Auto Loans

The First Thing to Do Before Buying a Car

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The First Thing to do Before Buying a CarA year and a half ago, I bought my first brand-new car. Until then, I’d always bought used. But thanks to the recession, people were holding on to their cars longer and prices for used cars in good shape with low mileage had risen. As a result, buying new made more sense.

While I find auto shopping completely stressful, I am luckily married to someone who loves the hunt and doesn’t mind spending hours researching vehicles. But I wasn’t about to let him loose without clear parameters.

[Buying A Car? Know Your Credit Score Before You Apply for an Auto Loan]

So before I headed out to start my car-buying experience, I had a slew of options for my first step:

Although I did all of those things, the very first thing I did was to check my credit scores to make sure there were no problems with my credit. I needed to finance my new car and I knew that getting a good interest rate would be just as important as negotiating a good deal on the vehicle I chose.

Whether you’re buying a new or used car, as long as you plan to finance it, you’ll want to make sure you don’t overlook this crucial step in the car-buying process. And I am not just saying that as a credit expert. Car-buying expert Phil Reed, who has bought at least one car every two months for most of the 12+ years he has worked at Edmunds.com, warned in a recent interview that prospective buyers who don’t take this extra step may pay far more for a car loan than they need to:

So what happens is they go directly to the dealership without checking their credit scores — which is not a good thing to do — and their attitude is “get me done.” In fact, that’s sort of a slogan that some car salespeople use; this (customer’s attitude) was just “get me done.” And that means that the borrower almost feels that the dealer is doing them a favor by giving them a loan. If they had taken time to check their credit, they might have found that they were in a stronger position. However, what happens is the dealership will go ahead and possibly offer them a loan that’s 2% to 5% higher than it could be… But even two percentage points on a $25,000 loan is going to mean nearly $1,000 to $2,000 more over the term of the loan.

The Consumer Financial Protection Bureau is also concerned that some buyers are steered into more expensive auto loans. It recently announced that it will be clamping down on potentially “unlawful discriminatory pricing” in auto loans. Its focus is “dealer markups” — where dealers charge more than the rate the lender is offering in order to make more money — which they say can add significantly to the cost of a loan.

[Related Article: Can You Really Get Your Credit Score for Free?]

When it comes to car loans, we’re talking big bucks: the CFPB says that there was approximately $783 billion in outstanding auto loan debt in 2012 and that auto loans are the third largest source of debt after mortgages and student loans.

Why Does the Dealer’s Score Look Different?

If you do check your credit scores before you start shopping for auto financing, you will probably find that the number the dealer or financial institution sees is different than the number you see. That doesn’t mean your free credit score is wrong. It’s different because there are many credit scores out there, and the credit scores used by the auto industry are usually customized to help them predict how likely the borrower is to pay that type of loan on time.

So when you do check your credit scores, be sure to focus on where you fall in comparison to other consumers, and what areas of your credit are strong — and what might need some work. For example, if you get your free Credit Report Card from Credit.com and earn an “A” in all the factors that make up your credit score, you know you should likely be getting a great rate on your auto loan. But even if some areas rate a “B” or “C” you may still be able to snag a good deal.

Once you know where your credit stands, you can shop for an auto loan before you set foot in a dealership. When you find the car or truck you have to buy, you can take the financing you have already lined up, or let the dealer make you a better offer. Either way you can enjoy your new vehicle knowing that, at least as far as financing goes, you got the best deal possible.

[Featured Products: Research and compare loans at Credit.com]

Image: Phillip Stewart

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  • Andrew Forge

    Most people when checking their personal credit score receive their FICO score which is not used by dealerships and banks for purchasing a vehicle. An auto finance score is used in the car buying process and that score is based of different variables from your credit profile/history, hence the difference between what you found vice the dealer when they pull your credit score. Please note that your auto finance credit score may also vary between the 3 major credit reporting agencies (Equifax, TransUnion, and Experian). Each again uses their own set of parameters to determine your auto finance score from your credit history. Ideally, the dealer and banks would like to see your score at 720 or above to enable them to secure the note. Just like the mortgage industry, many banks who wrote auto loans got caught with their pants down from authorizing loans to people with marginal credit only to see these vehicles come back to the bank once people began to miss their payments from losing their jobs in this latest economic downturn. Banks got burned since they often wrote these notes with no money down (sound familiar) and with cars being depreciating assets often found themselves owning a vehicle for thousands less than what they owned it for when taking these cars to auction. This is why banks have gotten so much tougher in their lending practices for auto loans over the past several years. My best advice to people wanting a car loan would be to go to your lending institution (bank or credit union) and secure your own draft and know how much car you can afford before kicking tires.

    • Credit.com

      One correction here — many car dealerships do in fact use the FICO score, but it’s the auto industry option model. One of the key differences in an auto industry option score is that it focuses more emphasis on previous auto loan information. Auto lenders will pull your credit report and score from one of the three credit bureaus, but which one they use will depend on the dealership and their in-house financing policies. If you do go through a dealership for financing, ask the dealership up front which credit bureau they use. That way, even though you cannot purchase your FICO auto industry option score, you will at least know which credit report will be used to determine the score. As Andrew states – going directly to your bank, or better — a credit union, will most likely get you a better rate than through a dealership. However, with the dedup logic built into credit scoring models, you can shop around to as many different lenders as you like as long (as it’s done within a 14 day window) and all of the inquiries will only count as one. So shop around for the best deal, most definitely.

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  • Trunder2

    Buy cash

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