Everything You Need to Know About Finance and Investing in Under an Hour
Uses a lemonade stand example to provide an overview of the financial aspects of a business (revenue, profits, valuation, growth, pricing, balance sheet, income statements).
Concentrates on investing, including the following key points
In the example, the owner starts with $750, with $250 of that coming from a loan.
Here's an income statement tracking the healthy growth of the lemonade business. By year five, the company has seven stands, supported by an increased margin on products, and makes a profit of $2,311 (earnings before tax).
With some compound interest examples, he highlights the importance of starting early so your money can grow early over time).
He tweaks return assumptions to show how long-term outcomes are impacted by changes in how much your investments return.
Save $10,000 and earn 10% each year, you would have $602,000 after 43 years.
Earn 15% per year, you would have over $4 million after 43 years.
Importance of not losing money as drawdowns can have significant negative effects on returns.
A business owner can take money from a lender, who profits from interest on his loan, or an equity investor, who buys shares in the company. An equity investor stands to make much more money than a lender due to the level of risk involved — if the company doesn't make money, neither does the investor.
What are keys to successful investing?
Invest in companies that are listed on the stock market (liquid, well-known).
Avoid investing in start-up businesses where prospects are not well known.
Invest in businesses that you understand.
Invest at a reasonable price.
Invest in company that could last forever.
For instance, an investor makes a small amount of interest from government bonds because the risk is low — the US government is more secure than any corporation. An investor makes a large amount of interest from loans to business owners because the risk is high.
What kind of businesses last forever? (Examples: Coca-Cola, McDonalds, candy business).
Equity is a "residual claim" because debt must be paid off before investors can profit. Shareholders may make money from company profits called "dividends."
When a company has grown significantly, its owner can sell it for a typically large sum of money, in exchange for control of the business and a shot at future profits.
Sell a product that people need.
Sell a unique product (not a commodity).
Elicit brand loyalty that consumers are willing to.
Find a company with limited debt.
High barriers to entry.
Immune to extrinsic factors.
Has low reinvestment costs.
Generate high amounts of cash flow.
Avoid businesses with controlling shareholders (one shareholder holds majority of company stock).
Instead of growing a business further, an owner can pay himself dividends to put cash in his pocket rather than in the company.
At a moment of strong growth, the business owner can either share profits with a private investor or go public.
When a business files for an initial public offering (IPO), its owners offer a portion of it to the general public, which raises cash, and the company gets listed on an exchange. It requires being transparent and, in the US, reporting to the Securities and Exchange Commission.
When are you ready to start investing?
When you have money you won’t need for 5-10 years.
After paying off credit card debt and student loan debt.
Have 6-12 months of emergency funds set aside.
Psychology of investing.
How to withstand volatility.
Be financially secure.
Don’t get spooked by short-term fluctuations.
Do your own research.
Invest at a reasonable price.
If you don't have the time or desire to invest in individual stocks, you can invest in mutual funds, large pools of funds managed by a professional investor.
Mutual fund companies.
Pros.
Portfolio diversity, even for small investment amounts.
Managed by professional investor.
Cons.
Choice: Over 10,000 to choose from.
Research is required to pick a good manager.
You can also outsource your investing to a money manager.
Reputation for integrity.
Easily explain investment strategy (“the two minute test”).
Has a value approach.
Long-term track record.
Consistent approach.
Invests own money in the fun.
You might find the perfect investment property, but before you can buy it you need to obtain financing. Many people will go to a bank and ask for a conventional loan with a repayment period of 25-30 years. Before doing so, however, you should analyze your credit history to check that you are a good credit risk. You have more options than simply relying on a conventional loan. For example, you could cash out the equity in your home or seek owner financing of the investment property.
Method 1 Obtaining a Conventional Loan.
1. Pull together a down payment. You can’t rely on mortgage insurance to cover your investment property. Accordingly, you will need a sizeable down payment, around 20-25%.
2. Consider a neighborhood bank. Smaller banks might be more flexible about lending to you if you don’t have a large down payment or if your credit score isn’t perfect. Local banks also may have a stronger interest in lending for local investment, so they are a good option.
You might not know anything about smaller lenders, so you should do as much research as possible. Ask people that you know whether they have ever done business with the bank.
You can also check online. Look for reviews.
3. Gather necessary paperwork. Before approaching a lender, you should pull together required paperwork. Doing so ahead of time will speed up the process. Get the following.
two months of bank statements, prior two months’ statements for investment accounts and retirement accounts, last two pay stubs.
information about self-employed income, such as last two year’s tax returns or business financial statements, driver’s license.
