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How to Get a Personal Loan with No Credit

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1 month ago

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There may be times in your life when you need a personal loan. But if you’re just starting out, it can be difficult to get a loan with no credit. To help you navigate that hazy period when your credit file is thin, we’ll discuss how to get a personal loan with no credit, what options you have, whether a “no-credit-check” loan is a good idea, and alternatives worth considering.

Can I get a loan with no credit?

Technically, it is possible to get a loan with no credit score. But if you try to get a loan with no credit score you’re likely to be hit with a high interest rate and less-than-favorable terms. Your lack of credit scares lenders. The tool they would normally use to judge whether or not you’re likely to pay back the loan (your credit score) is either nonexistent or too thin to tell them what they need to know.

Here are a few reasons you may not have a credit score:

  • You’re just moving into adulthood and haven’t had the time or opportunity to build a credit score.
  • You haven’t used credit in the past two years. Lack of activity puts a stop to the information credit bureaus need to generate an accurate score.
  • You’re a recent immigrant, just starting out in the U.S., and must build a credit score from scratch.

Having no credit score is not the same thing as having a poor credit score. When someone tells you you have no credit score it simply means that there is no clear record of how you behave as a borrower. Personal loans for those with no credit are borrowing options specifically designed for borrowers who don’t have a lengthy credit history.

It can be tough to get a loan with no credit. Even if you have credit, the credit score needed for personal loans can get a little confusing. Whether you want an auto loan, a loan to finance a new pool, or a personal loan to help cover an emergency situation, a strong credit score is key to opening the credit door.

What loan options are available if I have no credit? 

Let’s say you find yourself in a pinch and need to get a loan with no credit. You’ve borrowed your uncle’s RV, are vacationing in the mountains, and the RV breaks down. You don’t know what’s wrong but are pretty sure there’s going to be an expensive repair in your future. Your cash reserves are low and you don’t know where you’ll find the funds to get the RV up and running again. Qualifying for emergency loans without a credit score is not easy, but it is possible. To get a loan with no credit, it pays to know your options. 

Banks and credit unions

If your credit history is practically nonexistent, you may be surprised by your ability to get a loan with no credit through your home bank or credit union. As long as you have an established relationship, a bank or credit union can easily pull up your account to check things like how regularly you make deposits, if you spend more than you bring in, and generally, how responsibly you handle your account. It may not be a credit score, but it does give them a sense of how you are likely to behave as a borrower.

If you know you’ll need a personal loan in the near future, consider joining a credit union. Some of the lowest interest rates and best terms are offered by credit unions across the country. Also, if you’re a member, credit unions tend to be more willing to gauge your creditworthiness by using information outside your credit score.

Membership in a credit union is often based on criteria such as the county in which you live, who your employer is, if you’ve been in the military, or whether you’re a member of a specific organization. There are so many credit unions in the U.S. that you should easily be able to find one that fits your situation. The ability to get a loan with no credit can make it worth the trouble.

Family and friends

It will come as no secret to your family and friends that you’ll need help to get a loan if you have no credit. They’ll understand if you haven’t had time to build a credit history. If you find yourself in an emergency situation, ask for help from those who care about you.

If they agree to lend you money, treat it as you would any loan. Write up an agreement outlining:

  • How much you’re borrowing
  • How often you will make a payment
  • How much the payment will be
  • When the loan will be paid in full

And then stick with it. There’s nothing worse than losing the trust of someone kind enough to come to your rescue.

Cosigner

Most people know how tough it is to get a loan with no credit. Still, the people who care about you may not have the cash to help. If someone in your life has a terrific credit score, ask them to become a cosigner on a loan.

As long as you have internet access, you can apply for a personal loan without a credit score online. A cosigner with a strong credit score improves your odds of being approved for a loan. It also increases the likelihood you’ll score a low interest rate and attractive repayment terms.

Here’s how it works: You, along with your cosigner, apply with several lenders to compare offers. Both of your names are on the loan application. Lenders conduct a credit check and base their decision both of your credit scores. Your cosigner’s strong credit helps you to get a loan with no credit.

Then, lenders run a “soft credit check,” meaning it won’t impact your credit score. When they approve your application (often within minutes), they tell you what your interest rate and repayment terms will be.

Once you decide on a lender, you let them know that you want to move forward. That’s when they conduct a “hard credit check” that will briefly ding both of your credit scores by a few points. If that credit check looks good, the lender provides loan paperwork for both of you to sign and begins the process of depositing funds into your bank account.

