What Else Should I Know Before Buying A Car
Avoid dealerships that advertise no credit check or buy here, pay here. These dealerships specialize in sales to buyers with poor or no credit and make their own in-house loans.
According to the CFPB, you may not only pay high interest rates to places that specialize in buyers with poor credit, but you may pay thousands of dollars more for your car than you would elsewhere. If these are the only dealerships where you can get a loan, consider walking away.
If your credit score is less than 500, you may be better off getting a car you can afford to buy outright with cash, Khanna said. You can always get a nicer car when your credit improves.
While comparing car loans, remember to pay attention to the total cost of financing your car and be aware that the interest rate and the APR are different. You can expect your APR to be higher than your interest rate, because APR will include interest rate plus any fees the lender charges.
You have plenty to think about when youre shopping for a car. You shouldnt have to worry about your loan at the same time youre checking out features and searching car lots. Get a head start on financing before you go shopping, and youll have one less thing to worry about while you test drive your next car.
Bring Documents Showing Financial Stability
If your credit score is low, potential lenders are less likely to see you as a risk if they can see you have stability in other areas of your financial life. Bringing documentation like your most recent pay stubs and proof of address to show lenders how long you have lived at your current address and worked at your employer could help you seem more reliable.
Fico Score 8 Vs Vantagescore
The FICO credit scoring model is the most commonly used credit scoring model by auto lenders and car dealerships, and is also the oldest and first-ever credit scoring model. Its estimated that 90% of auto lenders use the current FICO Score 8 model when making lending decisions. Given its history and tried-and-true model in generating credit scores based on credit reports, its widely used and key in most auto lending decisions.
Another well-known credit scoring model is called VantageScore, and its similar to FICO in how it considers your credit reports, but isnt as widely used by dealerships. Its important to remember that all three credit bureaus may have different information on them. Depending on where you get your credit score, and where the information is coming from, you may see three different credit scores at any given time, based on the information in your credit reports.
There are also three different major credit bureaus: TransUnion, Equifax, and Experian. Depending on whats on these individual reports, they could all generate a different score. VantageScore typically only uses TransUnion and Equifax. The FICO score may use TransUnion, Equifax, or Experian.
If you want to see the credit score that an auto lender or car dealership is going to see, then its recommended to specifically find out your FICO credit score. And if you want to see what lenders see when they pull your credit reports, request them and comb through all three to learn where you stand.
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What Is The Difference In Credit Scores
While the fundamentals behind consumer credit scoring models are similar, each credit scoring model uses specific criteria to analyze one of your credit reports and generate a credit score.
Sometimes there are small, but potentially important, differences. For example, one credit scoring model might ignore paid collections accounts while another might consider a collections account a negative item even if it’s been paid.
FICO® and VantageScore are the two market leaders in credit scoring, and the base scoring models they create also share some similarities.
Each model only looks at the information in one of your credit reports from Experian, Equifax or TransUnion to determine your score. A higher score is best because it indicates you are less likely to miss a loan payment.
The latest base models also have the same scoring range: 300 to 850. However, FICO® also has industry-specific scores, including scores for auto lenders, that range from 250 to 900.
Which Credit Score Is Used For Car Loans
Through April 20, 2022, Experian, TransUnion and Equifax will offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com to help you protect your financial health during the sudden and unprecedented hardship caused by COVID-19.
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Lenders can choose which credit score they want to use when evaluating your auto loan application. Different lenders might use different scores, and even the same lender might test several credit scores. As a result, you likely won’t know exactly which credit score the lender will see when you apply for an auto loan.
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Apply For A Loan With A Cosigner
If your score is in the nonprime to deep subprime range, you might consider applying for a car loan with a cosigner. A cosigner is someone, such as a family member, who is willing to apply for a loan with you and, ideally, has good to excellent credit. A cosigner shares responsibility for the loan, reducing the lenders risk. Youre more likely to qualify for a loan and get a lower interest rate than if you applied on your own. But if you’re unable to make the loan payments, your cosigner will be stuck with the bill.
The Trouble With Running Credit Reports
Consumers should avoid having businesses run their credit reports unnecessarily because it will lower their credit rating slightly, consumer advice experts say. According to the Experian website: “10% of your credit score is based on inquiries or ‘credit checks.’ Every time you apply for credit, a ‘hard inquiry’ is placed on your credit report. Having too many hard inquiries could indicate to lenders that you’re trying to overspend.”
