Buying a car can be a traumatic experience for you, for your wallet and even your credit. The moves you make when purchasing a car -- and in some cases, before purchasing a car -- can impact your credit score in ways you had not predicted.
Applying for Financing
When you approach a seller about financing, he will perform a credit check. Repeated credit checks will show up on your credit report and generally will have a negative impact. However, with researching financing options, there is a catch.
If you contact multiple sellers about financing options and they all run credit checks, your credit report will only reflect one inquiry if all of the checks are run within a 30-day period and you commit to a financing agreement. This enables you to shop around to find the best options available. If you do not commit to an agreement, then your report will list every inquiry made and score you accordingly.
How Credit Scores Affect Loan Rates
Your credit score is determined by your past payment history and your current levels of debt. Your credit score will be high if you have missed payments, a high debt load or previous serious filings such as a repossession or foreclosure. Check with a credit agency to see what your current credit score is.
You are allowed to get a free report once a year directly from these three companies. Once you have these reports, you can make an initial determination of whether you will be able to get auto financing at a decent rate or need to take steps to repair your credit before seeking such financing.
Financing versus Leasing
Depending on your credit score, you may need to consider purchasing a used vehicle for a reduced amount, even with cash saved to avoid financing altogether. An outright purchase will not affect your credit score. Your credit score may limit the amount that a seller is willing to lend to you. If this is the case, you may also want to consider leasing options on a vehicle purchase.
Generally, a lease payment is less than a payment amount for purchase, and runs for three years compared to five or even six years of a purchase agreement. Furthermore, after three years, you have the option of sticking with that vehicle -- and possibly converting to a purchase, if desired -- or starting a new lease. It allows you to re-evaluate in the future if you believe your situation will significantly change.
Debt/Income Changes
The other key factor in your credit report, aside from payment history, is the evaluation of your debt-to-income ratio. The debt-to-income ratio measures the amount of debt you currently carry against your annual income. If this amount is too high, you may not be able to get the financing terms you hope for when purchasing a vehicle. Most dealers will look to see if this number is above 40 percent. If it is, it may indicate you would have trouble making payments and might scare sellers away from offering you any type of financing option.
0 comments:
Post a Comment