Just because your credit score might prevent you from purchasing a home, it probably won’t prevent you from purchasing a car. Because car loans are for less money and for shorter terms than home loans; and because cars are easier to repossess than houses, lenders aren’t quite as strict.
In fact, if a home mortgage lender has classified you as “sub-prime” that’s no reason to assume that you’ll carry the same classification when buying a car. That’s why it’s important to shop around for your loan and to avoid car lots that primarily cater to sub-prime borrowers.
The fact is, you may qualify for better rates and terms than you can get from those lots. But if you assume it’s the best you can do and go straight to a sub-prime lender, you’ll automatically pay higher interest.
Start with the bank or credit union where you have checking or savings accounts. Then see if perhaps your insurance company offers auto financing. You can also find lenders on line. Look for the cheapest money you can find – the lowest interest rate and the fewest number of payments.
Too many buyers look at the monthly payment rather than the total cost. Be smart and look at the total cost first. If you have to stretch that car loan out to 84 months, you should look for a less expensive car.
Since credit inquiries do affect your credit scores, consolidate your loan shopping into a short time-frame. When potential lenders and the credit bureaus can clearly see that several inquiries all point to one purchase, several inquiries will have the effect of one inquiry.
You should do your car shopping ahead of time, so you have a good idea of the car you want and thus loan value you’ll need, but while you’re shopping, don’t allow car salesmen to check your credit.
What to beware of when searching for a car loan:
• Loan contracts with add-ons. Steer clear of any loan that’s contingent on purchasing extended warranties, insurance, or other after-market services. This is a red flag that you’re dealing with a sub-prime lender and are about to pay too much for your loan.
• The “yo-yo” sale. Some car dealers offer loans and let the customer sign and drive away with the car without finalizing the terms of the loan. The buyer then finds out days or even weeks later that the terms of their loan have changed. They may be required to bring in more money for the down payment, their interest rate may be higher, or the payments larger. Be sure the terms on the loan are final before signing the document and taking the car. This practice sounds far-fetched, but it happens to about 4.5% of all buyers – and 11% of all buyers with bad credit.
Author: Mike Clover
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