Car salespeople are eager to run a customer’s credit report and often say it is for the buyer’s convenience, and will speed up the car-buying process, says Chris Kukla, senior vice president of the Center for Responsible Lending. “But they really want to know if they can easily finance you,” he says. “The result of the credit report has an impact on what the buyer pays for the car, and whether they get a hard sell for additional products in the finance and insurance office.”
Marv Eleazer, finance director at Langdale Ford in Valdosta, Georgia, agrees. “This is a ruse and designed to get access to the customer’s credit report in order to qualify a customer to various finance sources the dealer uses,” he says.
Buy here, pay here car dealers often demand a credit report early in the car-buying process, Kukla says. Often, the car’s price isn’t even posted on the windshield. After seeing the result of the credit report, the dealer can adjust the price to maximize his profit, Kukla says.
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What Options Do I Have If Im A First
If you have limited or no credit history, and you havent taken out a car loan before, you might qualify for a first-time car buyers program. These programs can enable buyers to purchase a vehicle on a monthly payment plan. They also might decrease the APR and the amount of the down payment you have to make compared to other loan options.
For example, Ford offers a program you can apply to if you meet the following criteria:
- You havent had previous car credit
- There are no issues with your credit report
- Your income is $2,000 a month or more
Note that these programs will typically have an income and/or employment requirement, so youll likely need to demonstrate that you are either currently employed and earning above the required minimum or show a written job offer for a position you will be starting soon.
Build Your Credit Before Car Shopping
If you still arent getting car loan rates that work for you, it might be time to delay your car purchase and work on building your credit. That means:
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Paying bills on time. A payment that goes 30 days past due can devastate your score, so pay at least the minimum on time.
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Keeping credit card balances low compared to your credit limits. How much of your limits you’re using is called your credit utilization, and it has a big effect on your score. You can try a number of tactics to lower your credit utilization in order to bump up your score.
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Avoiding applications for other credit within six months of applying for a car loan.
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Keeping credit card accounts open unless there’s a compelling reason to close them. Closing cards reduces your overall credit limit, which can hurt your credit utilization.
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Know These Credit Report Basics Before You Go Car Shopping
You walk onto a car lot and even before you test-drive a vehicle, the salesman asks you to fill out a credit application. Why is he asking you to do this? And what should you do?
Dealers say that they are struggling to meet increasingly complex government demands for information about their customers. But at the same time, experts warn consumers about the growing threat of identity theft and shady sales practices. This situation can sometimes put dealers and customers at odds and lead to misunderstandings.
It’s a good idea to check your credit score before going car shopping to make sure there are no mistakes on the report.
But with a greater knowledge of credit rules, car buyers and dealers can find common ground: namely, a good loan for the car buyer and a sale for the dealership.
Here, then, are seven things to know about your credit report. A better understanding can speed up car shopping and clarify what can be an intimidating and confusing process.
Buy Within Your Budget
Knowing what you can afford can actually be a bit confusing. What is important enough to spend money on, and what should you hold back on? Hey, at least youre asking these questions!
There are three big things that eat away most peoples earnings. They are:
- Student loans
- Mortgage or rent
- Car loans
People rationalize spending a lot of money on cars and houses by being frugal in other areas, such as taking lunch to work, not wearing major design labels, or going to Redbox instead of the movie theater.
In reality, these expenses are small potatoes.
Though they are the cheaper options, theyre not going to help you take that vacation to Ireland youve always wanted or save up for a major investment. Small savings may help you get the car or house you want, but they definitely wont help you retire early.
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How Much Of Your Paycheck Should Go Towards Your Car Payment
If you dont want to worry about eating out or going to see that movie that caught your eye, and you also want to put away money to make an investment, many experts recommend only 10%.
Thats right. Only 10%.
Now, for most Americans, thats not a lot to spend on a car at all, but its a safe amount. Consider that the average income in the U.S. is only $52,000 a year, and it becomes apparent people need to be more frugal especially in this economy.
