Financing a Car
Preparing your finances before buying a car
You’ve researched the perfect car to buy and the perfect time to
buy it. But have you researched your credit report and credit score?
Understanding your finances can save you time and money when shopping
for a car. Use TrueCredit’s simple three-step guide to car shopping.
Step 1: Give your Credit Report a Tune-up
Failing to check up on your credit early can lead to embarrassing
or costly episodes at the loan desk. Even small inaccuracies on
your credit data can cause significant changes in your credit score.
Here are a few tips to jump-start your credit tune-up:
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Order your credit report
You need the facts first. Choose an online credit report that
will give you all the information you need. A 3-in-1 Credit Report
allows you to compare and review your financial information from
each of the three credit bureaus: TransUnion, Equifax and Experian.
Your Credit Score and Debt Analysis are other vital pieces of
information allowing you to look at your credit history from a
lender’s perspective.
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Watch for errors
Check your credit report for inaccuracies in your personal and
financial information. If there’s a mistake, you should report
it immediately. Read the Guide to Handling Inaccuracies for more
information on disputing credit report errors. If there are significant
inaccuracies on your credit report, consider delaying your purchase
until the errors are resolved.
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Minimize
Reducing your credit card balances or paying off small debts can
sometimes boost your credit and save you money on a loan. Lowering
your debt-to-income ratio can also increase your borrowing power.
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Avoid excessive inquiries
You can check your credit report as often as you like without
penalty, but if too many creditors or lenders check up on you,
it can lower your credit score. Make sure that you really want
the loan before you apply.
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Pay your bills on time
Even a few months of prompt payments can improve your credit report.
Make sure that you pay on time and check to see that your creditors
record your good behavior. You can manage your progress with an
online Credit Monitoring service.
Step 2: Porsche versus Pinto. Calculate how much you can afford
Brand new sports car vs. used rattletrap? It all depends on your
financial situation. Before you decide that a car is right for you,
it’s a good idea to evaluate your balance of debts and assets to
see how much you can really afford.
• Check your inventory – First evaluate what you already own. Do
you have a trade-in or down payment to help you pay for the car?
These assets can help you negotiate a better rate with lenders and
can be especially important if you have problem credit.
• Do the math – Calculate your debt-to-income ratio. Divide your
monthly payments by your gross monthly income. Lenders look at this
percentage to determine how much you can borrow. A ratio of 40%
is generally the maximum that lenders will accept. Add in your estimated
monthly car payments to see how this figure will change after you
buy a car.
• Troubleshoot – Use the information you gathered from your credit
tune-up to correct inaccuracies and pay-off small debts before you
apply. Closing inactive credit card accounts can improve your loan
rate. If you have a lot of debt, weigh the advantages and disadvantages
of adding another loan to your financial portfolio.
• Age matters – Decide if you want to buy a used car or a new car.
Buying a used car can save you a heap of money if you do your research.
Since new cars generally depreciate 10-35% during the first two
years, it’s a good idea to check the depreciation rate on the car
you’re interested in by looking up the current price and the price
for the same car made two years earlier.
Step 3: Fabulous Financing
Applying for an auto loan doesn’t have to be stressful if you arrive
prepared and armed with your personal information. Investigating
your financial history and borrowing power before you start to shop
for a new car can save you both time and money.
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Think like a lender
Lenders look at a variety of figures to determine your borrowing
power. Your income, occupation, home ownership and credit history
are key points that gauge your financial security. Go over your
personal information before heading out to the dealership.
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Do your homework
When you’re ready to talk to lenders it’s a good idea to shop
around. Visit your local bank or credit union to discuss applying
for an auto loan. Financing with the car dealer can sometimes
be more expensive, so pricing out your options is a good idea.
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Dig through your options
Depending on your financial situation and credit history, you’ll
have several options for the loan term and down payment. Choose
the financing option that is best for your budget. Make sure that
you understand the factors lenders will research so that you can
negotiate the loan rate you deserve.
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Problem solving
If you’ve had credit problems due to divorce, illness or loss
of job, it may help to explain your situation to a lender and
show how you are repaying those debts. Lenders can be understanding
about the impact personal problems have on your finances as long
as you can prove to them that you’re getting back on track.
By taking charge of your credit information, you can negotiate
a better deal on your dream car – and the loan to finance it!