Social Security card, papers related to bankruptcy, divorce, or separation (if applicable).
4. Work with a mortgage broker. A mortgage broker will apply for loans on your behalf with many different lenders and will compare the rates. The broker can also try to negotiate better terms for you. Using a mortgage broker is a good idea if you are too busy to comparison shop by going to many different lenders.
Mortgage brokers don’t work for free. You typically will pay about 1% of the loan amount. For example, if you borrow $250,000, then you can expect to pay around $2,500 to the mortgage broker.
You can ask other investors or a real estate agent for a referral to a broker. Before hiring, make sure that you interview the person and ask how much experience they have and what services they offer.
5. Compare loans. If you don’t want to work with a mortgage broker, then you will need to educate yourself about the basics of home financing. You might be an experienced pro who has borrowed before. However, if you haven’t, then remember to consider the following when comparing loans.
Interest rates. An interest rate is a percent of the loan amount that you pay as a privilege for borrowing the money. Interest rates can be fixed for the entire length of the loan or fixed for only a portion of the loan term.
Discount points. For some loans, you can pay points, which will lower your interest rate.
Loan term. This is the length of the loan. A shorter loan will cost more each month, but you will pay it off sooner and with less interest.
Origination charge. This amount of money covers document preparation, fees, and the costs of underwriting the loan.
6. Seek pre-approval. You should try to get pre-approved for a loan before searching for properties. Make sure to request the pre-approval in writing because sellers might want to see that you are pre-approved.
7. Don’t forget other team members. Purchasing investment property requires the expertise of many different professionals. You should begin assembling your team early—even before you get financing. You will probably need the help of the following people.
An accountant who can help you understand investment tax strategies.
A realtor who can help you sign an appropriate real estate contract.
An attorney who can help you protect your assets, for example by forming a limited liability company to hold the property.
An insurance agent.
Method 2 Using Other Finance Options.
1. Use the equity in your home. You might be able to use the equity in your current home to purchase an investment property. Generally, you can borrow around 80% of your home’s value. There are different ways you can tap the equity in your home, such as the following.
You could get a Home Equity Line of Credit (HELOC). A lender will approve you for a specific amount of credit, and you use your current home as collateral for the loan. The credit is available for a certain amount of time. At the end of this draw period, you must have paid back the loan.
You might also get a cash-out refinance. The lender will pay you the difference between the mortgage and the home’s value, but is usually limited to 80-90% of the home’s value. For example, if you have $20,000 remaining on your mortgage, but your home is valued at $220,000, then $200,000 could be available. You could get 80-90% of $200,000 ($160,000-180,000). This option usually has a lower interest rate than a HELOC.
Both a HELOC and a cash-out refinance put your home at risk if you can’t make repayments. For this reason, you should think carefully before tapping the equity in your home to finance investments.
2. Obtain a fix-and-flip loan. You might be able to get this type of loan if you want to purchase a property in order to renovate and then quickly sell. The loan will be short-term and is secured by the property. Fix-and-flip loans have high interest rates, so you need to renovate and sell quickly.
You might find it easier to qualify for a fix-and-flip loan compared to a conventional loan. However, lenders will still look at your credit history and income.
The lender will also want to know the estimated value after repair, which can impact whether they extend you a loan and the terms.
3. Research peer-to-peer lending sites. Peer-to-peer lending connects investors with lenders who are willing to lend. Two of the more well-known peer-to-peer lending sites are Prosper and LendingClub.
Peer-to-peer lenders will require that you complete an application. They look at your credit score and credit history. They may also have minimum credit scores in order to qualify.
You might not be able to get a large personal loan through peer-to-peer lending. However, small businesses can typically borrow more, so if you create an LLC then you might be able to borrow up to $100,000.
4. Find a business partner. You might not be able to secure a loan on your own, in which case you will need to consider other options. One option is to find a business partner who you can invest with.
You will want to screen any potential business partner, just as a bank would screen you. If you are counting on the partner to help pay for the loan, then you will need to check their credit history and employment.
You also need to consider how you will hold the investment property. For example, it might be best to create an LLC and to both be owners of the LLC. The LLC will then hold title to the investment property.
5. Consider owner financing. With owner financing, the owner lends you the money that you use to buy the property. Sometimes the owner will lend only a portion of the price, which you then supplement with a conventional loan. You should analyze the pros and cons of owner financing.
