Buying on Credit: The Borrower's Guide

Is your head spinning? Are you confused about credit and auto loans? People have been buying on credit for hundreds of years, starting locally at the General Store, but it wasn’t until 1950 when the first universal credit card was created that credit and lending in general really got messy. Back in the “old” days, credit was only done locally; there weren’t all these fancy terms or annual percentage rate (APR) tacked onto what you owe. Now, we have to worry about all of that, and more. Credit can be tricky, but tends to be a safer move financially than paying cash when buying a vehicle. Most people just can’t afford to fork out $5,000 or more in one go which is why financing is there. What exactly does it take to get financed, though? Are there tricks to make sure you don’t end up paying more than you can afford, or worse, more than what the vehicle is actually worth? Of course there are, and luckily, most of what financing requires, you control. Buying a car through financing has many factors such as your credit score, your monthly budget, and the total price of the vehicle before down payment.

  • Credit Score: Your Risk Factor

One of the biggest mistakes people make when buying a car is walking into the dealership office or their bank just as blind about their credit score as the people they are asking to give them money. You wouldn’t eat a piece of gum off the street  or hand your child to a stranger, so why wouldn’t you be informed when making a huge financial decision? Check your credit score and know where you stand on the scale. Once a year, you can request a free credit report that includes reports from Equifax, Experian, and Transunion, the three top credit reporting agencies, so there really isn’t an excuse not to check. This report is what finance companies use to determine if they want to lend to you in the first place, and if they do, how much APR they plan to charge you on top of what they are already agreeing to lend you. A person with a credit score of 800 might get an APR of 3-8% yearly and have the option of fixed rate financing (the APR doesn’t change each year) whereas someone with a score of 500 might get an APR of 21% and be stuck with variable rate financing (the APR can change at any given point during payment).  Each place could charge you a different APR or allow you to borrow more money than the title loan shop down the street. Do keep in mind, however, that your credit score is a reflection of your payment history and what you can afford, so if your score is low, you appear to be more of a risk to financing companies causing you to have a higher APR with longer terms. Shop around, know what you’re worth and how much you can afford.

  • Monthly Budget: What You Can Afford

Before you even think of buying a car from the dealer, you need to have a good idea of the monthly payments you can afford. Take a few minutes and write down all of your current bills, figure up how much you make each month, and subtract your bills from your total income. The table below can be a handy tool to help you figure out just how much you can afford.

 

Monthly Pay (after taxes)

$

$

Savings

+$

+$

Other Income (child support/side job/hobby/etc)

+$

+$

Total

$

$

Monthly Expenses

 
 

Rent/Mortgage

-$

-$

Utilities

-$

-$

Groceries

-$

-$

Transportation (Gas/Vehicle Servicing)

-$

-$

Insurance (Home/Auto/Life)

-$

-$

Taxes (if applicable)

-$

-$

Clothing

-$

-$

Personal

-$

-$

Entertainment and Extracurriculars

-$

-$

Education

-$

-$

Credit Card Payment(s)

-$

-$

Vehicle Payment(s)

-$

-$

Medical Bills (if applicable)

-$

-$

Day Care (if applicable)

-$

-$

Total after subtracted expenses

$

$

 

Once you figure out how much extra you have each month, be sure to stay as far below the total as you can when searching for a possible loan. You don’t want to have $400 extra each month and be paying all $400 every month for your new loan. If something were to come up, like you needing a new set of tires or even just an oil change, you might not have the money to cover the extra expenses. Be careful not to place yourself in a bind, since making your payments on time every month increases your credit score, making you look better on paper to the finance companies.

  • Total Price: Everything Included

We’ve covered what your credit score is and how it affects your loan terms as well as how to figure out how much you can afford to pay on a car note each month, but what about the price of the car? Of course, there’s the price of the car itself, but that’s not all you have to worry about. When you buy a vehicle from a dealer, no matter if it’s cash or financed, you have to pay taxes, and other fees. This does help you out slightly, since you’re paying these fees upfront at a dealership, but would pay them when purchasing the tag if buying from an individual. These taxes and fees are typically paid when the purchase of the vehicle is made using your down payment. If your loan is for $10,000, and you have $2,000 as a down payment, it does not mean you can afford a $12,000 vehicle. You take the negotiated price of the vehicle, add in the taxes and fees,and subtract the down payment which gives you the total amount you need financed. Once you have the total amount you need financed, you add in the finance charge, if applicable. That number is what will be affected by the APR. You could have the same APR and finance charge quoted to you from two different companies, but one has a 3 year term and the other, a 5 year. While the 5 year may have lower monthly payments, you still end up paying more over time than you would if you went with the 3 year. Why? The APR (annual percentage rate) is addedannually which can cause you to pay more than what the car is actually worth, making it difficult to upgrade to a newer vehicle later. Remember, the goal is to improve your credit, stay within your budget, and not over pay for your new to you vehicle.

Of course, you could always just go to the first loan office or dealership you come across, but it’s always better to shop around and to be well informed. Knowing your credit score lets you know how big of a risk you appear to financing companies and lets you know where you’re starting from. Your monthly budget keeps you from making your credit score any worse, and helps you to know what you can afford. The overall price of the car lets you know what the monthly payments might be as well as about how much you’ll be paying in total for your new to you car. All of these factors are expressly important when financing a car. Don’t just walk into your bank or a dealership office blind, know your worth and be aware of just how much car you’re buying. With this information in hand, you’ll be ready to negotiate a deal that will make everyone happy, especially you.

 

Source by Lauren Eddins

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