By Ali Koomen, who spent over a dozen years in the car dealership busines, provides her expert insights
So what is good credit? Most lenders consider a Fair Isaac Score of 700 or better as good, but some of the too-good-to-be-true finance offers (no payments for 6 months, 2.9% financing, etc) require scores of even 720 and higher. A buyer with a 700+ should be able to get very competitive rates, but don’t assume that the buyer will automatically qualify for the best rate. The higher the percentage the F&I (the Finance & Insurance dept at a car dealership) manager can sell the loan for, the more money he makes. So he may get the loan bought at 8%, yet tell the buyer it is 9%. To avoid this trick, check with a preferred lender first to see the loan amount and percentage rate qualified for. If the interest rate offered is a mere half-percent less than what the dealer offers, it will still save a little over $200 over the life of the loan (assuming a 60 month loan on $15,000.)
Buyers with fair credit (in the 600’s) are often made to feel like the dealership’s F&I department is doing a marvelous favor by finding a lender. These buyers will often sign on the dotted line without doing the research. It makes no sense to fight furiously for the very best price on a new vehicle, then glibly accept what the finance department says is ‘the best finance rate, considering your credit score.’
The local credit union usually offers very competitive rates compared to the regular banks, and will often extend loans to its members that couldn’t get done at a conventional lender.
Buyers with poor credit (under 600) are not in a position to shop around for a loan, and the finance manager knows this. Paying a higher interest rate is a given, but signing a loan with rates bordering on usury is not. Walk away from a loan that isn’t fair. It’s far easier to continue to ride the bus than it is to pay an interest rate that will have the car upside down the entire life of the loan.
Try not to fall victim to the buy-here-pay-here lots. Buy-here-pay-here is really a misnomer, because the loan is not through the dealer but through a sub-prime lender. BHPH lots generally require payments every other week, which means a buyer will make the equivalent of thirteen car payments in a year, instead of the standard twelve. The vehicles in inventory at BHPH lots tend to be higher mileage and rougher-around-the-edges. Most BHPH lots do not have service technicians, so once the car is detailed, it’s thrown onto the lot and good luck to the buyer.
First-time buyers (no credit) might actually consider a new car. The big lenders (GMAC, FMC, etc) often give incentives to first time buyers, especially to recent college grads. The interest rate is better than most other lenders, and if the car breaks down, it’s under warranty-no unexpected repair bills!
While a buyer’s credit score determines the interest rate and terms offered on a loan, the most important thing for any person attempting to buy a car is that the dealership and the lender need you to remain in business.
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