A benefit of owner financing is that an owner might be willing to lend if you don’t have perfect credit or a huge down payment available. You and the owner can work out loan terms that are acceptable to both of you.
Typically, the seller’s loan will be for a short period of time (such as five years). At the end of the term, you are obligated to pay off the loan with a “balloon payment.” This usually means you need to get a conventional loan to make this balloon payment. You should analyze your credit to see if you can qualify for a conventional loan in the near future.
See Owner Finance a Home for more information.
Method 3 Analyzing Your Credit Score.
1. Obtain a free copy of your credit report. Your credit score will have the largest impact on your ability to get a loan, so you should obtain a copy of your credit report.[18] You are entitled to one free credit report each year from the three national Credit Reporting Agencies (CRAs). You shouldn’t contact the CRAs individually. Instead, you can get your free copy from all three using one of the following methods.
Complete the Annual Credit Report Request Form, which is available here: https://www.consumer.ftc.gov/articles/pdf-0093-annual-report-request-form.pdf. Once completed, submit the form to Annual Credit Report Request Service, PO Box 105281, Atlanta, GA 30348-5281.
2. Find errors on your credit report. You should closely look at you credit reports to find any errors that might lower your credit score. If your score is below 740, then you will probably have to pay more to borrow. For this reason, you should do whatever you can to increase the score. Look for the following errors.
credit information from an ex-spouse, credit information from someone with a similar name, address, Social Security Number, etc.
incorrect payment status (e.g., stating you are late when you aren’t), a delinquent account reported more than once.
old information that should have fallen off your credit report, an account inaccurately identified as closed by the lender.
failure to note when delinquencies have been remedied.
3. Consider whether you should fix certain problems. There may be negative information on your credit report that you want to fix. For example, you might want to pay an old collections account. However, you should think carefully before fixing certain problems.
Negative information must fall off your credit report after a certain amount of time. For example, an account in collections should fall off after seven years. If the account is six years old, you might want to wait and let it fall off rather than pay it off.
If you need help considering what to do, then you should consult with an attorney who can advise you.
4. Fix errors. You can correct errors by contacting each CRA online or by writing a letter. To protect yourself, you should probably do both. Mail your letter certified mail, return receipt requested.
The Federal Trade Commission has a sample letter you can use: https://www.consumer.ftc.gov/articles/0384-sample-letter-disputing-errors-your-credit-report.
See Dispute Credit Report Errors for more information on how to fix errors.
You might find the perfect investment property, but before you can buy it you need to obtain financing. Many people will go to a bank and ask for a conventional loan with a repayment period of 25-30 years. Before doing so, however, you should analyze your credit history to check that you are a good credit risk. You have more options than simply relying on a conventional loan. For example, you could cash out the equity in your home or seek owner financing of the investment property.
Method 1 Obtaining a Conventional Loan.
1. Pull together a down payment. You can’t rely on mortgage insurance to cover your investment property. Accordingly, you will need a sizeable down payment, around 20-25%.
2. Consider a neighborhood bank. Smaller banks might be more flexible about lending to you if you don’t have a large down payment or if your credit score isn’t perfect. Local banks also may have a stronger interest in lending for local investment, so they are a good option.
You might not know anything about smaller lenders, so you should do as much research as possible. Ask people that you know whether they have ever done business with the bank.
You can also check online. Look for reviews.
3. Gather necessary paperwork. Before approaching a lender, you should pull together required paperwork. Doing so ahead of time will speed up the process. Get the following.
two months of bank statements, prior two months’ statements for investment accounts and retirement accounts, last two pay stubs.
information about self-employed income, such as last two year’s tax returns or business financial statements, driver’s license.
Social Security card, papers related to bankruptcy, divorce, or separation (if applicable).
4. Work with a mortgage broker. A mortgage broker will apply for loans on your behalf with many different lenders and will compare the rates. The broker can also try to negotiate better terms for you. Using a mortgage broker is a good idea if you are too busy to comparison shop by going to many different lenders.
Mortgage brokers don’t work for free. You typically will pay about 1% of the loan amount. For example, if you borrow $250,000, then you can expect to pay around $2,500 to the mortgage broker.
You can ask other investors or a real estate agent for a referral to a broker. Before hiring, make sure that you interview the person and ask how much experience they have and what services they offer.
5. Compare loans. If you don’t want to work with a mortgage broker, then you will need to educate yourself about the basics of home financing. You might be an experienced pro who has borrowed before. However, if you haven’t, then remember to consider the following when comparing loans.
