How To Get an Auto Loan During the Credit Crunch
Part 2: Know the Score: How's Your Credit?
Your first step in landing an auto loan is optimizing your creditworthiness. Find out your credit score. Improve it quickly, if possible. And use this self-appraisal as the linchpin of your strategy.
Lenders insist that every car loan deal is as individual as we are. But they've got to start somewhere in evaluating your creditworthiness. And that place is your credit score, usually known as a FICO score.
The acronym stands for Fair Isaac Corp., the company that came up with the most commonly used credit scoring system. Your FICO score reflects every transaction you've made for the last several years involving credit and your record of paying it off.
FICO scores range from 300, which is awful, to 850, which is excellent. Americans' average credit scores are around 675.
These scores divide consumers into three basic categories: prime borrowers, whose scores usually range from 700-850; typical or "near-prime" borrowers, the largest category, whose scores usually range from 620-700; and subprime consumers, whose scores are below 620. (For more, see "How To Read Your Credit Score.")
You can raise your FICO score. But the first step is finding out what it is.
Three companies — Equifax, Experian and TransUnion — compile credit reports and scores and sell them to lenders. You can get one copy of each report per year for free as a result of the Fair and Accurate Credit Transactions Act, although you'll have to pay to obtain your actual credit score. Free reports are available through a dedicated Web site. You may order by telephone at (877) 322-8228 or by mail. For a copy of the mail-in form, download a pdf from the Web site.
More often than that, you can still get free copies of your credit report and free information about your credit score through online promotions — which, of course, usually have strings attached — or for a fee from the three companies. Your local bank also will run a credit report for you, but usually that costs more.
Yet amazingly — even after years of increasing news media attention to the importance of credit scores — 63 percent of Americans didn't know their FICO scores according to a 2007 survey by TransUnion.
Nudge Your Number
While you can't dramatically improve your FICO score overnight, you can nudge it upward almost instantly. And with a little planning and foresight, you can move it significantly higher over time so that you're more creditworthy for an auto loan.
In the short term, for example, resolve to make payments on time. "Even a few months of prompt payments can improve your credit reports," said Lucy Duni, vice president of consumer education for TrueCredit.com, a unit of TransUnion.
You can also boost your FICO score quickly by paying off credit cards with high balances, leaving yourself way under your approved credit limits. Also, refrain from closing open credit tabs, such as credit cards from specific retailers, just because you haven't used them in a while.
"Unused credit is one of the keys to getting a loan," said Edmunds.com Senior Consumer Advice Editor Philip Reed. "The more available credit you have, the more money a lending agency will be willing to loan you."
Over a longer term and in general, also avoid running up huge bills on your credit cards — even on corporate cards that might be listed on your credit report. Pay all your bills on time. Avoid opening up any new credit cards. Don't charge over the credit-card limits. And be certain to correct any discrepancies with creditors over past payments.
A Complete Picture
There are other components to your creditworthiness "package," including your occupation, proof of current employment and a stable and sensible job history, as well as home ownership. Be prepared to present proof of each and to explain credit problems due to divorce, illness or loss of job.
"Blemishes that didn't used to be problems are problems now," said Mark Edelman, partner in McGlinchey Stafford, a Cleveland-based law firm specializing in consumer finance. "Mortgage payment problems on a credit record, for example, set off alarms in the underwriting world at auto-finance companies and lenders."
Also, know your income. The more the better, of course. Edmunds recommends that your car payment equal no more than 20 percent of your take-home pay.
But don't count on robust or even fast-growing paychecks to make you a prime borrower singlehandedly.
"Paychecks are overrated with regard to credit scores," said Reed. "Factors like your credit history and payment records are much more critical.
Speaking Green
Having a trade-in vehicle, of course, will help you negotiate a better rate with lenders.
And one more thing: Accumulate as much cash as you can.
"If you can put substantial cash down on a vehicle, like 30 percent or more, a subprime borrower can actually get the interest rates reserved for prime borrowers," said Jesse Toprak, executive director of industry analysis for Edmunds.com.
This isn't as easy for many Americans as it used to be. For many homeowners, such "cash" for big-ticket items used to come out of seemingly bottomless troves of credit called home-equity loans. The rates were cheap, and home-equity interest is tax-deductible. But since the housing bubble burst, lenders have shut the lid on further home-equity outlays for many consumers.
Nevertheless, given how credit has tightened for many borrowers, the more greenbacks you can actually take to the dealer, the better position you're in to land favorable terms for the amount that you're going to finance.
Part 1: Credit Is Available and Pricing Incentives Abound
Part 2: Know the Score: How's Your Credit?
Part 3: The New Reality: Higher Rates, Stiffer Terms
Part 4: Go to the Source: Captive Arms, Banks and Credit Unions
