Auto Loans and Your Credit Score

For many of us, buying a car is the most expensive investment we make after buying a home. Sometimes everything works out just like it should, but all too often we find ourselves needing to purchase a car at the worst possible time—when we are overloaded with other debts and our credit is not at its most polished.

Common mistakes many of us make when looking for a car

Too many of us begin our search for a car by going out to nearby dealers uninformed and unprepared. Dealers love that! It usually means they will end up charging more interest, getting a higher price for the car and expensive extras we don't really want or need.

Before setting foot on a car dealer's lot, prepare yourself by:

• Determining what kind of car you want or need
• Checking the online auto rates
• Checking the fair asking price in the Kelly Blue Book or NADA guide
• Knowing your credit score and reading over your credit report
• Repairing your credit if needed

If you cannot do these things before making a deal for a car, you will likely pay more, and who needs that, especially if you are already overwhelmed by debt?

Before you fill out an application for a car loan

• If you do nothing else, get your credit score. A common car sales scam is to try to make you believe that you have poor credit when, many times, you don't. The reason? If a dealer can get you to finance the car through them at the very high interest rate charged to people with bad credit, they make more money. If you don't know your credit score, you cannot argue with the dealer. If you do know it and this scam is attempted, you can show them your credit score and ask them why they are trying to rip you off. Then take your business elsewhere.
• Compare auto loan rates on the Internet. Being armed with knowledge is your best bet toward saving money. Many websites have auto loan payment calculators.
• If your credit score falls beneath the high 600's, you will pay a higher interest rate. If there is any way you can increase your score before you buy that car, you should. Is the end in sight for the car you're driving now? Do the repairs seem to be increasing? By thinking ahead and putting in the effort, you can save yourself hundreds or thousands of dollars, depending on the car you buy.
• Get a copy of your credit report. You are entitled to one free copy a year from each of the three major credit reporting agencies.

• Did you know that the chances of having errors on your credit report are high? A study completed in 2004 by the U.S. Public Interest Research Group found that as many as 79% of credit reports contain errors. A substantial number of these contained errors so serious that the person named on the report could be forced to pay much more in interest for purchases such as cars or be denied credit completely.
• Identity theft is an ever-increasing problem that can destroy your credit score. Keeping close tabs on your credit report is one way to minimize the damage.
• Check your credit report carefully. You will see sections for the following:
  • Payment History for credit cards, retail accounts, installment loans, finance company accounts and mortgages.
  • There is also a section detailing public records, such as bankruptcies, suits, liens, judgments, past due accounts, wage attachments, etc.
  • First check the most basic areas: the addresses listed for you, your Social Security number and the name(s) on the report. Check the content of each of the above sections. Check the creditors and charges.
  • If you find errors that could harm your loan application, you should work to get them cleaned up. You can do this yourself, by writing letters that challenge the errors. If the credit reporting agency cannot substantiate the negative mark, they must remove it. This alone has the potential to raise your score substantially and thus get you a lower interest rate on your loan. If you feel ill-equipped to handle this task alone, credit repair organizations exist to help you achieve your goal.
  • Sometimes your credit score is low for legitimate reasons. In these cases, you can improve your score by paying off some of your creditors and lowering your balances on outstanding debts.
  • You might choose to close out some credit accounts listed on your report, such as retail credit cards you never use. Don't close out your oldest credit card accounts, however, for they are the ones that show your longest payment history.
  • Try to get your score as high as possible before applying for a car loan.

The home equity loan

If you own your home and have some equity built up, it might be to your advantage to get the money for a down payment on a car through a home equity loan. The interest you pay on a home equity loan is usually tax deductible, and it might be easier to get this loan from your mortgage company than from another bank or lending agency. The interest may be lower than the rate the car dealership might charge. The more money you put down on a car, the lower your monthly payments will be. If you decide to get a home equity loan, you must first be certain you will never default on this loan as you could lose your home.

You could also try to get a loan through your credit union, if you have one. Credit unions have historically been more lenient than banks when it comes to credit problems.

Common scams used against those with poor credit

• You are told you must pay a very high interest rate—higher than is reasonable, even for someone with poor credit.
• You are told that you must have a co-signer and your co-signer is tricked into being the actual borrower through a flurry of paperwork.
• You are told that you must purchase expensive extras because of your credit score: VIN etching in the windshield, an extended warranty, credit life insurance, etc.
• Often the dealer will call after a few weeks and tell you your financing was rejected. Then you are told that your monthly payments are increasing.
• It is not uncommon for the dealer to never pay off the previous loan on your trade-in car, even though he promised he would. You are responsible if that happens, unless you have the promise in writing.

A high credit score gives you power. It is well worth fixing your credit report before you buy a car.

Know your credit score before counting on rebates or 0 percent financing

You can also be denied special incentives such as 0 percent financing if your credit score is anything less than stellar. Most likely, you will also have to pay higher insurance rates.

Hopefully, you are reading this article long before you have to purchase a car. If there are items on your credit report that need disputing, you should know now that it will take time to get them eliminated, and while the items are in dispute, you may be rejected for financing or a lower interest rate.

There is more to a credit score than making your payments on time. Banks and lenders also look at how many open accounts you have, how high the balances are, your age, your work history, and other variables.

Ways to increase your potential approval for a car loan

• Your income makes a difference, along with the amount of debt you owe. The more you bring in every month, the easier it will be to get approved.
• Pay down your credit card balances, beginning with the highest APR cards.
• Wait to apply for a car loan if you have moved within the last six months. Lenders prefer stability.
• Stable employment also helps. The longer you have worked at a company, the better. College graduates should try to get in at least six months of employment at the same place before attempting a car loan.
• Repair any bad credit or errors on your credit report. You can do this yourself or through the use of a credit repair company. These experts can often improve your credit report much faster than you can on your own.
• If you have a previous auto financing loan in your credit history, this will help you with your current auto loan request.

If there are items on your credit report that should be cleaned up, take care of them now. The effect your efforts can have on your credit score and future car loan interest rate are tremendous.