Interest rates. An interest rate is a percent of the loan amount that you pay as a privilege for borrowing the money. Interest rates can be fixed for the entire length of the loan or fixed for only a portion of the loan term.
Discount points. For some loans, you can pay points, which will lower your interest rate.
Loan term. This is the length of the loan. A shorter loan will cost more each month, but you will pay it off sooner and with less interest.
Origination charge. This amount of money covers document preparation, fees, and the costs of underwriting the loan.
6. Seek pre-approval. You should try to get pre-approved for a loan before searching for properties. Make sure to request the pre-approval in writing because sellers might want to see that you are pre-approved.
7. Don’t forget other team members. Purchasing investment property requires the expertise of many different professionals. You should begin assembling your team early—even before you get financing. You will probably need the help of the following people.
An accountant who can help you understand investment tax strategies.
A realtor who can help you sign an appropriate real estate contract.
An attorney who can help you protect your assets, for example by forming a limited liability company to hold the property.
An insurance agent.
Method 2 Using Other Finance Options.
1. Use the equity in your home. You might be able to use the equity in your current home to purchase an investment property. Generally, you can borrow around 80% of your home’s value. There are different ways you can tap the equity in your home, such as the following.
You could get a Home Equity Line of Credit (HELOC). A lender will approve you for a specific amount of credit, and you use your current home as collateral for the loan. The credit is available for a certain amount of time. At the end of this draw period, you must have paid back the loan.
You might also get a cash-out refinance. The lender will pay you the difference between the mortgage and the home’s value, but is usually limited to 80-90% of the home’s value. For example, if you have $20,000 remaining on your mortgage, but your home is valued at $220,000, then $200,000 could be available. You could get 80-90% of $200,000 ($160,000-180,000). This option usually has a lower interest rate than a HELOC.
Both a HELOC and a cash-out refinance put your home at risk if you can’t make repayments. For this reason, you should think carefully before tapping the equity in your home to finance investments.
2. Obtain a fix-and-flip loan. You might be able to get this type of loan if you want to purchase a property in order to renovate and then quickly sell. The loan will be short-term and is secured by the property. Fix-and-flip loans have high interest rates, so you need to renovate and sell quickly.
You might find it easier to qualify for a fix-and-flip loan compared to a conventional loan. However, lenders will still look at your credit history and income.
The lender will also want to know the estimated value after repair, which can impact whether they extend you a loan and the terms.
3. Research peer-to-peer lending sites. Peer-to-peer lending connects investors with lenders who are willing to lend. Two of the more well-known peer-to-peer lending sites are Prosper and LendingClub.
Peer-to-peer lenders will require that you complete an application. They look at your credit score and credit history. They may also have minimum credit scores in order to qualify.
You might not be able to get a large personal loan through peer-to-peer lending. However, small businesses can typically borrow more, so if you create an LLC then you might be able to borrow up to $100,000.
4. Find a business partner. You might not be able to secure a loan on your own, in which case you will need to consider other options. One option is to find a business partner who you can invest with.
You will want to screen any potential business partner, just as a bank would screen you. If you are counting on the partner to help pay for the loan, then you will need to check their credit history and employment.
You also need to consider how you will hold the investment property. For example, it might be best to create an LLC and to both be owners of the LLC. The LLC will then hold title to the investment property.
5. Consider owner financing. With owner financing, the owner lends you the money that you use to buy the property. Sometimes the owner will lend only a portion of the price, which you then supplement with a conventional loan. You should analyze the pros and cons of owner financing.
A benefit of owner financing is that an owner might be willing to lend if you don’t have perfect credit or a huge down payment available. You and the owner can work out loan terms that are acceptable to both of you.
Typically, the seller’s loan will be for a short period of time (such as five years). At the end of the term, you are obligated to pay off the loan with a “balloon payment.” This usually means you need to get a conventional loan to make this balloon payment. You should analyze your credit to see if you can qualify for a conventional loan in the near future.
See Owner Finance a Home for more information.
Method 3 Analyzing Your Credit Score.
1. Obtain a free copy of your credit report. Your credit score will have the largest impact on your ability to get a loan, so you should obtain a copy of your credit report.[18] You are entitled to one free credit report each year from the three national Credit Reporting Agencies (CRAs). You shouldn’t contact the CRAs individually. Instead, you can get your free copy from all three using one of the following methods.
Complete the Annual Credit Report Request Form, which is available here: https://www.consumer.ftc.gov/articles/pdf-0093-annual-report-request-form.pdf. Once completed, submit the form to Annual Credit Report Request Service, PO Box 105281, Atlanta, GA 30348-5281.
