Check Your Credit Score First Before Buying A Car
By Aaron Crowe
In the car buying world, impatience can be expensive.
Even after researching trade-in value and finding the most reliable car you can afford, you don’t want to rush into the finance manager’s office at the auto dealership and tell them to do whatever it takes to get you in the new car.
You’re probably exhausted from dealing with the car salesman, but don’t give up yet. If you’re not willing to spend a little more time checking your credit score before you go to the dealership, your impatience could cost you a few thousand dollars.
If you’re going to finance through the dealer, first check your credit score to make sure it doesn’t have any problems and to ensure it’s accurate. The Federal Trade Commission released a study in February that one in four consumers found errors on one of their three major credit reports that could lead to them paying more for products such as auto loans.
Don’t think that the dealer is doing you a favor by providing you a loan. With a credit score in hand, you can be in a stronger position to get a better interest rate, as personal finance blogger Glen Craig learned when he checked his credit score before shopping for a new car many years ago.
The finance manager offered Craig a 6.5% interest rate, a few points higher than the rate he had already gotten from an outside bank. Craig told him to take another look at his credit score and told him about the rate he had from the bank, and the manager beat that loan with a 3.5% interest rate on a three-year loan. He saved about $500.
“Even though I had gone through everything I could to negotiate the price of the car down I still would have lost out if I didn’t already have my credit score checked,” Craig says. “Once you sit in the finance manager’s office it’s a whole new ballgame.”
To get a low advertised rate from a dealer, having a preferred score and knowing what it is can be helpful, he says.
While a credit score is a key factor, it isn’t the only factor when evaluating an auto finance application, says Jacquelyn Johnson, a communications manager at Ally Financial, which provides auto financing services.
Ally Financial also looks at factors such as credit history, income, terms of the proposed transaction, and if the consumer has the ability to manager the proposed monthly payments, Johnson says. Its customers can apply for financing online before going to the dealership.
Auto loans are the third largest source of debt after mortgages and student loans, with approximately $783 billion in outstanding auto loan debt in 2012.
Though auto dealers don’t provide the financing for loans they help consumers set up, they have a financial interest in the loans and get a cut from the loan provider. The Consumer Financial Protection Bureau issued a warning in March about auto dealers making deals for higher loans to minorities, with the auto dealers getting higher revenue for loans with higher interest rates.
Good credit scores are needed more now than before the 2008 recession to get good loan rates, says Eric Counts of CreditNerds.com. Before 2008, “sub-prime” credit users with credit scores of less than 620 had approval rates of 60%, Counts says. Today, those sub-prime application approvals are down to 9%, a rise after falling to a low of 6% in 2009.
A loan for $25,000 can have major differences at different interest rates. A sub-prime borrower approved at 10% interest for 60 months would pay $531 per month and $6,870 in interest, according to Counts’ figures.
Someone approved for a first-tier prime rate of 1.9% for the same loan terms would pay $437 a month and $1,226 in interest. That’s a savings of $5,664 in interest and nearly $100 less per monthly payment.
Besides possibly having a wrong credit score, the dealer or bank could see a different score than what you see. They may be looking at a score from a different credit score agency, or their scores may be customized to help them predict how likely the borrower is to pay the loan on time.
There are plenty of imposter websites that the FTC warns against using, and only annualcreditreport.com is authorized to provide free annual credit reports that consumers are entitled to under the law.
Each of the nationwide credit reporting companies — Equifax, Experian and TransUnion — are required by federal law to provide a free copy of a credit report by request once every 12 months.
Aaron Crowe is a reporter who specializes in personal finance topics and covers the auto industry for CheapCarInsurance.net.