Each on-time monthly payment is reported to the credit bureaus and helps you build a positive credit history. But if you fail to make a payment, it’s your cosigner who’s on the hook. You owe it to your cosigner to make all payments as promised.

Secured loans

There are two types of personal loans: secured and unsecured. A secured loan means that you promise to give the lender something you own (an asset) if you can’t pay the loan. This is known as “pledging collateral.”

That asset may be anything of value, from a retirement account to fine art or jewelry. The lender knows that if you miss payments, they have the option of seizing the asset and selling it to recoup their losses.

It’s usually easier to qualify for personal loans without credit if you can offer collateral.

Military assistance

If you’re in the military and need to get a loan with no credit, a military aid society may offer assistance. For example, the Navy-Marine Corps Relief Society, Air Force Aid Society, Army Emergency Relief, and Coast Guard Mutual Assistance offer grants and interest-free loans to their service members in need.

Paycheck advances

Some employers offer paycheck advances. These are loans repaid through deductions from future paychecks. Often, these programs are run through third-party lending companies and offer all employees the same interest rates and terms — regardless of their credit scores. 

If you need to get a loan with no credit and your employer offers a paycheck advance, it can benefit you in two ways:

  • You’ll get the loan you need when you need it.
  • It can help build your credit score. 

Before you take out a loan, make sure you understand how much it’s going to cost you in interest and fees. Also find out about repayment terms and make sure you can afford the monthly deduction from your paycheck.

Personal loans for bad credit

As we mentioned, having a thin or nonexistent credit score is not the same as having a bad credit score. Still, lenders willing to take a risk on borrowers who need to get a loan with no credit are often the same lenders who take a risk on borrowers with poor credit.

With personal loans for bad credit, you can expect to pay a higher-than-average interest rate and may not land the best repayment terms. Still, taking out a small personal loan from one of these lenders gives you the opportunity to make full, on-time payments that will be reported to the major credit bureaus.

A steady stream of positive monthly reports to the credit bureaus will build your credit score. If you’re going this route, look for a loan with no prepayment penalty. Then, come up with a plan to repay the funds as quickly as possible. This strategy will help you save money on interest.

Online lenders that look beyond credit

Some lenders cater to borrowers looking to get a loan with no credit by weighing other things. They might look at where you attended college, your major, and grade point average. In other words, they attempt to figure out how responsible you’ve been so far and how likely you are to be in the future.

Be careful, though: Many lenders that offer personal loans to those with no credit history charge high interest rates and fees.

Credit-builder loans

To get a loan with no credit you may want to look into a credit-builder loan. With a credit-builder loan, you apply and are approved for a small loan. You make payments on the loan, including interest, and those payments are reported to the credit bureaus. It’s only after all payments are made that you have access to the money you borrowed.

A credit-builder loan is not a good option if you need money right away.

What is a no-credit-check loan? 

As the name implies, a no-credit-check loan requires no credit check. That doesn’t mean you automatically qualify, though. Lenders look at things like employment, income, and whether you have collateral to offer. And these loans are often overly expensive, causing borrowers to sink into a vicious cycle of debt. Be very careful if you’re considering a no-credit-check loan.

There are many no-credit-check loans on the market. Both a payday loan and title loan are types of no-credit-check loans. Both are prohibitively expensive, often charging 400% or more in interest. And both can trap you in a cycle of borrowing, then needing to borrow more to pay the first loan. Some no-credit-check lenders give their companies fancy names designed to sound like mainstream banks. What all no-credit-check loans have in common is prohibitively high interest rates, exorbitant fees, and terms that make it difficult to repay the loan by its due date.

Is a no-credit-check loan a good idea? 

A no-credit-check lender does not conduct a credit check because it knows you need to get a loan with no credit and are unlikely to qualify for a low-interest unsecured loan. That’s precisely why they can take advantage of you. Despite how well they may advertise their loan products, a no-credit-check loan is never a good idea.

What alternatives are there to no-credit loans? 

In review, there are a number of ways to get a loan with no credit without resorting to no-credit-check loans. They include:

  • Banks and credit unions
  • Family and friends
  • Cosigner
  • Secured loans
  • Military assistance
  • Paycheck advances
  • Personal loans for bad credit
  • Online lenders
  • Credit-builder loans

Looking for a loan with no credit is neither fun nor easy. Getting a loan in this situation is, however, possible. If you’re looking to get a loan with no credit, go through these recommendations, find the one that fits your situation best, and go for it. If you carefully manage the loan once it’s in your hands, you’re on your way to building a solid credit score.

