Are you looking at cars and credit options? Indeed, millions of Americans buy cars each year, and the vast majority use credit to seal the deal. In this article, we’ll cover the best ways to ensure you get the best deal. To be sure, consumers will usually get the best deal on a car or SUV when not using credit, but it’s just not realistic in all situations.
When buying a new or used car with credit, consumers choose between leasing and financing. To be sure, each has its pros and cons. Also, questions around the borrowers’ ability to pay will become front and center. For example, income, downpayment, trade-in equity, and credit scores will all play a factor in the approval process.
Getting Organized to Buy a Car Using Credit
Consumers looking to lease or finance a car first need to get organized to get the best deal. Getting organized means borrowers knowing what’s on one’s credit report, having all the right documentation and equity (i.e., downpayment) to complete the deal. While it’s true that borrowers who lack in one area aren’t necessarily automatically declined, being organized will almost always result in a better deal.
Start With A Copy of The Credit Report
Before consumers go shopping for a new or used car, those who will use credit to buy a vehicle should have their credit score and report in hand. Consumers armed with the credit score and report will have the upper hand in getting the best financing deal.
Americans looking to buy a car on credit with a FICO score in the 700’s will be in good shape. And if the credit score falls in the 800’s, well, they are all but guaranteed to get the best possible terms.
Consumers willing to fork over a few dollars can benefit from getting their FICO auto score. The FICO auto score puts more weight on previous payments of your car loans. If you’re looking to check your credit, consider that most lenders will use auto-specific credit scores anyway, so it might be a good investment.
Car loan rates vs. Credit Scores
Naturally, someone with a higher credit score will get seen as a lower credit risk to the lender. For that reason, having an excellent credit score will save the borrower thousands in interest dollars.
According to Cars Direct (as of 3/3/2021), 36-month (new) auto loans are averaging 3.24%. However, borrowers must remember that these rates are for the super prime (best-qualified) buyers. That means high credit scores, reliable income, and perhaps even assets.
On the other hand, borrowers who have FICO scores in the low 600’s can expect to pay over 7%. Finally, subprime borrowers (i.e., discharged after bankruptcy or other delinquencies) with a score in the 500’s will pay around 11% for a new car and over 17% for a used automobile!
Let’s say a super-prime borrower (FICO score over 781) gets a $30,000 new car loan for 60 months at 3.24%. The monthly payment will be $542.27/mo and includes $2,535.97 in interest payments over the loan’s life. Further, these borrowers will get preferable loan options than others.
However, if that same borrower has a FICO score between 501-600, they could end up needing a cosigner and owe $9,136.36 in interest for the same loan over the same period. In other words, if the borrower could raise their credit score, they could save $6,600.39 over the loan’s life!
Improve Your Credit Score
Credit scores generally fall between 500 and 850. A score in the 600’s doesn’t mean an automatic decline. However, it does mean borrowers will pay more when buying cars on credit.
65% of the credit score gets calculated from payment history and utilization. Naturally, borrowers looking to improve their credit score will get their best bang for their buck by focusing first on those two factors.
Payment History (35% Of The Credit Score)
Payment history refers to how often the borrower pays their bills on time. Interestingly, one payment that’s 30 days+ late will crater the borrowers’ credit report. Indeed, years of excellent payment history can get wiped away with one overlooked payment. As a result, it’s essential to pay all the bills on time.
Unfortunately, there’s no shortcut to improving payment history. It takes time and patience.
Utilization (30% Of the Credit Score)
Credit utilization refers to the % of combined balances utilized. For example, if someone has a combined credit limit of $10,000 and has a $6,000 balance, their utilization is 60%.
Borrowers can lower their utilization in two ways. First, the most obvious way to reduce credit utilization is to pay down debt. The more debt that’s paid down, the lower the utilization. However, an even faster way to lower credit utilization is to request limit increases.
Considering the above example, the person with a $6,000 balance on a credit card with a $10,000 limit has a 60% utilization ratio. However, if the same borrower calls their credit card company to increase the limit to $20,000, the utilization instantly drops to a more acceptable 30%.
