So you find yourself needing a new car, or at least one that is new to you. Whether you’ve saved cash or not, you are going to need to finance the purchase. You have done a little homework and know that your less-than-awesome credit rating is going to have negative effects. A higher interest rate is expected. But when buying a car, the cost of your bad credit could show up in other places too.
Your credit history determines what interest rate you can expect to pay. You may already know what your FICA score is. You can also obtain your credit report online through Transunion or Experian.com. Knowing your credit score will help you determine if you need to improve your score before trying to get financing. Look for mistakes in the different reports, and set out to correct any reporting errors immediately. Also, assure that there are no late payments within the past six months before looking for financing.
Even if you have taken all the steps to minimize the effects of credit, there are other things to consider.
The Unscrupulous Dealer
Dealer financing, where the dealership finds financing for you, can be a convenience to you, the car buyer. But be aware that this reduces a dealer’s accountability when it’s just you and them. A dealer may outright lie about your credit score. If you are unaware of what your score is you may end up paying a significantly higher interest rate. Even a 1% rate increase makes for a marked change in your monthly payment.
Adding extended warranties and after-market accessories, it is another way the dealer adds easy profit to the sale.
The dealer may say the financing company requires that warranty extension, garnering profits for the dealership. They may say you need to have a co-signer, and without your knowledge, place that co-signer in the position of the primary debtor. This won’t help you rebuild your credit, not to mention make you co-signer the first person they’ll come after if you don’t make the payments. Knowing your credit rating ahead of time could prevent the shady dealer from taking advantage of your ignorance.
Another threat to be aware of is that posed by the “add-ons” that the dealer may sell you; things like that extended warranty or underbody rust preventive. It’s not the add-ons themselves that pose the threat, it’s the fact that these things are in the financing. Unless the add-on product is absolutely necessary, it is not in the best interest of the buyer with poor credit to pay the high-interest rate on products that you can buy outright at a later time.
Use caution when trading in a car for which you are still making payments. The danger lies in the dealer not paying off that previous loan promptly. You may be left holding the bag for a payment that you thought the dealer would pay through your new loan. It is best to get it in writing that the dealer will pay off your old loan within an appropriate time frame.
Finally, it is important to know that it hurts your credit score to apply repeatedly for credit, particularly when being denied. This will further lower your score. Avoid this possibility by going to a multi-source lender, one who can shop around and find a source who will work with you and get you the best rate. But be aware, every time they apply to one of their sources, that’s yet another inquiry, and a further lowering of your score.