2. Find errors on your credit report. You should closely look at you credit reports to find any errors that might lower your credit score. If your score is below 740, then you will probably have to pay more to borrow. For this reason, you should do whatever you can to increase the score. Look for the following errors.
credit information from an ex-spouse, credit information from someone with a similar name, address, Social Security Number, etc.
incorrect payment status (e.g., stating you are late when you aren’t), a delinquent account reported more than once.
old information that should have fallen off your credit report, an account inaccurately identified as closed by the lender.
failure to note when delinquencies have been remedied.
3. Consider whether you should fix certain problems. There may be negative information on your credit report that you want to fix. For example, you might want to pay an old collections account. However, you should think carefully before fixing certain problems.
Negative information must fall off your credit report after a certain amount of time. For example, an account in collections should fall off after seven years. If the account is six years old, you might want to wait and let it fall off rather than pay it off.
If you need help considering what to do, then you should consult with an attorney who can advise you.
4. Fix errors. You can correct errors by contacting each CRA online or by writing a letter. To protect yourself, you should probably do both. Mail your letter certified mail, return receipt requested.
The Federal Trade Commission has a sample letter you can use: https://www.consumer.ftc.gov/articles/0384-sample-letter-disputing-errors-your-credit-report.
See Dispute Credit Report Errors for more information on how to fix errors.
If you need a car and can't afford to buy one with cash, financing is always an option. If you want to finance a used car, you have the choice of getting your own direct financing, or having the dealer obtain financing for you. If you have a low credit score, "Buy Here Pay Here" lots may be your only option, but should only be used as a last resort.
Method 1 Getting a Direct Loan.
1. Request a copy of your credit report. Knowing your credit score will give you a good idea of what kind of rates and terms you'll potentially be offered. In the United States, you're entitled to one free copy of your credit report every year.
Check your report for errors or inaccuracies that could be affecting your credit score.
If you have a credit score of 680 or above, you're a prime borrower and should be able to get the best possible rates. The higher your score, the lower the rate you can potentially negotiate with lenders.
2. Contact local banks and credit unions. If you have had a credit or savings account with the same bank for a number of years, start there when looking for a direct car loan. Your history as a customer may get you better rates.
Branch out to other banks in your area. Credit unions often have more forgiving loan terms and fewer restrictions.
Banks typically won't do a direct car loan for a car purchased from a private owner or an independent dealership. In those situations, you may need to try to take out a personal loan. This is also true if you're buying a collector or exotic car.
3. Try online lenders. If you're not a prime borrower, it's still possible to get a direct loan for a used car. There are a number of online lenders who are willing to finance used cars for people with less than stellar credit.
Since online lenders have less overhead, they typically will offer you a lower rate than you could get from a brick-and-mortar bank or credit union.
These loans may come with more restrictions than the direct loan you could get from a bank with better credit. For example, they may not finance cars more than five years old, or cars with over 100,000 miles.
4. Get rates from multiple lenders. Before you choose a loan, apply for several so you can compare the rates offered. Many banks and lending companies have a pre-approval process that won't affect your credit.
Multiple offers may give you the opportunity to negotiate for a better deal. For example, if you got a better rate from a different bank than from your own bank, you could get your bank to match that rate to get your business.
5. Complete a loan application. Once you've decided which lender you want to use for your financing, you'll typically have to fill out a full loan application. Many lenders give you the option to complete the application online.
You'll need to provide basic identification information, such as your driver's license and Social Security numbers. You also may need to provide basic financial information regarding your income and debts.
If you've had some credit problems in the past, you may want to go into a bank and apply for the loan in person so you can talk to a lending agent.
Your loan agreement will include basic requirements that the car must meet. As long as the car meets these requirements, you can use the financing to purchase the car.
6. Negotiate with the dealer. In most cases, you're going to secure direct or "blank check" financing before you find the specific car you want to buy. Having financing already secured puts you in a stronger position to get the best price from the dealer.
When you bring your own financing, you're saving the dealer a lot of costs. Ask if there's a discount available for that.
Since you're buying a used car, have it inspected before you buy it and go over the car's history. The car is a better buy if it's had fewer owners and never been in an accident.
7. Give the dealer your blank check. Lender policies vary, but in most cases you'll get a check for the exact amount of your car, or a blank check that's worth any amount up to the maximum amount your lender has approved.
