Get Smart About Credit: What to Know Before You Buy a Car

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Congratulations, you’re about to gratify the dream of many Americans – getting a new car. When you go out shopping for a vehicle, you might wind up at a dealership and want to take a test drive. Before you are allowed to do this, though, you might be asked to fill out a credit application, even if you tell the salesperson you intend to pay in cash. Why is this? Whether that car is purely for pleasure or a much-needed transportation option, most people finance their car purchases, both new and used, but even if you are not financing, you run up against some legal regulations which might involve pulling your credit.

Why is a Salesperson Eager to get a Credit Application?

In order to take a look at your credit report, a salesperson needs a permissible purpose; this permission is often given on a credit application. Why are they so interested in your credit if you haven’t yet agreed on a deal or a price?

  • Dealerships make their money in three ways: selling you the car, buying your trade in for as little as possible and selling you auto financing. A credit report will tell the dealer what kind of loan products you qualify for. Loans for those with poor credit are highly lucrative. If a dealer can sell you one of these profitable loans, they may be willing to take less money for a car, and make up the loss in increased fees on your loan. If your credit is good and you qualify for a low interest loan, you may wind up paying more for your car, as the dealership did not make any money on the auto financing.
  • Salespeople want to know that you are serious about buying. If your credit report indicates you make a lot of money (you are making high payments on other loans), a salesperson knows that he or she is not wasting their time with you.
  • Another reason a salesperson will ask you to fill out a credit application is that it gives him or her a chance to start a dialog and build trust. If the customer is ok telling the salesperson about his or her employment and income, a certain level of trust exists and this makes it easier to sell a customer a vehicle.

Know What’s in Your Credit Report Before You Go Out Shopping

To arm yourself with the most information possible and get the best loan product with the least amount of loan applications, it helps for you to know your credit score, a numerical rating of the information contained on your credit report, as it drives the kind of loan you get. The most widely used credit score is the FICO score, and the range is 300 – 850, the higher your score, the better your credit. You can get an approximation of your credit score by signing up at the free websites: credit.com, creditkarma.com and creditsesame.com.

While shopping, you may have to apply several times for financing before you find the loan you like. You should know that every time you apply for a loan, your credit is pulled and a record of this credit pull is placed on your credit report in the form of an inquiry. Inquiries can cost you up to 5 credit score points a piece. There is a silver lining: shopping for loan products is a responsible thing to do and you are rewarded for this: all inquiries within a 30 day period only count as one inquiry credit score-wise.

By all means see if a dealership has the best financing deal, but other places to look for financing, especially if your credit is poor, is at a credit union. Credit unions often can beat dealerships, as they are more forgiving of troubled credit histories. Another great resource is bankrate.com, which offers you loans by credit rating and location. The average auto financing loan term is 5 years and getting close to 6 years, so getting the best deal will have a large effect on your finances for a long time and it’s worth doing a little homework.

Why Does a Dealership Want a Credit Application if I’m paying all Cash?

Despite the fact that some parts of the Patriot Act were allowed to expire on June 1, 2015 (most notably phone records are now not automatically collected by the NSA), the rest of the provisions of the Patriot Act remain in place or were renewed through the USA Freedom Act. What does the Patriot Act have to do with your automobile purchase? All purchases in cash greater than $10,000 must be reported to the IRS, and this provision is in place to identity potential terrorists from conducting money-laundering efforts in support of their terrorist activities. Paying by a personal check is not considered cash, though paying with a cashier’s check, money order or traveler’s check does count as cash. Therefore, if you are financing your car purchase at some place other than the dealership, you will be getting a cashier’s check from the bank or credit union and paying for your purchase with this check, thus paying in cash, and the Patriot Act can apply.

If you do fill out a credit application, you can refuse to have your credit pulled at the dealership by writing your refusal on the credit application or by not checking any boxes that give the dealer authorization. It is not part of the Patriot Act regulations to run a credit report on car buyers. If you apply for financing, though, having your credit report pulled is inevitable.

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