What Does Running Your Credit Mean
For those that need it, lets have a quick recap! Running your credit is when a lender will check your credit score and history to determine whether they will move forward with your loan or not. You can run your credit yourself doing whats known as a soft inquiry.
This will not impact your credit score and show you your score and what has determined it, such as your payment history and if you have made payments on time.
Companies can also run your credit. These are known as hard inquiries and are used to determine whether you will be approved for mortgages or auto loans.
These checks will stay on your report for two years and allow lenders to see your credit history, payment history, if you have any debt, and if you have ever declared bankruptcy.
The higher your number, the better your credit score is, and the more likely lenders agree to the loan.
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What Apr Can You Expect Based On Your Credit Score
The higher your credit score, the better the auto loan deal you can get. Thats because if you have a proven track record of borrowing money and paying it as promised, the higher your credit score is and the lower the risk you are to lenders. These lenders might even compete with a bank or credit union for your business by offering you a lower interest rate loan.
If your payment history on previous loans is sketchier, however, youre considered a riskier bet in the eyes of prospective lenders. They may think you could quit paying and that they would ultimately have to take steps to collect or repossess the vehicle. In return, lenders expect compensation for extra risk in the form of higher interest rates.
This chart, based on APRs for closed auto loans by credit score on the LendingTree loan platform in 2020, illustrates how your credit score can affect what you pay to finance your car:
| 14.39% | 20.45% |
If you have poor credit a score of 580 or lower your best option might be to find a cosigner with a better financial track record. Note that a cosigner is responsible for the debt if you default, so make sure the car payment is within your budget to protect your relationship with whomever you ask to cosign. For more in-depth guidance, read our article on how to get a car loan with bad credit.
Fico Credit Scores Are Meant To Help Lenders Determine How Risky You Are As A Borrower But Some Scores Are Better Tailored At Calculating How Risky You Are For Specific Credit Products Like The Auto Loans
To determine FICO® Auto Scores, FICO first calculates your base scores, which are the traditional you might be more familiar with . Then FICO adjusts the calculation based on industry-specific risk behavior to create tailored auto scores. These scores help creditors predict the likelihood that youll make auto loan payments as agreed. The result is your FICO® Auto Scores, which range from 250 to 900 points.
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What Do Car Dealers See When They Run Your Credit
Are you considering taking out an auto loan and want to know what a dealer will see when they run your credit?
Maybe you are waiting to find out if you are approved for your dream car and want to know what checks will be run?
Perhaps you are curious and want to know more? Whatever your reason might be, we have the answer for you!
We know how daunting the thought of having your credit checked can be. Your mind starts racing, wondering what could be unearthed and if it will impact your chances of securing the loan or not.
For many of us, the chance to own our car comes through auto loans provided by car dealers. The last thing we want is to ruin our chances and be stuck commuting on foot forever.
Thankfully, you dont need to worry a moment longer! Today we are here to walk you through what car dealers see when they run your credit.
Keep reading to have your mind put at ease and find out what your car dealer will see!
Car Dealers Can Use Your Drivers License To Access Your Credit Report
What does that mean? According to the FTC, simply shopping around, checking deals, and even taking test drives does not constitute a legitimate business need by itself. Rather, its only when youve gone further along into an obvious purchase transaction that your actions qualify as business that possibly involves a need to check your credit, according to a 1998 FTC staff opinion letter.
Only in those circumstances where it is clear both to the consumer and to the dealer that the consumer is actually initiating the purchase or lease of a specific vehicle and, in addition, the dealer has a legitimate business need for consumer report information may the dealer obtain a report without written permission, says the FTC opinion. –Jeff Blyskal
For more on the ins and outs of buying new and used cars, check out the Cars section of Consumer Reports Online.
Aaron Bailey
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How To Access Your Fico Auto Scores
While some credit scores can be monitored for free, you may have to hand over some cash if you want access to your FICO® Auto Scores. When you pay $39.95 a month through FICO, you can monitor a handful of your credit reports and scores, including your FICO® Auto Scores.
Before you pay for credit monitoring though, note that there are several versions of the FICO® Auto Score model. Monitoring just one doesnt guarantee youll see the same version your lender pulls. Consider calling your prospective lenders financing department to see which version they use, and check to see which scores youll get through the monitoring service, before paying for your scores.
