So you are in the market for a new car. You think you know your credit score but in all likelihood you do not because there is nowhere you as a consumer can access your auto-enhanced score with any of the bureaus. An auto loan is an installment loan and the auto-enhanced score weights more heavily your installment loan history. Have you had an auto loan in the past? Was it paid satisfactorily? Mortgages and student loans are also installment loans, as are personal loans (though these are much less common). If you have not had any installment loan history, more than likely your auto-enhanced score will be lower than the FICO score you can purchase online.
I became friends with a Finance Manager at a Lexus dealership who gave me a few “suggestions” when it came to completing the application. When it asks you how long you have lived at your current residence, he said to always put at least 3 1/2 years. When asked how long you had been employed at your current job, always put at least 2 years. This information is rarely if ever verified but he said it often was considered in reviewing applications. Unlike a house, a car is a piece of property that can be moved around even though it is liened – thus, the bank likes to see that you have lived at the same place for a while, worked at the same job – that you are stable and not going to disappear in a few months.
When you go to an auto dealership and apply for financing there, be prepared for them to “shop” your loan – meaning, they will send your credit application to the captive lender and two or three other banks. (The captive lender is, for example, VW Credit Services if you are at VW.) The dealership will pull your credit, then each of the lenders they send your loan to will pull it as well, so you will end up with a bunch of inquiries that WILL count as hard inquiries, regardless of what the salesman may tell you. I can tell you based on just a few pieces of information whether or not you will get approved – if you are not confident, you should consider running it by someone who knows first and save yourself time. If you have defaulted student loans, no auto loan history, and a score in the mid-500s, you are not going to get approved at a dealership – well, not without 50% down, and even then it is not guaranteed.
My best score is with Transunion, so when my Transunion score soared above 720, I applied online with VW Financial Services, as I knew they would only pull Transunion. As expected, I was approved immediately and referred to my local VW dealership. I went in the next day and basically just had to pick out a car. My credit was not pulled again and the financing was not an issue. I was approved for a lease with a low interest rate and nothing down. Had VW pulled Equifax, things would have been very different.
I personally believe the best thing for your credit when it comes to an auto loan appearing on your credit is for it to be with the captive lender. If it isn’t, it just looks bad. The captive lender is where you get the lowest interest rates, the cash back, etc. If you can’t get in with them but you are a member of a credit union, I would suggest applying with your credit union before you even go to the dealership. Credit unions also offer great interest rates and if you get approved, you will go to the dealership in a stronger position, as you won’t need financing from them at all.
Even if you don’t know your auto-enhanced score, having a general idea of what is on your credit file before you go car shopping is a good idea. If you have a low credit score, especially due to recent missed payments or delinquencies, you should know what you will be faced with. Without excellent credit, it is highly unlikely you will be approved for a lease. My Jetta had a sticker price of about $30,000 – and my lease payment is $414 per month. If I had financed the car for five years at 10% interest, the payment would be $637 per month; at 20% interest, it would be nearly $800 per month. It is not uncommon for dealerships to use lenders charging exorbitant interest rates of 25% or higher for people with compromised credit. Additionally, at an interest rate of 20%, to get that payment down to what my payment is, you would have to put about $13,000 down – almost half. Now, if you are in a position to do so, you will have equity in your vehicle and be able to pay it off more quickly. If not, though, you may be unable to get the car you want because the monthly payment is too high based on your income.
And finally, with regard to applying for an auto loan, apply for a car you can easily afford the payments. Make your monthly payments on time and you will find your car buying experience in the future to be simple and easy – and you will save a fortune each month not paying outrageous interest. I can’t imagine paying $800 a month for my car, but $414 is just fine.
Roots, Credit & Life 