I am interested in financing a car? What are the pros and cons of this?
Jul 31, 2009
in
Commercial Mortgage FAQ
I need a car, but i don’t have the money to do this right now. Also i heard that financing builds your credit up which is something i am interested in doing because while apartment hunting for 8months my credit score dropped from people running it constantly. Any advise?
I don’t want anything fancy or large, just simple and reliable.
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3 comments
banannalouise on July 31, 2009 at 9:30 pm
I disagree heartily with the person above–in most cases, financing a car makes all the sense in the world! Any savvy business person will tell you that paying cash money for a depreciating asset like a car is a mistake. Once you spend your cash, it’s gone, and your car will NEVER be worth what you paid for it (unlike real estate, which appreciates…THAT type of asset you’d want to OWN as quickly as possible!). Better to keep your money (if you have it) in the bank, earning interest. Even at today’s lousy interest rates, interest compounded will earn you money and keep you liquid while you pay down on the loan, which you can also insure. Remember that you are making a monthly payment against your principal balance each month on a car loan, so therefore, the amount of interest reduces every month as well, whereas, money in the bank EARNS interest at a compounding rate…so don’t be confused by the fact that your loan APR is higher than your savings APR–the spread usually winds up being negligible.
If you haven’t built up credit already, you’re going to need to eventually…now is as good a time as any. It won’t ever get easier…in most cases, it only gets harder as life comes at you, so you may as well try for some small installment credit now. It’s often not easy, but you need to go through it at least once to get started.
Believe it or not, though, it’s harder to get a loan for a first time buyer with NO credit than it is for someone who has BAD credit. Reason for that is, at least the bad credit person has a HISTORY that the lenders can see, and sub-prime lenders are skilled at identifying where it went wrong in the past. However, lenders are reluctant to grab at first time buyers precisely because there IS no history–good or bad–to gauge your payment performance.
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Below is my advice for first time buyers. There are several different scenarios because I don’t know enough about you to know which applies, so I included every possible scenario, which is why it’s so long. Sorry for the length:
- If you are a recent college graduate: Car manufacturers are DESPERATE to sell cars, and you may be able to get a great deal on an inexpensive NEW car. Most captive finance companies, like GMAC, Toyota Motor Credit, etc., and even some credit unions and banks, will have a college grad program. College grad programs vary, but usually involve a small rebate of $400-500, and will give credit to college grads (usually graduated within the last 2 years or about to graduate within 6 months) who have no credit, or light but good credit, as college grads are a better risk statistically than generic first time buyers. Some College Grad programs will even give you a special rate. Call around to local dealers and lenders and ask if they have any First Time Buyer or College Grad programs.
- Generic First Time Buyers are riskier, and for that reason, most major lenders have steered away from them…but occasionally, there are lenders that will do First Time Buyers. Call around to different dealerships and ask them if they have any lenders who will do FTB’s. I think Toyota Motor Credit MIGHT have a FTB program, but don’t quote me on that. Any FTB program you may find, though, will almost assuredly have a high interest rate attached to it, due to the risk.
- The BEST way to get a loan as someone with little to no credit is to do so with a parental co-signer. Most people are LOATHE to ask family for help, but I’ve found that most who do muster up the courage to ask–even if they feel their family won’t or can’t help–often DO wind up getting help. Even if your co-signer has marginal credit, a good finance manager can often make something happen. And if your co-signer has good credit, you will benefit from a good rate as well. The caveat to this is, any late pays or defaults appear on your co-signer’s credit as well as yours, so to avoid heartache, be prepared to pay this loan before ANY other bill you have.
- A footnote on co-signers: some lenders require that the person with stronger credit be listed first on the loan. This has caused many co-signers to stress out, but unnecessarily so. Usually this is done because the APR will be based on the credit score of the first person, and obviously, the loan will be more easily paid if the rate is lower. Contrary to popular myth, however, this does NOT affect either yours or your co-signer’s credit ANY differently. Regardless of who’s listed first, lenders report to BOTH parties’ credit, and there is usually no way to determine who was primary or who was secondary.
Bottom line: If you’re only just starting to build credit, absolutely go for it, but do so carefully and cautiously. Your car loan will be your single most important payment, as you will always need a car. So make sure you always pay it before any other bill, and pay it on time. Sign up for bill pay through your bank to insure it automatically withdraws from your account on time each month.
Good luck!
B B on July 31, 2009 at 9:30 pm
In your case there isn’t any advantage to financing a car to build a credit rating. If you try to do so and have currently have a low score, the rate of interest will be very high. Debt/credit/loans are a high stakes poker game that the lenders have played well for decades,they know the rules and play to win. Look at the housing market as proof.
Could you save a few thousand and get a beater from Craig’s to serve you transportation needs for a few years and build your credit another way?
Derran G on July 31, 2009 at 9:30 pm
Financing is never good as you never own the car until you pay it off, you are better off getting a personal loan.
However, financing can improve credit rating and you don’t need any money upfront. You will end up paying more than market value for the car as you will be paying quite a bit of interest on it.
Another way to get your credit rating up is do what I did after I defaulted a few times. Apply for capitol one card(the 29% apr one) as they accept almost anyone, put money on it and pay it off and keep doing that.