Related read: How to Improve Your Credit Score
Grab a Copy of Your Tax Returns
While not always necessary, borrowers who are organized and have two years of tax returns will benefit if the lender asks. Also, in my experience, having tax returns on hand and knowing what’s on them gives me the upper hand when negotiating rates.
Get a Better Rate With Your Bank Or Credit Union
Borrowers considering buying a car on credit need to remember that dealerships cannot give you a better deal than the banks or credit unions. While it might seem like the dealer can beat the banks’ rate, in the end, someone is getting a rebate. And the buyer gets the short end of the stick, disguised as a deal.
For example, a car dealer might be offering dealer financing of 0% for 60 months on a new car. Sounds great, right? Well, someone is trading the rebate for the interest costs. More than likely, it’s the manufacturer who is rebating the car’s cost. In the case of used cars, a used car dealer might apply a rebate toward the bank’s interest rate, thereby lowering the overall APY. Looks good to the buyer, but, in the end, it’s all the same old tune.
The best deals on cars, new or used, are generally based on “cash” deals, where the borrower brings with their own prearranged financing. And any rebate that would have got applied to the loan would now get applied to the sticker price.
Related read: Personal Finance Tips
How Much Can I afford?
Consumers looking for cars and credit options would generally benefit from a payment not exceeding 10% of their take-home pay. Considering the above example, a borrower who buys a car with a $542.27 should have at least $5422.70 in after-tax monthly income. This way, the payment should not become a burden.
Related read: How To Save $5000 This Year
Borrowers often find that personal loans are the most straightforward loans to get approved. With a personal loan, the car buyer negotiates a term (i.e., 60 months) at a specific interest rate (i.e., 4% fixed rate) and pays a set amount to the lender each month until the loan gets paid in full. Personal loans are ideal for those who want a structured loan, and today, most can apply online.
Related read: How to Pay Off Debt Fast
Line of Credit
A credit line can be an excellent way to borrow money because borrowers can readvance the funds when the loan gets paid again and again. And those borrowers with good credit scores will benefit from low-interest rates. Credit lines often come with variable interest rates and interest-only payment options.
Related read: 10 Ways to Build Credit Without a Credit Card
Credit card balance transfers can offer a quick source of cheap cash. With a balance transfer, the borrower gets a promotional rate from the credit card company (usually 0-3% APY) plus a fee ranging from 0-5%. The best credit card balance transfer I could find (March 2021) is from Wings Financial. Their Wings Visa Platinum card comes with a 0% APY and a $0 fee balance transfer for 12 months. That’s genuinely a free loan!
Those who can take advantage of the balance transfer have to plan what to do at the end of the promotional period as the interest rate will reset back to normal. At that point, borrowers can refinance into a car loan, line of credit, or pay it off in cash.
Getting the Best Deal Buying and Selling Cars
Consumers looking to buy, sell, and trade in cars have many options. Some consumers appreciate a DIY approach, while others prefer a concierge-like service. In the end, getting the best deal on a car depends on how much work the buyer or seller wants to put into the project.
Buying From the Dealer
Consumers looking to buy a new car almost always have to buy direct from the dealer. And often, there are incentives for doing so.
Buying a car from the dealer brings on many different emotions stemming from the thought of hard negotiations, haggling, and to some extent, questionable sales practices.
When visiting a dealer, consumers would be best to take a “zip it” approach. In other words, don’t answer too much. Buying a car from a dealer is akin to a high-stakes negotiating game. And your opponent (sales rep) has far more experience than you do.
“When visiting a car dealer, start by 10% off from the top because that’s what the TMV (True Market Value) of the car is,” says Aaron Price, a personal finance blogger. “People who know the True value of cars are hard to deal with because they cut down our commission on the car sale”, adds Price.
Some of the initial questions consumers might expect from a dealer will be:
- Do you have a car in mind?
- Are you thinking of trading in a vehicle?
- Are you thinking of leasing or financing?