When you buy a car using direct financing, you still must maintain full coverage insurance on the car. Your loan agreement will include information on the minimum amounts of coverage you must maintain.
Method 2 Using Dealer Financing.
1. Research interest rates. Dealers have special financing offers available throughout the year. Especially if you're not picky about the make or model of your car, shop around and see who has the best deal.
Know your credit score and how qualified you are for different offers. Typically the best offers are only available for prime borrowers with credit in the 700s or higher.
If you're trading in an old car, look for dealer offers to double the price on a trade-in, or pay a minimum amount for any trade-in regardless of its condition.
2. Choose your car. If you've done your research, you have a few dealerships in mind. You should be able to evaluate their inventory online before you go visit in person. Find the best car for you, looking at overall price.
Dealers may advertise monthly payment amounts rather than total price. This can be a way to charge you a higher interest rate.
Dealers typically will finance any car on their lot, so you may have more variety to choose from if you use dealer financing than you would if you used direct financing. However, this might not necessarily be a good thing – you still need to check the car's history and have it inspected before you buy.
3. Offer a sizable down payment. Cars depreciate in value. If you're buying a used car, you want to finance as little of the total price of the car as possible. A down payment of 10 to 20 percent of the purchase price of the car typically will get you the best rates.
A sizable down payment can help you avoid being underwater on your loan – meaning you owe more for the car than it is worth. This is particularly important to avoid when you're financing a used car, which could develop mechanical problems relatively quickly.
4. Apply for financing through the dealer. You'll need basic identification information as well as information about your income and employment to complete the financing application at the dealership.
It may take a few minutes, but in most cases the dealer will have a financing offer available for you that day. Then they'll call you back into an office to discuss the terms you've been offered.
The finance company may require additional documents from you, such as pay stubs to verify income. If the dealer mentions any of these, make sure you get copies to the dealer as soon as possible so as not to jeopardize your financing offer.
5. Negotiate the deal. If you've done your research and know your credit score, you may be able to get better terms from the dealer than what you're initially offered. Review each term and see if you can improve it.
For example, you typically want the shortest term loan, since it will usually have the lowest interest rates. But dealers often focus on the amount of the monthly payment. Financing for a shorter term does mean a higher monthly payment, but it will save you money overall.
6. Use cash for extras. Dealers tend to tack on extra fees, including sales tax, registration fees, and document or destination fees. You also may end up paying extra for dealer warranties, especially for a used car.
The dealer typically has no problem rolling these extra fees into your financing, but there's no point in paying interest on fees and tax. Pay that out of pocket if you can.
Method 3 Using "Buy Here Pay Here" Financing
1. Exhaust all other options. If you need a car and have had credit problems or have an extremely low credit score, BHPH financing is available for you. However, due to the high rates you should consider this only as a last resort.
There are some franchised dealerships, particularly Ford and Chevy dealerships, who are willing to work with customers who have bad credit. It may be possible for you to get a loan there. It wouldn't be the best rates, but it you would still pay less than you would at a BHPH lot.
If you have a relative with a good credit score, you might find out if they are willing to co-sign on the loan with you. That could get you a better rate or make traditional lenders more willing to work with you. This option can be especially valuable if you're young and don't have much, if any, credit history.
2. Ask if the dealer reports to credit bureaus. Because BHPH lots finance the car themselves, they don't always report to credit bureaus. If you have bad credit or no credit, you want the payments you make for your car reported so you can start to rebuild your credit.
You may have to visit several lots before you find one that reports to credit bureaus, but be persistent.
3. Research the car thoroughly. Any car you buy from a BHPH lot typically is sold "as is." Some of these cars may have mechanical problems, and the lot may not be required to disclose those problems before you buy the car.
Demand a Carfax or similar car history report so you can see how many owners the car has had and whether it's been in an accident. These lots typically have older cars, so they've likely had several owners – but a car that's changed hands several times in the past few years may be a red flag.
Take the car to a reputable mechanic before you buy it and have them conduct a thorough inspection. If there are any major repairs that need to be made, you may be able to convince the lot to make those repairs before you purchase the car.
4. Negotiate with the dealer. BHPH dealers often present the price of a car – and the financing terms – as though they are non-negotiable, but that's typically not true. Even though you may not be in the best bargaining position, you can still try to get a better deal.
The more of a down payment you can make, the better your terms typically will be. These lots often specialize in low down payments, but that doesn't mean you can't pay more.
If you're buying a car at a BHPH lot, your down payment should be as high as possible to keep you from ending up underwater – try to aim for somewhere between 40 and 60 percent down.