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How to Buy a House With Bad Credit: Guide for 2021

Published

5 hours ago

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January 25, 2021

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Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

Having bad credit makes it harder to get a mortgage. A low credit score makes you look riskier to lenders; it suggests you might be financially unstable or unwilling to repay your debts.

A poor score, however, can also simply be the result of not knowing how the scoring process works or having gone through a brief rough patch that required you to take on debt.

If you think you’re ready for homeownership despite your bad credit, here’s what you need to know:

What counts as a bad credit score?

How do you know if your credit is bad? Once you know your score, see where it falls in the ranges below:

  • Poor (less than 640): Lenders consider borrowers in this credit score range to be high risk. Having poor credit means you probably won’t qualify for a conventional mortgage, but you might be able to get a government-backed home loan.
  • Fair (640 to 699): Lenders see borrowers in this credit score range as less risky. You might have less debt or a stronger payment history than borrowers with poor credit. You can qualify for a conventional mortgage with fair credit, but you might need to be stronger in other areas to make up for it, and you could be saddled with a higher mortgage rate.
  • Good (700 to 749): With good credit, you’ll have a much easier time qualifying for a mortgage and getting a low interest rate. You’ll probably secure offers from more than one lender.
  • Excellent (750 and above): An excellent credit score demonstrates your ability to manage debt. You consistently make your payments on time and don’t use too much of your available credit. Combined with a steady income, you’ll qualify for a mortgage from multiple lenders and have the luxury of choosing the least expensive option.

While potential borrowers with poor credit will find it challenging to get a home loan, it can be done. You just need to learn about the options available and how lenders will look at your application.

Find Out: 800 Credit Score Mortgage Rate: What Kind of Rates Can You Get?

Credit score needed to get a mortgage

While your credit score is an important factor in your home loan eligibility, it’s not the only one. Here’s what else lenders care about:

  • Down payment: Depending on the loan and the lender, you’ll need a minimum of 0% to 5% down.
  • Debt-to-income ratio: Typically, you want a debt-to-income ratio of 36% or less when applying for a mortgage. In most instances, it can’t total more than 45% to 50% of your income.
  • Cash reserves: You might need up to six months’ worth of mortgage payments in the bank with a low credit score and/or low down payment.

Minimum credit score by loan type

Loan type
Description
Min. credit score
ConventionalA home loan not insured by the federal government620
FHAGovernment-insured mortgage for borrowers with low credit scores580
(with 3.5% down; 500 with 10% down)
VAGovernment-backed mortgage for military service members (including qualified reservists) who meet length and character of service requirements, and their unmarried surviving spousesNone
(though individual lenders might impose limits)
USDAGovernment-insured home loan for low- and very-low-income applicants in eligible rural areasNone

What having bad credit means for your mortgage rate

The lower your credit score, the higher your mortgage rate, all else being equal. If you have poor credit, expect to pay at least 1.5% more than someone with excellent credit.

The result will be a higher monthly mortgage payment and a higher long-term borrowing cost.

Assuming you’re able to secure a loan with bad credit, you won’t necessarily be stuck with the same rate forever. It might be possible to refinance to a better rate after improving your credit score.

Keep in mind: You’ll have to pay closing costs when you refinance, and if market rates increase, having a higher score might not actually translate to a lower rate.

It’s safer to only take on a mortgage now if you feel confident you can afford it long term, even if you hope to refinance or sell your home in a few years.

Learn More: What Is a Mortgage Rate and How Do They Work?

How to get a mortgage with bad credit

You might already be able to get a mortgage despite your bad credit. For example, if your score is at least 580, you can put down just 3.5% and get an FHA loan.

However, working to improve your score and other aspects of your finances gives you more options and can save you money. Follow the steps below to increase your chances of getting a mortgage:

1. Keep an eye on your credit

It’s never been easier to get a free copy of your credit report. You can receive a free copy of your credit report from each of the three national credit reporting agencies at AnnualCreditReport.com.

Tip: Some sites make it look like you need to pay for your report. You don’t. The three national credit bureaus — Equifax, Experian, and TransUnion — are required by federal law to provide you with a free annual credit report.

Analyze your reports to make sure all the information is accurate. If you find a mistake that could be weighing down your score, dispute it with the credit bureau or with the company that reported the incorrect data.

Check your score weekly as well. This allows you to see how your financial activity is affecting your score. If it’s moving in the wrong direction, frequent checks will help you take quick corrective action.

2. Pay your bills on time

Payment history is the most important factor that determines your credit score, making up about 35% of it.

