It is common for consumers to spend months researching and saving for new vehicles. But many auto buyers do not put the same amount of effort into finding auto loans. That’s unfortunate, as Consumer Reports notes that those who do not have financing arranged before visiting a dealership may not get the best loan terms.
Prior to buying a vehicle, drivers should give consideration to how they appear in the eyes of creditors. Few if any people pay for cars or trucks in full at the time of purchase. As a result, it’s key for buyers to make themselves as attractive as possible in lenders’ eyes.
Improving credit score
Lenders use consumers’ credit scores to determine how likely they will be to honor the terms of a potential loan. Consumers’ FICO scores are the type of credit score most often used to make lending decisions. FICO scores range between 300 and 850. The higher the score, the lower the risk to lenders. However, lenders do not necessarily use the same formula to assess risk.
The first step potential borrowers should take is figuring out what their credit score is, and what information is on their credit report. For those who haven’t done so already, they can request a free copy of their credit reports from the three major credit monitoring bureaus.
Once credit reports are obtained, consumers can work to correct any mistakes or inconsistencies. Some of these may be simple fixes, while others may take some effort. A 2012 study from the Federal Trade Commission found that one in five consumers had an error on at least one of their credit reports.
Consumers also can improve their credit scores by doing the following:
Make payments on time, as payment history can have the greatest effect on a bad credit score, according to Credit.com.
Reduce debt by paying off balances on credit cards or other loans.
Obtain a mix of different credit sources, such as those in the form of credit cards, furniture financing, home ownership, and auto loans. This, too, can raise credit scores and make borrowers appear less risky.
Keep old credit accounts open, as they establish a strong credit history. Try not to open too many new accounts in a short period of time.
Those with strong credit have more wiggle room in terms of loan negotiation. A person with a high FICO score may be eligible for better terms, including a low interest rate.
Consumers should consider the length of the loan and how much they can afford before signing any paperwork. Lengthy loans will cost buyers much more in the long run when factoring in interest payments. Still, Edmunds reports that, over the last 10 years, the length of the average car loan has risen above 68 months. Financial experts advise that buyers avoid relying on lengthier loans simply to buy more car than they can afford.
Consider large lenders when shopping for auto loans. Such lenders may have better rates than going through dealerships directly. Other lenders include credit unions, local banks and finance companies.
Borrowers with strong credit will be attractive to lenders and will have more loan options at their disposal.