How to Get the Best Used Auto Rate

For most of us, having a car to get around is a necessity. Unless you live in a large city and have access to a robust public transportation system, car ownership is a critical component of functioning in the modern world.

Automobiles, generally speaking, also represent the second largest purchase(s) we make in our lives, second only to homes. One way to minimize that expense is to shop for a used car, as opposed to new. Most of us have heard the cliché about how much the value of a new car drops the moment you drive it off the lot. Buying used can help avoid that rapid depreciation.

HOW CREDIT SCORE INFLUENCES USED AUTO RATE

Even if you buy used, the cost of vehicles has gone up considerably in recent years, making financing that purchase almost certainly a necessity. Financing will involve a lender evaluating a number of different criteria. Your employment history, your income, your levels of debt, and other factors are considered. One of the most critical components of qualifying for an auto loan will be your credit history. Not only does your credit history determine what kind of used auto rate you will pay, but it plays a large role in whether you qualify for a loan at all.

If you’ve experienced challenging circumstances in the past, and those circumstances have resulted in missed payments or other credit issues, a good first step is to get your arms around what’s on your credit report. Consumers are entitled to a free copy of their credit report from all three of the major credit bureaus (Transunion, Experian, and Equifax) annually. You can get these copies online at annualcreditreport.com,. These copies will include the content of your credit reports but not your actual credit scores. While credit scores are a component in financing approval and the used auto rate that you end up paying, what you’re most interested in at this stage is what is reflected in your credit history.

You want to review these reports and look for any negative items. Late pays, collections, public records (including bankruptcies), are all things you want to identify.

Then, if anything is incorrect, you have a right to dispute any incorrect information. You want to send a letter to both the lender reporting the information and to the credit bureau. In your letter, explain that you are contesting the accuracy of the reporting.

CREDIT SCORE COMPLICATIONS

Don’t worry too much if the negative items are accurate. Everyone experiences ups and downs in our lives, and changing circumstances have a direct impact on our finances. Health issues, job losses, wage reductions, divorces, and a million other things, all directly affect our financial well-being. And even after a rocky period, you can turn things around and rebuild your credit rating. At first, you may be stuck paying a higher used auto rate than is ideal. However, as your credit improves over time, you can look to refinance at more favorable interest rates.

The single most important thing you can do is avoid any further negative items on your credit report. Pay everything on time. The more positive payment history you build, and the longer ago the negative items occurred, the more favorable your application will be viewed.

OVERCOMING CREDIT SCORE WOES

If you’re still experiencing difficulty staying current or paying everything on time, consider meeting with someone who can help. Firefighters Community Credit Union offers assistance through our financial wellness partners at Greenpath.

Some lenders, including FFCCU, will give you an opportunity to explain the negative items on your credit report. Take this opportunity to explain the circumstances that were making it difficult to stay current on your financial obligations. And show the lender how you’ve been able to pay on time since then. Not every lender will take these explanations into account. So if you’ve experienced some bumps and bruises with your credit, look for one that will.

Another good idea is to pay down revolving lines of credit as much as possible before shopping for a car. Revolving lines of credit are loans where you can borrow and pay it back, borrow and pay it back. Common examples are credit cards and home equity lines of credit. As opposed to installment debt, like a car loan or mortgage, where you borrow a lump sum once, and then pay it back over a set period of time in the form of a fixed monthly payment. Your credit score, which is a big factor in determining your used auto rate, is significantly impacted by how close to your limits you are on these revolving lines of credit. The lower the balances, the better.

WHAT A DOWN PAYMENT DOES FOR YOUR USED AUTO RATE

The next thing you want to do is save a down payment. There’s no magic number here, 10%, 20%, etc. The bottom line is that the more money you put down on the purchase of a car, the less risk the lender is taking by financing the rest. Your down payment shows your commitment to the purchase, and also allows the lender to lend less than the value of the car. If you’re struggling to get approved, try saving and coming to the table with a bigger down payment.

Another factor influencing your used auto rate is the type of car you’re attempting to purchase. With past credit issues, the lender may focus more on the car you’re buying than they usually would. Expect it to be easier to be approved for modest, reliable transportation rather than a luxury or sports car. Also expect it to be easier to be approved for more recent model years with fewer miles. This again boils down to the level of risk the lender is taking by financing the purchase.

It’s possible – particularly if you’re still going through a difficult period – that getting approved with a bank or even a credit union may be difficult. If you find yourself in this situation, it’s best to continue to follow the recommendations above. Begin or continue to pay everything on time, continue building your down payment, and consider purchasing modest, reliable transportation. The more time you have rebuilding positive payment history and keeping balances low on revolving lines of credit, the more likely you are to be approved.

WHAT NOT TO BUY

Two things you want to avoid at almost all costs: one – financing at very high interest rates, or, two – purchasing a vehicle that will result in constant, expensive repairs and headaches.

There are lenders that participate in what’s known as subprime auto lending. These lenders charge very high used auto rates, upwards of 25%, and make loans to borrowers with troubled credit histories. They count on making enough money off the loans that pay to offset the losses on those that don’t. It is possible, however, to purchase reliable transportation and finance it with a subprime lender. It’s still not ideal, and should be something of a last resort, but it’s possible. Again, focus on mileage and age. You’re going to be paying a lot of interest, the last thing you want is to have to pay for an engine replacement or new transmission, as well. And then, as you rebuild your credit history, look to refinance your loan, to a more favorable used auto rate in the future.

What you really don’t want to do is finance a “lemon:” a car that’s going to require constant, significant repairs. Generally, these cars are older with higher mileage. And the borrower purchases it because they feel like that’s the only car they can get with their damaged credit history. Unfortunately, this makes matters worse, and they end up not being able to afford the endless, costly repairs. Often times borrowers even walk away from the vehicles and default on the loans, putting them in a worse situation than when they started.

NEXT STEPS TO NAIL DOWN A GREAT USED AUTO RATE

If you’re looking for a used car loan at a great rate, FFCCU is a great place to start. Check rates, apply online, or get further information at ffcommunity.com. If you’re interested in rebuilding your credit after some bumps and bruises, FFCCU has tools that can help. Connect with us for a Dare2Compare, and our teammates can lay out a number of options to start you down the road!

Posted In: auto loans, Lending