Make sure all your credit card, auto loan, and other debt payments post to your account by the due date to boost this part of your score.

3. Work on paying down debt

How much you owe makes up 30% of your credit score. Specifically, your credit score evaluates your balance relative to your available credit, often referred to as your credit utilization ratio. The lower that ratio, the better.

For example, your score will look better if your balance on a $5,000 credit line is $500 (10% utilization) instead of $2,500 (50% utilization).

If you rack up a high credit card balance one month, try to pay it down before your next statement is issued to keep your credit utilization down on your credit report.

Tip: If you’re looking to improve your credit score, it’s important that you use at least some of your available credit. Low credit utilization impacts your score more positively than 0% utilization.

4. Stay away from hard credit inquiries

Applying for a loan or credit card will usually ding your credit score if the creditor conducts a hard credit inquiry.

Credible lets prospective homebuyers shop for rates without impacting their credit scores. We’ll show you actual, prequalified rates from our partner lenders — our process is secure and simple, and it only takes a few minutes to complete.

Credible makes getting a mortgage easy

  • Instant streamlined pre-approval: It only takes 3 minutes to see if you qualify for an instant streamlined pre-approval letter, without affecting your credit.
  • We keep your data private: Compare rates from multiple lenders without your data being sold or getting spammed.
  • A modern approach to mortgages: Complete your mortgage online with bank integrations and automatic updates. Talk to a loan officer only if you want to.

Find Rates Now

Opening a new account — or closing an old one — will also decrease the average age of your accounts, a factor that accounts for 15% of your credit score.

There are situations, however, where the benefit of applying for new credit might outweigh the impact on your credit score.

One example of this is transferring high-interest debt to a lower-interest card, which could help you pay down debt faster.

5. Consider a rapid rescore

If you’re in a hurry to boost your credit score, a rapid rescore might help. Normally, your credit report and score get updated each billing cycle.

This means that after you pay down a credit card balance, for example, your new credit utilization rate might not be reflected in your score for up to a month.

Rapid rescoring can speed up the change to your credit score. Your lender might recommend it if you’re close to having a good enough score to qualify for a loan or better rate.

Tip: Only your lender can request a rapid rescore; you can’t do it yourself.

Keep Reading: Credit Score Needed to Get a Home Loan

6. Save up for a larger down payment

A larger down payment gives you more skin in the game, which makes you look less risky to lenders. It also means you won’t need to borrow as much.

If your income is too high to qualify for other low-credit-score conventional loan programs such as Fannie Mae’s HomeReady, you may still qualify for a conventional loan with a credit score of 620. You’ll need to put 25% down and your debt-to-income ratio must be 36% or less.

In this case, you won’t have to pay for private mortgage insurance. Your monthly mortgage payment will be smaller and your long-term interest expense will be lower. So, while you’ll pay more up front, you’ll pay less each month and over time.

7. Bring on a co-signer

A co-signer whose credit is better than yours could help you get approved for a mortgage or lower interest rate.

However, they will be taking on a huge responsibility: the obligation to pay your mortgage payments if you default. If they can’t, their credit score will be impacted.

In other words, a co-signer must put their savings and their credit reputation at risk to help you. That’s a big ask.

8. Consider a loan type with less stringent credit requirements

As we’ve noted, FHA loans have low credit score requirements. VA loans and USDA loans technically don’t have a minimum credit score requirement. However, these two loan types do have stricter eligibility requirements:

  • VA loans: Only available to military service members who meet length and character of service requirements, and their unmarried surviving spouses
  • USDA loans: Only available to low- and very-low-income applicants in eligible rural areas

9. Shop around to find the best offer

Even with poor credit, you should shop around to find a great mortgage rate. With Credible, you can check prequalified rates from multiple lenders for free, all on one platform.

You might be eligible for better rates than you think. And if you’re not, you now know the steps to get your score into better shape.

Get started today by checking out the table below, and see what rates you prequalify for from our partner lenders.

About the author

Amy Fontinelle

Amy Fontinelle

Amy Fontinelle is a mortgage and credit card authority and a contributor to Credible. Her work has appeared in Forbes Advisor, The Motley Fool, Investopedia, International Business Times, MassMutual, and more.

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More accountability among council proposals for Akron police

Published

10 hours ago

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January 25, 2021

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Akron City Council wants more resources for the city’s only independent police auditor and more public access to police records, from use of force reports to citizen complaints and logs that track the race of everyone stopped by police.

Those are among the recommendations to be released publicly on Monday by council’s special committee on Reimagining Public Safety. Members are trying to answer a community call for a police force that better reflects the demographics and lived experiences those it serves and protects following the police killing of George Floyd in Minnesota last year.

