The allure of a new car is about more than just the new car smell. Many of us, including me, will be in the market for a new car when 2013 rolls around. That means we’ll likely be in the market for automotive financing, unless you plan on writing a fat check for you new set of wheels.
The auto loan environment is not unlike the mortgage or credit card environment. Decisions about your credit application are made based on a variety of factors, including credit risk, which means your credit reports and FICO scores will be pulled as part of the underwriting process.
The differences between applying for an auto loan and a mortgage loan.
Last week I wrote about preparing your credit for a mortgage in 2013, but the preparation for obtaining an auto loan isn’t the same. The main way auto loans differ from mortgages is the number of credit reports that will be pulled as part of the process.
In the mortgage world, all three of your credit reports and FICO scores are pulled, while your auto loan will likely be underwritten by a lender that only pulled one of your three credit reports and FICO scores. Which report they’ll choose to pull is a mystery.
Auto loan rates vary wildly depending on the lender and the make and model you’re financing. If your credit is good enough and you choose the right car, you may end up with a 0% interest rate or something close to it. If your credit is poor, you may end up with a 19% interest rate or worse, a denial.
Auto financing options.
Most people don’t think about preparing for an auto loan as much as they do for a mortgage loan. It’s actually very easy to apply for an auto loan, while it’s very cumbersome to apply for a mortgage.
You can either get preapproved at your bank or credit union and “take the financing” to the car dealership with you or you can apply for a loan through the car dealership.
Another option is called indirect lending, where the dealership sets up the financing with one of their financing partners, normally a bank or credit union, but can sometimes be the financing arm of the manufacturer.
Preparing your credit.
When it comes to car buying, most people don’t want to prepare like they’re preparing for a home loan. Car buying is more impulsive than home buying and you can walk onto a lot and drive away in a new car in just a few hours. You can’t say the same thing when you buy a house.
Because of the short lead-time, you’ll have to prepare your credit as best as you can. That normally means you’ll have less than a month to gussy up that credit report and FICO score, which might not be enough time to do anything to help your scores.
At best, you can go online and pay off some or all of your credit card debt and hope the credit card issuer updates the account with the credit bureaus within a few days, which is a stretch — to say the least.
You’ll do much better with the credit card “pay down” strategy if you’ll plan at least one month in advance. That way, you can pay your bill online today and get the value of the lower balance on your credit reports (and in your credit scores) in as little as a few weeks.
If you’ve got strong credit, you might be able to find a deal at or near 0% interest offered by a “captive” lender. The captive lender is the financial arm of the manufacturer.
Lending money at 0% clearly earns the lender nothing in interest fees but for certain models lending at 0% to someone who is almost void of credit risk just to move a unit off the lot and onto the road is worth it.
Plus, there’s margin in the car. So, even if you’re able to get killer financing from your local bank or credit union, they won’t be able to touch the best financing offers from the captives.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.