Making a major purchase can be confusing if you don't do your homework. Particularly when the car dealers use unfamiliar phrases like "down payment" and "APR." making you feel like you've walked into some private club. With the Internet as your ally, these terms become raod signs to follow to get in the driver's seat. It's that simple.
Here's my process in five easy steps:
Choosing the right car.
Dealing with the car dealers
Understanding the credit scores - FICO
Getting a credit report
Obtaining an auto loan
The information compiled in this article will save you time on your car purchase. I used the Internet search engine Google as my research buddy. If I needed to learn something, I simply typed in keywords and found the useful links listed in this report. Some of these links were easier to find than others. For example, many of the links listed under car manufacturers took me hours to locate. But with car loans, it was easy. I simply typed the keywords 'car loans' and found everything I needed right away.
Step #1: Choosing The Right Car
With car buying there's always going to be a wish list and the practical list. It takes a good combination of these wishes to get on the road in the right car. The wish list is an emotional, feel good kind of thing, it's great for dreams and goal setting, but it belongs in the passenger seat. The driver's seat needs the practical wished steered by common sense and a strong dose of logic. For me it's real simple. I want a car that's fun, stylish, drives great, is safe and within my reach, you know, affordable. Looking at the old ceckbook...cash in, cash out, I set a reasonable price range for my new car and factored in fun, style, and safety.
Here are some basic questions, whick kept me focused:
Is the car going to be used for hauling things? (consider getting a pick-up truck, or an SUV)
Is the car to be used for taking trips on the weekends or cycling, kayaking, surfing, camping, etc? (consider an SUV or a pick-up truck)
Is the car going to be used for commuting to work? (consider a car that gets good gas mileage)
Choosing the right SUV, when there are dozens of makes and styles, just seemed daunting. I wasn't sure where to start, so I visited all the major car manufacturer's websites and checked out the cars and the available options. While style and functionality are important, safety really is number one. Consumer Reports with unbiased indepth coverage for safety on new and used cars really made it easy for me to narrow down my selection to:
Toyota 4Runners - $25,000-$34,000
Honda CRV - $21,000-$25,000
Taking a test drive is another important part of the selection process. I visited my local Toyota and Honda dealers and drove their SUVs. I lied the way the Toyota 4Runner handled quick turns and freeway driving. It was a nice smooth drive. Driving the Honda CRV felt more like driving a sports car and not a larger vehicle, which is also attractive. I'm going to take a few more test drives and make my final decision based on the dealers' time frame. While this may sound strange, I've discovered a little known fact, that the dealers actually mark down prices at certain times of the year to get rid of inventory. The best time of year to purchase a car from a dealer is during the last two weeks of December and from July through October.
Step #2: Dealing With The Car Dealers
Fueled by the rumor that car dealers act like sharks, I did my homework. I didn't want to be intimidated or fall for some line. I wanted the facts.
I learned both the average price and the base price (the price of the car without any special options, otherwise known as the manufacturer suggested retail price) by visiting various dealerships and comparing prices. Consumer Reports suggests finding out what the dealer price is and negotiating up from that figure as opposed to working from the sticker-price down.
Some dealers will bargain on their profit margin, which is often between 10 and 20 percent. In many cases this is the difference between the manufacturer's suggested retail price and the invoice price.
Negotiating With The Dealers
The shear notion of negotiating with car dealers at first intimidated me. I found out by going into the dealership prepared with a price, the pressure of negotiating is on the dealer, they're the ones that sweat.
Buyers Beware---Once the dealer knows you want the car, that's often where unsavory practices happen. A scam that dealers sometimes try is to get you to pay a variety of extra charges. Don't fall for this trick. Stick to the price you agreed to. Walk out if you feel you're being treated unfairly.
At first, I thought the trade-in value for my car was not that big a deal, considering my car is 10 years old. While looking through the Kelley Blue Book, I discovered having a trade-in is like finding money, because that's essentially what a trade-in is, or in other words it can be used as a down payment for a car loan in lieu of cash. Both Kelley Blue Book and the Consumer Reports Used Car Buying Guide, list the market value of used cars. Their estimates are based on cars in good condition with an average of 12,000 miles per year.
Step #3: Understanding The Credit Scores - FICO
What's FICO got to do with a car loan?
Everything! It's the lifeblood of getting an auto loan. FICO stands for Fair Isaac & Company and is a score based on your credit report. When you apply for a car loan, the credit bureaus evaluate your credit profile and assign a score. This score is used to estimate your credit standing. Experian, Trans Union, and Equifax all have their own credit scoring system.
How is the FICO Score Determined?
Past payment history (counts for about 35% of the score). The less late payments the better off you'll be. Recent late payments have a greater impact than old bankruptcy.