There would be no age limit for police cadets, which the city recently upped from 35 to 40 years. A new “Pathway to Law Enforcement” would ask community and education leaders to steer young adults into careers with the city and the Akron Police Department.

More so than they do now, social workers would help police handle 911 calls involving mental health and addiction. Officers would spend more time walking or biking their beats in an effort to build trust and understanding with the neighborhoods they police.

And council would keep up with the latest in law enforcement technology as city police deploy drones or consider feeding camera footage into crime-solving software that can scan faces and license plates, which would prompt leaders to weigh public safety against personal privacy.

Council President Margo Sommerville will present the full list of recommendations and special committee findings during council’s regular public meeting Monday. The 22-page document is the culmination of 22 subcommittee meetings, each averaging about an hour.

But the report is not the end of the road to “Reimagining Public Safety,” Sommerville explained. The end goal is “more equitable” policing systems and stronger bonds between police and the policed.

As he searches for a new police chief, Mayor Dan Horrigan and his deputy mayor for Public Safety, Charles Brown, express agreement with council in recognizing the best elements of policing in Akron while considering improvements outlined in the listed recommendations.

Next, Sommerville said council will take its newfound knowledge of policing in Akron to the public and rank-and-file officers.

University of Akron President Gary L. Miller said he’s honored and excited that council has asked his faculty and students to develop a community engagement process of surveys and virtual town hall meetings. The information gathering process will solicit feedback from residents, officers and the police union, which as an organization was not given an opportunity to address council’s special committee.

“We know at the end of the day, when we really begin to finalize these recommendations, we’re going to need the Fraternal Order of Police (Lodge #7),” Sommerville said, pinning successful implementation of any reform or enhancement on the commitment of everyone impacted.

FOP President Clay Cozart will see the recommendations Monday. While continuing to disagree with the prominence given to police reform in the wake of Floyd’s death, Cozart said he’s watched every minute of the 22 meetings discussing the work of his members, and he appreciates Sommerville’s willingness to work with the union.

Informed by Akron police officers serving as “liaisons,” the special committee involving every member of council broke out into four working groups.

Police oversight

The Accountability and Transparency group, which met seven times, delved into issues of external oversight, officer discipline and public access to records, drawing on the expertise of police auditors, civilian review board members and national experts on the subject from coast to coast.

Background: Who polices Akron police? Auditor says his office is understaffed, under-resourced

“In our society, we entrust police with the critical responsibility of protecting public safety, including by using force, if necessary,” the working group concluded. “External oversight recognizes that the seriousness of this delegated power requires particular scrutiny in order to ensure that the rights of the public are protected. On both a national and local level, historic injustices have created a trust deficit in how the public, particularly communities of color, interact with law enforcement, and government more broadly. Community trust is essential for effective policing.”

The group settled on two formal recommendations:

  1. Give Akron Police Auditor Phil Young, who answers to the mayor, a role codified in city law with “sufficient authority to access information, adequate staffing and funding and independence from the political process.”
  2. Ensure “that more police data and information is made publicly-available online and updated on a regular basis.”

Prevention

The prevention working group discussed community policing and best practices around responding to mental health, addiction and other 911 calls that can end tragically for officers and citizens.

While identifying funding as the greatest barrier to more robust training, the group recommended that every officer undergo Crisis Intervention Team training. Currently, 76% of officers lack the 40-hour training.

More: Akron’s police chief to retire in 2021

To “help solidify stronger relationships between police officers and the communities they diligently patrol and serve,” the group also recommended more walking and biking for beat cops, something previous councils and mayors have tried to achieve.

The final recommendation recommended a shifting, or at least sharing, of the burden of solving society’s problems, which armed officers encounter daily.

There’s some appetite for the concept, even among officers. Police1, an online source of information and resources for law enforcement, surveyed 4,000 American officers for a special report called “What Cops Want in 2021.” Officers named serving their community as the top reason for becoming officers. They also ranked the types of 911 calls they’d rather see other agencies handle: housing for homeless people (93%), animal control (88%), nuisance abatement (64%), parking enforcement (61%) and dispute mediation (53%), responding to mental health crises (45%) and drug overdoses (29%).

“Throughout our working group meetings, there was a continuing discussion of whether it may be appropriate for social service agencies to respond to some 911 calls relating to mental health or other issues, the idea being that a social service-focused approach might be more effective in some cases, and could also free up APD to focus on issues that clearly need a police response,” the group concluded. “Our APD liaisons made clear that they believe there should be a police response to all calls, as situations are fluid and could endanger non-police responders.”

