low car loan rates

Cars & Credit: How Your Credit Impacts Car-Buying

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Purchasing a car can help boost your credit score if you consistently make on-time impact of credit on car buying speedometer type image showing scredit scorespayments. On the other hand, you need fair or better credit to qualify for a car loan.

How can you get the loan you need, then, if your credit is not ideal?

It helps to understand just how important credit is to obtain a car loan and what steps you can take to increase your ability to do so.

Factors Impacting Your Ability To Buy A Car

If you wish to buy a vehicle using a loan, you need to prove to the lender that you are a good credit risk.

In every situation, the lender needs to weigh just how much risk a borrower is based on how likely they are to repay the debt in full. Borrowers who are a very high risk may not qualify for the loan. On the other hand, borrowers that are a lower risk may qualify for a lower interest rate.

When vehicle lenders consider you for an auto loan, they are thinking about the following:

  • What do you want to buy – is it worth how much you want to pay for it?
  • Do you have previous borrowing experience that shows you are a reliable borrower?
  • Do you have the financial means to repay your debt on a monthly basis along with any other debt you have?

It is up to you, then, to show lenders your goals are achievable. Even if you have never obtained a vehicle loan in the past, working with a credit union or other lender is possible if you can show you are a good risk.

Type of vehicle

First, consider the vehicle itself. How does the vehicle play a role in whether or not a lender will give you a loan?

Car loans are secured loans in most cases. If you stop making payments on the loan, the lender will force the sale or repossession of the car. This offers the lender a bit of a safety net. They can sell the car to recoup at least some of the cost of the loan.

For this reason, car loans tend to be a bit easier to qualify for than an unsecured loan, such as a personal loan.

The lender must learn about the actual value of the car. They use a number of tools to determine this including an appraisal of the vehicle. It does not matter what the dealership wants you to pay for the car. The vehicle must be worth that much from a third-party appraisal service.

If the vehicle is worth the amount you wish to buy it for, the lender may approve the loan for you.

Credit history

The next step is determining if you qualify for a car loan based on your previous borrowing history.

The best way for a lender to know this is to pull a copy of your credit history. This includes all of the accounts you have had in the past. It covers previous car loans, credit cards, any judgments against you, and mortgages. Most lenders use a credit score to determine your qualifications. A score is simply a mathematical representation of your borrowing history.

Poor or no credit history?

Some people have no credit history. Others have a poor record of making payments on time.

If you find that your credit score is limiting your chances of obtaining a loan, there are several things you can do…

  • Make on-time payments on all current debts. Doing this for several months increases your dependability. Avoid being late on payments.
  • If you have no credit history, consider a secured credit card or a low-fee credit card. Most credit unions and credit card companies offer these to those who have employment.
  • Consider paying down some of your debt. The lower your debt to credit limit ratio, the better.
  • Don’t apply for too many credit cards or loans in a short period of time. Aim for no more than one or two every few months to a year.
  • Get a co-signer for your loan. A person who has a good credit score can help you qualify for a loan. And, in the long term, this can boost your credit score as well.

Gradually work on improving your credit score over time. When you do so, you eliminate the lender’s concerns that your past borrowing habits will translate into a new loan.

Employment status

Finally, a lender needs to know you have the income necessary to make payments on the vehicle. Even if your credit is fantastic, if you do not have a way to prove to the lender that you have income, then the lender is unlikely to offer you a loan.

More specifically, the lender is looking at your debt to income ratio. How many expenses do you have compared to how much income you have coming in? The lower this total, the more likely you are to have the cash on hand to make payments.

If you do not have steady employment, you may wish to work on this as a first step. Be sure you can prove to your lender that your employment is reliable, too. Paycheck stubs can assist in showing steady employment.

The Role Credit Plays In Car Buying

Each one of these factors plays a role in your ability to obtain a new car loan.

Other factors can do so as well. The interest rate, whether or not you have a down payment, and even if you are buying a new or used car can impact the lender’s decision. Yet, beyond anything else, it comes down to your ability to make payments on a timely basis.

If you are unsure whether you qualify for a car loan, work with your local credit union. They know you and are more likely to lend to you than traditional banks. These loans may even be more affordable than those obtained from other sources.

Learn more about auto loans at Destinations Credit Union.

New Cars Vs. Used Cars

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Q: I need a new set of wheels and I’m wondering if it’s better to spring for a new vehicle

Two women looking at car

or to go the cheaper route and buy a used vehicle. What do I need to know about each kind of purchase?

