, do they?
Also make sure they don’t inflate state mandated fees. I’ve seen it happen sometimes. Independently look up/call the DMV and ask how much sales tax and registration should be.
Part II.IV: Dealer Participation
I really recommend you read the section on dealer participation from the financing section. Else this may seem out-of-context. Also ignore anything about subprime from the financing section...leasing is mostly with captive lenders. Subprime lenders really don’t do leases.
What’s different about participation with leases?
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Well the fun thing is dealers can “participate” in all of the various aspects of a lease (MF, residual, mileage, etc…). You need to be careful here. This is where getting multiple quotes helps. Also obviously read your paperwork carefully and make sure everything is right BEFORE you sign. DON’T let them pressure you to sign. Feel free to take up a whole day in the finance manager’s office reading everything or even request that you take the paperwork home and after reading you’ll sign. They’ll pushback, but be firm: I read or no deal. They’ll let you read.
Part II.V: Lease Termination
Anything about my lease ending?
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Yes, several things you need to keep in mind.First thing is you need to decide if you want to turn in your car or buy it.
If you are over your mileage allowance or there's damage to the car, you can be liable for extra charges if you decide to turn in your car.
If your lease is ending because your car was abruptly totaled, I hope you are doing okay (I'm assuming it's totaled most likely due to an accident). Keep in mind that in this case, even with GAP insurance, your down payment vanishes. If you put down a security deposit (different than a down payment), you will most likely get the security deposit back.
I want to turn in my lease, what should I be aware of?
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If you didn't like it or want a new car or it has depreciate more than what the residual value for the lease was, good reasons to turn it in. Keep in mind some leases have a lease termination fee if you decide not to lease again from the same manufacturer.
If you are turning it in and it's worth MORE than the residual value, try to see if Carmax or someone doesn't offer you a high enough number such that the lease can be paid off AND you're left with money in your pocket. I will warn though that this rarely ever happens and may not be worth a trip to a place like Carmax.
I liked the car and want to keep it. Anything I need to keep in mind?
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Previously you may remember how I said that you pay at the lease end the residual value if you want to buy. BUT this isn't always true if the car is worth less than the residual at turn in.
Some finance companies will negotiate it with you. If the residual is more than what the car is worth, it's beneficial to them if you buy it. I recommend calling your finance company maybe a month before lease end and seeing if they'll negotiate the price closer to what the car is worth. Might have to call a couple times to get the right agent haha. If you guys agree to a lower purchase price, it won't hurt your credit or anything (just ask them to make sure). Some captives refuse to play this game though primarily due to dealership pressure, and that's their right.
Even if they don't agree to a lower purchase price, when turning it in, ask the dealer at turn-in if they'd sell it back to you immediately for less than the residual. You can even call a bunch of dealerships and ask before choosing which to turn it in at...you're typically allowed to turn-in at any dealership and that dealership usually gets first pick of whether they want to buy the car from the finance company before it goes to auction.
With the dealer, try to aim for a price a little above wholesale. If you have a friend who's a dealer, try to get him to look up Manheim prices for you. Else a good approximation is KBB Good condition trade-in value for many cars. With the dealer, mention that you've seen Manheim prices and MMR (use that abbreveation) even if you haven't haha. You'll look like you know what you speak of even if you don't lol.
Of course if the captive and dealerships say no, you can still just buy it for whatever the stated residual in your lease is just as always.
Finally, remember to shop for financing if you need it to pay the residual. You can look at the same sources as for financing (captives at the dealership, banks, CUs). I recommend treating it just as if you were buying a car since it works in almost the same way (read the financing section).
Part II.VI: Miscellaneous
Anything else I should keep in mind?
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You need to know that leases are just inherently more complex than purchasing with cash or financing. No reason to not lease. Just be careful AND SHOP AROUND for lease terms! Also remember when first discussing price, do not UTTER the word lease or anything that sounds close to it.
Ultimately if you want the absolute best deal on a car, leasing is probably not going to make it easy to achieve. But if you remain vigilant, you can definitely get a good deal.
I have some leasing question not covered?
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Create a thread and post in the auto loan section of our forum. There are many experts here glad to help and we don’t bite, we promise. In fact we promise to pass no judgment on your prior credit (mis)steps or what car you buy or whatever. We’ll just help you try and get financed (though we may point out that a particular purchase may be unwise if the financial picture you post merits it).
All discussion related to this thread here, please: http://ficoforums.myfico.com/t5/Auto-Loans/Discussion-of-The-Definitive-Guide-to-Financing-or-Leasin...