We also heard from the Police Chief in Alexandria, Kentucky, a small city south of Cincinnati, who described a program in which the department employs two social workers, who follow up on calls (and in some cases respond to calls where the scene is deemed safe).”

The group heard from a Kentucky police chief who sends social workers out on many calls, sometimes without an armed officer. They said Akron, as a community, should involve more social service providers on 911 calls, when “appropriate,” and expand programs where counselors and health professionals follow-up after the fact.

Personnel and culture

A third committee tackled hiring and staffing as commanders must take officers from their patrols to fill specialized units like Neighborhood Response Teams — the backbone of community policing in Akron — or Quick Response Teams that respond to overdoses.

The group recommended more ongoing training and identified potential problems with hiring like not testing for steroids in the screening process because it costs twice as much or disqualifying applicants because they have or lie about a history of bad credit or minor drug offenses.

Background: Akron police force struggles to reflect city’s diversity

To get a more diverse and broader pool of candidates, the group recommended abolishing the current 40-year maximum age for cadets, as other large cities have done.

They also recommended bringing back an Akron Urban League program that prepared candidates for the city’s civil service exam and the creation of a Pathway to Law Enforcement program.

The Pathway program would use neighborhood “figureheads” and public educators to recruit 18 year olds and hold their interest in becoming cops until they turn 21 and are allowed by state law to carry a firearm as a civil servant. For a couple years, they would get city jobs dealing with the public while earning criminal justice credentials through UA or Stark State.

The group added two suggestions: APD should update its mission statement “to include the need for a workforce that reflects community and the need for diversity” and bring in an outside group that would take confidential and “unvarnished opinions” of officers “that could provide constructive feedback for further institutional change.”

Technology and equipment

No formal recommendations, aside from getting a body-worn camera for every officer who interacts with the public, came out of the technology and equipment committee.

More: Akron is ‘Reimagining Public Safety’ with drones, diversity and license plate readers

This last group learned about policing gadgets and systems like unmanned aerial vehicles (drones), “less-lethal” weapons (tear gas, pepper spray, tasers) surplus military rifles and body-worn cameras.

City information technologists informed them of existing software that allows detectives to stake out drug houses or solve crimes by accessing 277 cameras mounted around the city on buildings, lights and traffic poles. The footage is recorded 24/7 and kept for 21 days. And they discussed emergent technology like Briefcam, a program of computer algorithms that scans faces and reads license plates then automatically generates turn-by-turn video of stolen cars or suspects.

“Going forward, it will be important to gauge public opinion about how cameras in public spaces should be used,” the committee cautioned. “With Ring doorbells and other consumer camera systems becoming ubiquitous, it may be that the public is willing to accept greater surveillance by police within public spaces. Still, there should be transparency and clear rules on what is and is not permitted.”

Reach reporter Doug Livingston at dlivingston@thebeaconjournal.co or 330-719-1756

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Everything You Need To Know About Financing A Car In 2021

Published

16 hours ago

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January 25, 2021

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Thinking about financing a car? Depending on your job and where you live, owning a car may be the easiest way to get around. But reliable vehicles can be expensive, which is where car financing comes in.

We’ve reviewed several of the best auto loan providers and researched everything you need to know about the car financing process. This article summarizes the most important information into an easy-to-understand guide to help you find your best auto financing options.

We’ll explain why you would finance a car, how car financing typically works, tips for finding the lowest interest rates, and recommend top lenders to get you started. Read on to learn everything you need to know about financing a car in 2021, and click below to start comparing rates from multiple lenders at AutoCreditExpress.com.

 

In this article:

Is Financing A Car A Good Idea?

If you have the cash to purchase a new car without a loan, take this approach. Unless your annual percentage rate (APR) is zero percent (which is rare), it is cheaper in the long run to purchase a car with cash. Of course, this is not practical or possible for many people. If you need a vehicle soon and don’t have the money saved up, financing may be the only way to purchase a car.

You should finance a car if:

  • You need a car and can’t afford to pay for the full value of the car in cash.
  • You want a car and can’t afford to pay the full value, but you can budget for the monthly expense of your payments.

You should not finance a car if:

  • You cannot afford monthly payments.
  • You can afford to pay for the full value of the car in cash.

 

 

How Does Car Financing Work?