A: Any decision surrounding a purchase as large as a car needs to be made with careful research and consideration. There are pros and cons on both sides of the fence here. Your final decision, though, will depend on your budget, personal preferences and particular needs.

To make your job a little easier, we’ve outlined the pros and cons of each purchase type below.

Pros of new cars

  • Status symbol. The strongest allure of owning a new vehicle is obviously its attractiveness. You don’t hear many people bragging about their just-purchased used car or posting pictures of it all over their social media pages.
  • Fewer repairs. With a new vehicle, you can assume you won’t be dealing with major repairs or maintenance issues for a while.
  • Easier shopping. When everything is completely new, there’s no need to drag your prospective new car to the mechanic. It’s also easier to determine a fair price for the car.
  • More financing options. If you’re considering a new car, you’ll be offered attractive incentives like cash rebates from the carmaker and better interest rates from the lender.
  • Improved technology. Cars are getting more updates, and recent models have incredibly convenient technology, such as programmable settings, autonomous emergency braking, adaptive cruise control, blind spot monitoring, built-in Wi-Fi hotspots or lane-departure warnings.
  • Automaker’s guarantee. All new cars come with warranty coverage for their first three years or 36,000 miles, whichever comes first.

Cons of new cars

  • Price. Of course, a new car is going to be more expensive. But it’s not just the price that puts you at a disadvantage – it’s the fact that you can get a perfectly comparable vehicle for much less.
  • Depreciation. New cars go down in value as soon as they leave the lot. In fact, a new car can lose 20% of its value once it’s owned. At the end of the first year of ownership, your new car can drop another 10% thanks to the mileage you’ve clocked and the wear and tear. You’ll feel this loss if you try to sell your car a few years down the line.
  • Higher premiums. Insurance companies charge more for newer vehicles. You’re also more likely to want the maximum coverage and protection when every dent in your new car is enough to bring you to tears.

Pros of used cars

  • Price tag. Let’s be honest here: No one would think of buying a used car if it weren’t for the savings. And those savings can be enormous! Consider this: according to the National Automobile Dealers Association (NADA), the average American own 13 cars in their lifetime. A typical new car costs $30,000. If each car that a person owns throughout their life is just 3 years old and costs $20,000, the driver can save $130,000 on car costs throughout their life!
  • Less depreciation. The savings on a used car don’t end at the dealer’s lot. With the previous owner absorbing the initial depreciation on the car during its first few years of ownership, your vehicle will only experience a minimal drop in price. You can save yourself thousands of dollars in loss if you want to sell your car a few years down the line.
  • Lower insurance premiums. With your car weighing in at a lower value, your monthly insurance premiums will be more manageable. You can also opt out of full protection when your car isn’t a new model anyway.
  • Lower interest. If you choose to finance a used car instead of a new one, you’ll likely have a higher interest rate. However, since the loan amount is lower, you’ll save in total interest payments over the life of the loan.
  • Predictability. When purchasing a just-released car, you never know what issues might crop up in the future. But, when you’re buying a model that’s been around for a few years, you’ll have a wealth of research and ratings available on your car so you’ll know what to expect.

Cons of used cars

  • Complicated purchase. You won’t be able to walk into a lot and walk out with your new car an hour later. With a used vehicle, you’ll want to get a vehicle history report, ask to see the vehicle’s service records and bring it to a mechanic for a professional inspection.
  • Fewer choices. When buying pre-owned, you don’t get to be picky about things like colors, upgrades and features. If you find something in your price range that meets most of your specifications, you grab it!
  • Risk. Even if you do your homework well, you still run the risk of walking out with a lemon when you buy a used car.

It’s a multi-faceted decision, but by carefully weighing your options and personal preferences, you’ll drive off of the dealer’s lot with a real winner!

Whether you choose to go new or previously-owned, don’t forget to call, click, or stop by Destinations Credit Union to hear all about our auto loans. Not only do we offer one of the best car loan rates in the Baltimore area, between now and November 21, 2018 you can win prizes worth up to $200 in our CARnival of Savings event!

Your Turn: Did you buy your car new or pre-owned? Are you happy with your decision? Tell us all about it in the comments below.

SOURCES:
https://www.nerdwallet.com/blog/loans/compare-costs-buying-new-car-vs-used/
https://www.autotrader.com/car-shopping/4-questions-help-you-decide-new-or-used-car-167808
https://cars.usnews.com/cars-trucks/new-cars-vs-used-cars
https://www.iwillteachyoutoberich.com/blog/cost-vs-value-should-you-buy-a-new-or-used-car/