The answer to all these questions ought to be: MAYBE!
Unfortunately, the more the consumer talks, the worse off they’ll be. In my experience, it’s better to focus on one thing at a time. The buyer can start by picking a new car they like and negotiate the price based on a “cash deal” with no trade-in (Even if they have one).
After the car buyer settled on a price with the dealer, they can decide on a side deal involving the trade-in. However, to get the best deal, the trade-in must get negotiated separately. Consumers who know their cars’ trade-in value ahead of time will benefit by not selling their cars for too low a price.
Consumers can look at pricing guides from NADA, Kelley Blue Book, and Edmunds.com for their used car value. And on Autotrader, consumers can see what people from their area are selling similar cars for.
Avoid Buying Add-ons From the Dealership
Dealers love to sell extended warranties, paint protection plans, tire protection plans, and other insurances. Indeed, much of it will earn the dealership a lot of money because they are often overpriced options that few will use.
However, if there is something that sounds good to you, like an extended warranty, consider if you’ll keep the car for the warranty duration. Or, if you like the idea of the paint protection plan, ask about the manufacturers’ warranty offered on the paint.
Americans looking to lease a new car will often benefit from a lower monthly payment than financing. However, buying a car based on payment alone is never a good idea. Instead, leasing offers an excellent tax deduction for those who can make use of them, such as realtors.
When consumers lease a vehicle, the payment covers the depreciated cost over the term. For example, if a car costs $30,000 and at the end of the lease, the residual value is $20,000, then the amount financed is $10,000 (the deprecation).
Things to know about leasing
Open-ended lease: The client must pay off the car at the end of the lease.
Closed-end lease: Bring the car and the keys back. No obligation to pay it off. Even if the vehicle is worth less than expected in the end, you won’t be on the hook.
Future value – The value of the car at the end of the lease.
Capitalized Cost: AKA “cap cost” refers to the amount financed. For example, if the car costs $30,000, and the car’s future value is $20,000 – then the capitalized cost is $10,000. A lower capitalized cost means a lower lease payment.
Mileage: – Consumers who negotiate milage upfront as miles can potentially save a boatload of money when the lease is over. Today’s additional cost will almost certainly be better than the cost per mile afterward.
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Buying a Car Privately
Consumers looking for the best deal on a car will find buying from a private party can often get the job done. Dealerships have to make money, so those who buy a car privately can save the dealers costs and profit.
There are many ways to buy a car privately; however, most people start with an online search. Car buyers can begin with Autotrader or eBay, but the best cars get found on Craigslist in my experience. Those who have the Kelley Blue Book price and good haggling skills can get a great deal on a vehicle.
Americans looking to finance a car they are about to buy privately can get a prearranged balance transfer or use a line of credit. Otherwise, the buyer can pay cash and then get a car loan from the bank afterward. Either of these choices will offer quick, cheap access to funds.
Related read: 7 Questions To Ask When Buying a Used Car
Sell or Trade-in Your Used Car to the Dealership
Car dealerships are retail outfits and make their money on the difference between the price paid for a car and what they sell it for. The difference is called the dealer’s margin.
Consumers looking to sell or trade-in their car to the dealership will get cash in hand, often in one afternoon. No doubt, those who need cash fast will find this method to be the most hassle-free. Unfortunately, however, it’s also the least efficient. Selling a car to a dealership means the seller will get a wholesale, or worse, the salvage price. Indeed, there’s a price for convenience.
Sell Your Used Car Privately
Consumers who sell their automobiles privately will often get more money than by selling them to the dealer. There are many places to sell a car online. For example, those who want to sell a used car online can do so on Autotrader, eBay, etc. But, in my experience, Craigslist consistently brings the best buyers.
Also, I recognize not everyone will want to sell their car themselves. I’d suggest knowing the Kelley Blue Book value of their car before selling it to the dealer for those people.
The Bottom Line
Consumers wanting to buy cars on credit can typically find the best deals if they have excellent credit, prearrange financing, and buy from a private party.