Car financing is a type of loan. A lender will pay for a certain amount when you purchase the car, which you will be required to pay back, with interest, at a predetermined monthly rate. There are several important variables to any auto loan:

  • Purchase price
  • Fees
  • Down payment
  • APR
  • Financing term length

The purchase price is the final agreed-upon cost of the car. Typically, the purchase price is set by a dealer but can be negotiated. On top of this price, you will also be required to pay taxes and other fees depending on the state and dealership. Taken together, these represent the total cost of the car.

Most auto loans do not pay for the entire cost of your vehicle. A typical down payment is 20 percent of the car’s total cost. The higher your down payment, the lower the amount you need to finance. The more you can pay as a down payment, the better, as you will be charged interest on the remaining amount.

APR represents the amount of interest you will pay. In the United States, there is no standard for how APR must be calculated for auto loans. This means that depending on how often the interest is compounded, the same APR for the same loan amount can result in a different total interest paid. For this reason, it is difficult to compare offers between lenders based solely on advertised APR.

Luckily, many car financing offers will clearly state your monthly payment amount. If you multiply this number by the number of installments you will pay, you can determine the total price you will pay. If you subtract this total amount from the amount that you financed, you can figure out exactly how much you will pay in interest.

For example, imagine the total cost of the car you purchase is $20,000. You place a 20-percent down payment of $4,000. This means you take out an auto loan of $16,000 to pay the remainder. If your contract requires you to pay $250 per month for 4 years, you will end up paying a total of $20,000 to your lender. This is $4,000 more than the amount you financed – $16,000 – and represents your total financing fee (how much extra you had to pay in order to get a loan).

Beware of dealerships that advertise zero percent APR. Typically, when a dealer advertises this rate, it may give you no interest on your loan but tack on other fees that increase the total amount you must pay back. For example, rather than saying you must pay $16,000 plus 4 percent APR, the dealership will add a “service fee” on top of the sticker price so that the amount you must pay back is much higher, even though your debt does not accumulate interest.

If your loan contract does not clearly indicate the total amount you will need to pay back, do not sign it. Only agree to an auto loan you fully understand. If you have trouble understanding your loan terms, you aren’t alone. Many loans are intentionally confusing so that the customer has a more difficult time realizing if they are being scammed. Consider enlisting the help of a friend or even a loan professional to review your contract’s terms and conditions before signing.

Your financing term is the length of time it will take for you to pay off your auto loan, assuming that you meet all monthly payment obligations. The longer your finance term, the more you will ultimately pay. This is because the longer your loan remains unpaid, the longer you will accumulate interest. Try to pay off your loan as quickly as possible.

 

 

How To Get Car Financing

Along with deciding on a vehicle and determining your budget, you’ll need to choose where to get your auto loan from. There are several places to request car financing from, and each has its benefits and downsides:

Option For Financing A CarHow It Works
Dealership financingMost dealerships offer vehicle financing, typically through third-party lending partners. This is the most convenient option, as you can compare multiple offers at the dealership and see if there are any special rates for certain vehicles. However, be aware that dealer loans may include high fees.
Bank financingWhile it may be more of a hassle to visit a separate location from where you will buy your car, local banks and credit unions can help work within your budget, won’t pressure you to buy, and will likely offer some of the best terms. Credit unions in particular are likely to be less predatory.
Online lender financingThe easiest way to browse financing offers is online. Many online lenders partner with dealerships so that you can prequalify for a loan and shop for eligible vehicles on the same website. However, there are a lot of online auto lenders out there, so you’ll need to look for one that’s credible.
 

 

 

Tips For Financing A Car

When you are financing a car, there are several best practices to keep in mind to get the lowest rates:

  • Decide how much you can pay beforehand: Before even deciding which car to buy, determine how much you can afford to finance. Think about what monthly payment you can comfortably pay, and work backward from there. Cars depreciate in value, so you can quickly find yourself in debt if you take out a loan you can’t afford. After a few years, is not uncommon for the value of a car to be less than the amount you owe on your loan.
  • Check your credit score: Interest rates are largely based on your credit score. You are entitled to a free copy of your own credit report at least once a year. You can request this at AnnualCreditReport.com and other websites. If you have a poor credit score, you might need a bad credit auto loan. One way to get a better APR if you have a low credit score is to have a cosigner with good credit.
  • Reduce finance charges: Your goal should be to lower the total amount you will pay on top of the cost of your vehicle. This means looking for a low APR and a short payment term. Also, try to reduce the amount you must finance by making as large a down payment as possible. Twenty percent is standard for a down payment, but if you can afford to pay more upfront, you will pay less later.
  • Compare offers: It’s a good idea to compare auto loan offers before you visit the dealership. When doing so, be sure to only request loan offers from lenders that offer pre-qualification that does not include a hard credit check. Hard credit checks lower your credit score, so do not agree to one unless you are ready to finalize a loan offer.

