New York If you have a gilt-edged credit history, every lender wants to give you money. Conversely, if your history is pocked with long periods of slow payments, lenders want you either to take a hike or pay for the loan in blood.
Their judgment is reflected in the newest trend in auto-dealer loans, known as "tiered pricing." Good guys get lower interest rates; bad guys get higher ones.
The plain fact is that the most creditworthy borrowers normally find the cheapest loans at banks and credit unions, not through auto dealers. But if they choose to borrow through the dealer, tiering should get them a lower-than-normal monthly payment.
If, on the other hand, you sport a black hole in your credit record, banks may not want to lend to you at all. With tiering, you pay a higher rate of interest but have a much better chance of being accepted for a loan.
The tiered approach to auto financing was pioneered in 1989 by General Motors Corp.'s financing division, the General Motors Acceptance Corp. Ford Motor Co. copiedGMAC's tiers last year, Chrysler Corp. has the idea under development, and a few banks are offering modified versions.
The savings accorded to virtue are high. At Ford Motor Credit, sound borrowers pay as much as 4 or 5 percentage points less than those with the worst credit histories. On a four-year $10,000 loan today, to take one example, average rates range from 12 percent to 16.25 percent. For the most creditworthy,that's a saving of $21.35 a month. Over four years, you'll pay about $1,025 less.
Both Ford and GMAC stack their customers into four tiers. At GMAC, you're ranked from A down to D; each drop in level raises your loan rate by one-half to 1 percentage point.
Before tiered pricing, all buyers were treated as average risks, which would be the B level, says John Andrews, a GMAC spokesman. C-level risks would probably have been turned down, and D risks almost definitely so.
Now, higher-risk borrowers might be accepted, says Daniel Taylor, Ford Motor Credit's vice president of marketing. The extra interest theypay offsets the increased risk of default.
The factors considered by both GMAC and Ford in assigning tiers are pretty much the same: whether your credit report shows slow pay or repossessions; the relationship of your income to your debt; how long you've lived at your present address and worked for your present company; the size of your down payment; and the length of your loan.
Tiers apply only to regular loans. If an auto manufacturer offers 2.9 percent or 5 percent financing to help move a particular model, every buyer gets that rate.
Auto dealers also get financing from banks, some of which offer tiers of their own. Seafirst Bank in Seattle, a unit of BankAmerica Corp., offers dealers three levels ofrates: premium, standard and "special" (a euphemism for marginal).
AM South Bank, based in Birmingham, Ala., publishes a loan rate for dealers, then adjusts it up or down depending on the borrower's creditworthiness and the terms of the loan. A blue-chip customer with a big down payment might get a loan at 9.75 percent plus the dealer's markup, according to George Williams, the bank's senior vice president in charge of auto finance. A marginal customer might pay 3 percentage points more.
If you borrow directly from a bank, rather than through an auto dealer, you'll find few loans rigidly tiered by credit quality. Instead, banks consider the kind of customer you are.
At Comerica Bank in Detroit, forexample, the better customers get a preferred rate. Average customers get a standard rate (which probably parallels GMAC's B tier). A few C-level loans make it into Comerica's mix, also at the standard rate.
Seafirst lowers its interest rates on larger loans. Many other banks and credit unions offer a single rate to all.
*Always ask your bank if you can get the loan for less.
*Even poorer credit risks should first try a bank or credit union before accepting dealer financing. You might squeak in on a bank's standard rate. Dealer loans include a profit of 1 percentage point or more, which is why they generally cost you more.