5. Make your payments on time. You typically won't have to make payments for a long term, but it's essential to make every payment on time if you want to rebuild your credit. Some BHPH lots will repossess a car after as few as one missed payment.
Some BHPH lots require you to make a trip to the lot with your payment. Depending on how the financing is structured, you may be required to make weekly or bi-monthly payments. If you have a checking account and the lot offers automatic payments, sign up for them so you won't have to worry about it.
At most BHPH lots, you won't pay any less if you pay the loan off early. Ask about this when you buy the car. If the lot is reporting to the credit bureau and you won't save any money by paying the loan off early, just keep making the payments on time. All those payments will reflect well on your credit score.
If you need a car and can't afford to buy one with cash, financing is always an option. If you want to finance a used car, you have the choice of getting your own direct financing, or having the dealer obtain financing for you. If you have a low credit score, "Buy Here Pay Here" lots may be your only option, but should only be used as a last resort.
Method 1 Getting a Direct Loan.
1. Request a copy of your credit report. Knowing your credit score will give you a good idea of what kind of rates and terms you'll potentially be offered. In the United States, you're entitled to one free copy of your credit report every year.
Check your report for errors or inaccuracies that could be affecting your credit score.
If you have a credit score of 680 or above, you're a prime borrower and should be able to get the best possible rates. The higher your score, the lower the rate you can potentially negotiate with lenders.
2. Contact local banks and credit unions. If you have had a credit or savings account with the same bank for a number of years, start there when looking for a direct car loan. Your history as a customer may get you better rates.
Branch out to other banks in your area. Credit unions often have more forgiving loan terms and fewer restrictions.
Banks typically won't do a direct car loan for a car purchased from a private owner or an independent dealership. In those situations, you may need to try to take out a personal loan. This is also true if you're buying a collector or exotic car.
3. Try online lenders. If you're not a prime borrower, it's still possible to get a direct loan for a used car. There are a number of online lenders who are willing to finance used cars for people with less than stellar credit.
Since online lenders have less overhead, they typically will offer you a lower rate than you could get from a brick-and-mortar bank or credit union.
These loans may come with more restrictions than the direct loan you could get from a bank with better credit. For example, they may not finance cars more than five years old, or cars with over 100,000 miles.
4. Get rates from multiple lenders. Before you choose a loan, apply for several so you can compare the rates offered. Many banks and lending companies have a pre-approval process that won't affect your credit.
Multiple offers may give you the opportunity to negotiate for a better deal. For example, if you got a better rate from a different bank than from your own bank, you could get your bank to match that rate to get your business.
5. Complete a loan application. Once you've decided which lender you want to use for your financing, you'll typically have to fill out a full loan application. Many lenders give you the option to complete the application online.
You'll need to provide basic identification information, such as your driver's license and Social Security numbers. You also may need to provide basic financial information regarding your income and debts.
If you've had some credit problems in the past, you may want to go into a bank and apply for the loan in person so you can talk to a lending agent.
Your loan agreement will include basic requirements that the car must meet. As long as the car meets these requirements, you can use the financing to purchase the car.
6. Negotiate with the dealer. In most cases, you're going to secure direct or "blank check" financing before you find the specific car you want to buy. Having financing already secured puts you in a stronger position to get the best price from the dealer.
When you bring your own financing, you're saving the dealer a lot of costs. Ask if there's a discount available for that.
Since you're buying a used car, have it inspected before you buy it and go over the car's history. The car is a better buy if it's had fewer owners and never been in an accident.
7. Give the dealer your blank check. Lender policies vary, but in most cases you'll get a check for the exact amount of your car, or a blank check that's worth any amount up to the maximum amount your lender has approved.
When you buy a car using direct financing, you still must maintain full coverage insurance on the car. Your loan agreement will include information on the minimum amounts of coverage you must maintain.
Method 2 Using Dealer Financing.
1. Research interest rates. Dealers have special financing offers available throughout the year. Especially if you're not picky about the make or model of your car, shop around and see who has the best deal.
Know your credit score and how qualified you are for different offers. Typically the best offers are only available for prime borrowers with credit in the 700s or higher.
If you're trading in an old car, look for dealer offers to double the price on a trade-in, or pay a minimum amount for any trade-in regardless of its condition.
2. Choose your car. If you've done your research, you have a few dealerships in mind. You should be able to evaluate their inventory online before you go visit in person. Find the best car for you, looking at overall price.