 

 

Recommended Lenders

When financing a car, it can be difficult to know which lenders are credible. To help you sift through the hundreds of choices available, we’ve narrowed down the best loan providers in the industry.

Read on to learn more about some of our top picks, or read our full review of the best auto loans for a longer list of recommended lenders. If you’re ready to start comparing loan offers right away, you can do so via AutoCreditExpress.com.

 

PenFed Credit Union offers some of the lowest auto loan rates we have seen. However, it has stricter credit score requirements than other lenders and may not be an option for some. The company is well-regarded and has a positive reputation online.

PenFed Credit Union ProsPenFed Credit Union Cons
Offers exceptionally low interest ratesModerate customer service reputation
A+ rating from the Better Business Bureau (BBB)Does not offer loans to drivers with poor credit
 Customer reviews describe a slow application process
 

Auto Credit Express is a good choice for those with bad credit. Even if you are undergoing bankruptcy or repossession, Auto Credit Express will work with you. Plus, Auto Credit Express will help you build your credit score if it is low.

Auto Credit Express ProsAuto Credit Express Cons
Offers financing for customers with bad or no creditCurrently has a BBB alert regarding licensing issues
Pairs customers with loans based on credit profilePoor customer reviews
Offers special rates for military members 
 

To learn more about this provider, read our full Auto Credit Express review.

myAutoloan.com is not a direct lender but a portal that connects lenders with customers. It’s a good way to browse loan offers and even find loans for private purchases.

myAutoloan.com ProsmyAutoloan.com Cons
Offers loans for drivers with bad credit historyNot available in Alaska and Hawaii
Offers loans for private purchasesNot available to drivers with credit scores below 575
Good customer service reputation and an A+ rating from the BBB 
 

To learn more, read our full myAutoloan.com review.

 

 

Alternatives To Financing A Car

If you need a vehicle but do not want to take out an auto financing loan, you have a few alternatives.

  • Lease: If you lease a car, you will pay a monthly fee that is likely to be lower than an auto loan payment. However, at the end of the lease term, you must return the vehicle and will be charged for excess damages. Some lease contracts have the option to buy the vehicle at the end of the lease.
  • Private loan: You might ask for a loan from an individual rather than a loan provider. An individual that you know may loan you money at a much better rate than auto lenders (or with no interest at all).
  • Cash payment: If you can avoid making a monthly car payment, it’s the best route to go. Cash payments are the cheapest way to purchase a vehicle in the long run, but most people do not have the funds to take advantage of this option.

 

 

Frequently Asked Questions

What happens if I miss a car payment?

If you think you are going to miss a car payment, contact your lender right away. You may be able to request an extension or have your contract terms changed. If you are able to negotiate any changes, be sure to get them in writing. If you miss too many car payments, your vehicle can be repossessed.

How long should you finance a car?

You should try to finance your car for as short a time as possible. A typical auto loan term is five to six years. Longer auto loans are not recommended because the value of your car may depreciate below the amount you have left in payments.

Can you finance any car?

Which cars you can finance depends on the lender. Many lenders will not provide auto loans unless you buy your car from a dealership, but this is not always the case. A lender will not provide a loan for an especially expensive car if the borrower has a poor credit score or low income. Likewise, if the value of the car is too low, a lender may not offer an auto loan and you’ll need to look into personal loan options.

Which bank is best for car financing?

There is not a single best bank for car financing, though we generally recommend Chase and Capital One – which are generally good banks for auto loans. Typically, a local bank or credit union is your best bet for auto financing.

What credit score do you need to get zero percent financing on a car?

Few lenders offer zero percent financing on auto loans. To be eligible for this interest rate, you would likely need a credit score above 720, as well as a stable income. Most of the time, if a dealership advertises zero percent APR, you will end up paying more in hidden fees.

Is a 72-month car loan bad?

While 72 months is long for a car loan, it’s not uncommon. If you can, try to sign up for an auto loan that does not exceed 60 months (5 years).

What car dealerships are offering zero percent financing?

Few car dealerships offer zero percent financing. Some dealerships advertise “0 percent APR,” but this is usually just a way to get people in the door and doesn’t always equal saving money on your purchase. Rather than charge an interest rate, the final contract may include additional fees that are not legally considered “finance charges.” This has been a common practice among U.S. automakers since the 1980s.

 

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