TopGearage

Are you in the market for a new car? Does your credit report suck? Do you favor a used car over new? If your credit score is lower than 600, have no fear. Let me explain a little about how car financing is done these days. I’m going to share with you how I ended up financing a new car in September 2009.

These days, everybody’s credit score sucks. You’re not alone. Banks are holding their good cards very close to their chest while at the same time, they put their bad cards down on the table for all to see. I do have a close friend who happens to have a 806 credit score, good income, a steady job, and even he was turned down for a home loan.

So don’t think that there’s no chance in hell you can get a new car without paying cash.

The credit world is very complex. But if you look at it from one point of view, it will become much simpler to understand: The bank wants to give you a loan. But only to the LOWEST RISK for the HIGHEST RETURN. If person A has a 720 credit score, the bank is looking to give him the highest rate possible for the least amount of risk. By all means, this is a simple principal. If person B has a 604 score, her risk of going bankrupt is higher. But between both Person A and Person B, the bank’s ability to get more money from lending to Person B is higher. So the bank’s biggest choice to make is “How much am I willing to lose to make?”

So with this in mind, let’s talk about credit scores. There are many different scores out there. Believe it or not, more than 75 scoring models exist. And with 3 major credit bureaus, it’s up to the lender to choose which score to pull. Each score costs the lender a different amount to pull. The more complex the credit file analysis, the more expensive the score.

Car lenders have their own scoring model known as the Beacon Score. This score depends heavily on your ability to pay back car loans. It takes a significant accountability at how you were able to repay an auto loan for the past 24 months. If you have an auto loan, and have been on-time with your car payments since the dawn of time, you should have no problem getting a loan to finance a car. However, if you were a bad boy or girl and paid your car loans late each month, your chances of getting a car loan under the Beacon Score are lower. In order to improve your Beacon Score, you need to start paying your car loan on-time. At least six months of current payments are a necessity to gaining approval for a new car loan. But you also want to make sure that during the last 24 months, you were not late on your car loan more than 3 times.

Now that you’re more familiar with the credit score and credit history you need to get a new car loan, let’s more on to something equally important: equity.

Equity is what you have invested in your car. In simple terms, you want to owe less on the car than what it’s worth. So if you buy a new car, you will need a nice chunk of cash for a down payment. This is not only good for lowering your new car payment, it’s also good for the bank. You see, if you are Person B that was mentioned earlier, and you have more money down than Person A, it means that although your score is lower, you have more equity in the deal. So you may still be a higher risk to the bank, but your are also a better source of profit for them because you will be paying more interest in the long-run. In the short-term, however, the bank needs to know that if you buy a new car and immediately miss your payments, they can repossess your car and auction it off immediately. This allows the bank to sell that car (a depreciating asset on their books) in order to raise funds to pay off your loan. But the bank never want to do this for anyone – and is why they take into account other factors in your Beacon Score.

So if you’re in the market for a new car, and you think your credit sucks, you need to make sure:

• You have been on-time with your current car payments for 6 months
• Your current car loan payments haven”t been late more than 3 times, over the past 24 months

Once you have established a good payment history, you need to find a car that you can afford. Start with a down payment. If you have less than $5,000 for a down payment, you should not be looking at a car with an MSRP of more than $20,000. This is because your down payment needs to pay for sales tax, fees, and registration, while the rest actually goes toward paying for the car.

In order to get that loan, you need to make sure that you have enough cash to cover tax and fees in addition to paying enough for the car so that the bank knows your equity is high.

Read the above sentence again, because it’’s important.

The bank is going to be more generous in granting you approval if they know you owe less on the car than it’’s worth from the start. For instance, if Person B buys a new car for $15000 and puts $6000 down, the bank will know that the car loan is really for $12000. So if the bank has to knock on your door and take the car back because you start missing payments, they can send it to auction and get a wholesale value (let’s just be hypothetical and give it a $11000 value at auction), the bank knows that their risk was high, the return was high, but their actual loss is small.

In contrast, let’s say Person A buys that same $18000 car with $2000 down. The bank has a small risk buyer but is making less money on interest. The bank also knows that if Person A loses his job and stops making payments, the car will only fetch $11000 at an auction and is loosing more money on the car.

Believe it or not, banks are not in business to lose money. They are in business to make money (or take money, depending on who you are and how you look at the current events).

In short, make sure that your car payment history over the past 24 months is decent. Save up enough money for a suitable down payment. Buy a new car you can actually afford (both from a monthly payment perspective and from a maintenance and insurance standpoints). You should be able to go into a car dealership and drive out with a good deal.

I highly recommend buying a new car that is very popular, in high demand, and economical.

Enjoy the purchase and enjoy the new car.

Tags: credit report, credit score, financing, free credit reports

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