Dealers may advertise monthly payment amounts rather than total price. This can be a way to charge you a higher interest rate.
Dealers typically will finance any car on their lot, so you may have more variety to choose from if you use dealer financing than you would if you used direct financing. However, this might not necessarily be a good thing – you still need to check the car's history and have it inspected before you buy.
3. Offer a sizable down payment. Cars depreciate in value. If you're buying a used car, you want to finance as little of the total price of the car as possible. A down payment of 10 to 20 percent of the purchase price of the car typically will get you the best rates.
A sizable down payment can help you avoid being underwater on your loan – meaning you owe more for the car than it is worth. This is particularly important to avoid when you're financing a used car, which could develop mechanical problems relatively quickly.
4. Apply for financing through the dealer. You'll need basic identification information as well as information about your income and employment to complete the financing application at the dealership.
It may take a few minutes, but in most cases the dealer will have a financing offer available for you that day. Then they'll call you back into an office to discuss the terms you've been offered.
The finance company may require additional documents from you, such as pay stubs to verify income. If the dealer mentions any of these, make sure you get copies to the dealer as soon as possible so as not to jeopardize your financing offer.
5. Negotiate the deal. If you've done your research and know your credit score, you may be able to get better terms from the dealer than what you're initially offered. Review each term and see if you can improve it.
For example, you typically want the shortest term loan, since it will usually have the lowest interest rates. But dealers often focus on the amount of the monthly payment. Financing for a shorter term does mean a higher monthly payment, but it will save you money overall.
6. Use cash for extras. Dealers tend to tack on extra fees, including sales tax, registration fees, and document or destination fees. You also may end up paying extra for dealer warranties, especially for a used car.
The dealer typically has no problem rolling these extra fees into your financing, but there's no point in paying interest on fees and tax. Pay that out of pocket if you can.
Method 3 Using "Buy Here Pay Here" Financing
1. Exhaust all other options. If you need a car and have had credit problems or have an extremely low credit score, BHPH financing is available for you. However, due to the high rates you should consider this only as a last resort.
There are some franchised dealerships, particularly Ford and Chevy dealerships, who are willing to work with customers who have bad credit. It may be possible for you to get a loan there. It wouldn't be the best rates, but it you would still pay less than you would at a BHPH lot.
If you have a relative with a good credit score, you might find out if they are willing to co-sign on the loan with you. That could get you a better rate or make traditional lenders more willing to work with you. This option can be especially valuable if you're young and don't have much, if any, credit history.
2. Ask if the dealer reports to credit bureaus. Because BHPH lots finance the car themselves, they don't always report to credit bureaus. If you have bad credit or no credit, you want the payments you make for your car reported so you can start to rebuild your credit.
You may have to visit several lots before you find one that reports to credit bureaus, but be persistent.
3. Research the car thoroughly. Any car you buy from a BHPH lot typically is sold "as is." Some of these cars may have mechanical problems, and the lot may not be required to disclose those problems before you buy the car.
Demand a Carfax or similar car history report so you can see how many owners the car has had and whether it's been in an accident. These lots typically have older cars, so they've likely had several owners – but a car that's changed hands several times in the past few years may be a red flag.
Take the car to a reputable mechanic before you buy it and have them conduct a thorough inspection. If there are any major repairs that need to be made, you may be able to convince the lot to make those repairs before you purchase the car.
4. Negotiate with the dealer. BHPH dealers often present the price of a car – and the financing terms – as though they are non-negotiable, but that's typically not true. Even though you may not be in the best bargaining position, you can still try to get a better deal.
The more of a down payment you can make, the better your terms typically will be. These lots often specialize in low down payments, but that doesn't mean you can't pay more.
If you're buying a car at a BHPH lot, your down payment should be as high as possible to keep you from ending up underwater – try to aim for somewhere between 40 and 60 percent down.
5.
Make your payments on time. You typically won't have to make payments for a long term, but it's essential to make every payment on time if you want to rebuild your credit. Some BHPH lots will repossess a car after as few as one missed payment.
Some BHPH lots require you to make a trip to the lot with your payment. Depending on how the financing is structured, you may be required to make weekly or bi-monthly payments. If you have a checking account and the lot offers automatic payments, sign up for them so you won't have to worry about it.
At most BHPH lots, you won't pay any less if you pay the loan off early. Ask about this when you buy the car. If the lot is reporting to the credit bureau and you won't save any money by paying the loan off early, just keep making the payments on time. All those payments will reflect well on your credit score.
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