Credit use (counts for about 30% of the score) Low balances across several credit cards is far better then the same balance concentrated on a few cards, which are close to their maximum limits. Too many credit cards can also bring down the score. Closing accounts can negatively impact a credit rating if the entire profile is not considered.
Credit history (counts for about 15% of the score) Longevity counts in your favor. The longer the accounts have been open, the better your credit score. Opening new accounts and closing seasoned accounts can bring down the score considerably.
Types of credit used (counts for about 10% of the score) Financing accounts score lower than bank or department store accounts.
Inquiries (count for 10% of the score) multiple inquiries could indicate a negative risk if several cards are applied for or if other accounts are near their maximum. Multiple mortgage or car inquiries within a fourteen-day period are counted as one inquiry.
The Car Dealer Credit Score Scam
Don't get bitten by the car shark. There is a myth about credit reports. Many people are under the wrong impression that if they get a credit report, their credit score goes down. Sadly, car sales people often perpetuate this myth. They get away with this by feeding on consumer ignorance and charging a higher interest rate. My friend Lisa warned me about this unsavory practise.
With a credit score of 780 (Excellant Rating) Lisa should have been eligible for a 0% interest rate. But the dealer she visited wanted to pull a fast one. Lisa filled out the credit application at the dealership and felt like she was in a bad movie when all of the sudden a bunch of finance people with "worried looks" on their faces approached her. They showed her a supposed report of her "credit score" with the number of 580 circled in red and went on to explain how they could get her financed at 10.9%, but not at the advertised 0% interest rate. When questioned, they lied on the spot. Lisa, showed them her credit reports, promptly left, and bought car from an honest dealer. She secured a 0% interest loan on her own.
What is a good credit score for approval of a car loan?
A credit score above 680 is considered a "prime borrower". With this rate you can get a good APR on your loan. A credit score below 680, is considered "sub prime", and will pay a much higher APR for a car loan. If you have a credit score below 550, go to CarApproval.com
Can you Improve your Credit Score?
Yes. However, it is not possible to legally remove accurate information from a credit report. You can remoce any wrong information that's listed in your file. If you find something in your credit report that is inaccurate or incomplete, simply ask the credit-reporting agency for a dispute form. Then submit your dispute in writing with copies of the disputed charges and any other necessary information. These corrections should be make well in advance of purchasing a car, because you never can tell the exact impact a change will have on your credit score.
Can Debt Consolidation improve the FICO score?
Yes. By reducing your debt, you can improve your credit rating and increase your chances of being approved for the loan amount you need. Here's a helpful resource for debt consolidation.
Step #4: Getting a Credit Report
Here is a great resource about credit ratings and credit reports for car loans. This site also has great information on obtaining a car loan.
Follow these simple steps before applying for a car loan:
Get your credit score so dealers can't try to pull a fast one. For example, some dealers will say you have a bad credit score and offer you a high interest loan, when you're eligible for a 0% interest loan!
Sign up with a credit repair program at Lexingtonlaw. I followed their 4 step process and was so pleased with their strategies.
I used the online dispute valet Lexingtonlaw and they happily helped me remove the erroneous items to dispute on my credit report.
Lexingtonlaw can be relied upon for credit repair council, recommending the most appropriate way to remove negative/inaccurate items from your credit report. I sat back while Lexingtonlaw challenged negative items directly with the three credit bureaus.
Lexingtonlaw is a website you need for up-to-date information on removing inaccurate, misleading or unverifiable information. Once your FICO score goes over 680, we recommend you apply for a prime rate care loan.
Buyer Beware--Car Dealer 'Super Deals'
Dealers advertise 0% and 1% financing as their quote "Super Deal." Typically, these loans are for 24- or 36-months. The dealer makes up for the cash by offering a higher monthly payment. Don't fall for this trick. Did you know that you can get affordable car auto/car financing on your own, scoring a much better interest rate and loan terms, compared to dealer financing? Even if the dealer says, "your credit is no good", there are auto loans for people with bad credit. Don't be fooled be the dealers' fancy talk. Besides, auto loans do exist in many forms, including: refinance auto loans, low interest auto loans, and loans to buy a new car. Don't forget to look at the car loan calculator and tips listed here, this site makes calculating car loan payments and other loan details easy.
Dealer Cash Rebates
Often car dealers offer cash back rebates of $1,000, $2,0000, or even $3,000.
Buyer Beware --- The dealer is simply inflating the price of the car in the guise of giving you cash. back.
Remember, the real "super deal" is getting the best price of the car and the best possible financing rate. Do your homework, be safe, get the facts, and have fun in the driver's seat!