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Finding Out About Financing

When you start shopping for a car, you might be more concerned with additional features and specialty paint jobs than you are about the monthly bill. Unfortunately, the wrong financing can cost you dearly. Compound interest never sleeps, which means that you might be paying much more than you should if you work with the wrong lender. I want to help you to make great financial decisions, which is why I created this website. However, if you can remember a few tricks and keep those payments to a minimum, you can drive away with the car of your dreams without breaking the bank.

Finding Out About Financing

The Cheapest Auto Loan May Not Be The Best For Your Credit Score

by Colleen Porter

Many car dealers are competing on financing rates to attract buyers with a bad credit history. But should you accept their cheaper rates? 

If you have bad credit, when shopping for auto loans, you do not necessarily want the best deal. You want the auto loan terms that will help you improve your credit score.

Lower Your Monthly Payment 

Managing high credit risk is like a house of cards. If your car loan is too high, you could be late with your mortgage payment. Or you could get caught up in a cycle of taking out high-interest credit card advances or payday loans trying to make your car payments on time. Eventually, a monthly payment is missed, and then another, and your credit rating comes toppling down. 

Extending the term of your loan can lower car payments. A longer term, though, will add higher interest expense. Auto loan services that practice responsible lending practices will ensure borrowers have the financial means to pay back loans while not paying outrageous interest on the loan. 

Other ways to reduce your monthly payment are:

  • Making a larger down payment
  • Using additional collateral besides the new car (e.g., another vehicle, stock, home equity)

Negotiate Terms That Improve Your Credit Score 

If a longer auto loan term adds marginally higher costs but can lower your credit risk and improve your credit score, the term may make financial sense. These five main factors influencing your credit score should be considered when negotiating auto loan terms.

Payment history — Avoid negotiating terms that could raise the risk of a missed payment (i.e., too high of a monthly payment).

Credit utilization — If you borrow from your credit card to make a down payment or monthly payments on a car, and increase your credit utilization ratio (revolving credit used/total credit available) beyond 30 percent in doing so, you could lower your credit score. 

Credit history length — Keeping an auto loan in good standing adds to the length of your positive credit history. 

Credit mix — Adding an auto loan to a mortgage and credit cards provides a diversified credit portfolio. 

New credit — Shop around for auto rates, but do not fill out applications. Too many credit inquiries can negatively affect your FICO score.

With an improved credit score, you will be in a position to negotiate lower rates on future auto loans, as well as home loans and credit card rates. A marginally higher auto loan is a small price to pay for a good credit score and cheaper financing options.

Contact an auto loan service today for more information.