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How to get the best deals on auto loans

[Apr 4, 2012.]


There are two particularly effective ways of driving down the costs of auto loans:

  1. Do everything you can to manage your credit score proactively so that you qualify for the best deal possible.

  2. Shop around for the best rates from many different lenders.

Cheap auto loans and credit scores

On Jan. 22, Susan Tompor (Yes, she was mentioned in last week's article too. And, no, your blogger isn't Ms Tompor's stalker.) told in the Erie Times-News the story of Keith Meintjes of Waterford, Mich. This model citizen had a credit score of over 800 when he bought a new Chevrolet Malibu in March last year, and consequently got a pretty amazing deal on his lease. Come November, when he went to get another car, this time for his son, he was surprised to find that he no longer qualified for the best rates.

Indeed, his credit score had tumbled to somewhere around 750, which was good, but not good enough to qualify him for the best deals on auto loans. Indeed, his new, lower score would, had he gone ahead, have cost him an additional $1,548 over the lifetime of the loan.

He hadn't missed or been late with any payments, and he always zeroed his credit card balances each month. He was mystified. What had gone wrong? Well, he'd changed jobs, and his new work required him to travel much more. So he'd signed up for two new credit cards that would allow him to earn more rewards. That's it! The new lines of credit that those cards represented dinged his score, presumably because some people acquire new cards when they anticipate personal financial trouble ahead.

The moral of this story? If you want to pay as little as possible for your auto loans, make sure you actively manage your credit score. Just getting new credit can harm it.

Improving your credit score

On Jan. 20, The Boston Globe ran a feature that suggested three key ways of improving your credit score prior to making any finance applications, including those for auto loans:

  1. Get a copy of your credit report (you're entitled to one free one annually from annualcreditreport.com). Check it carefully. That should allow you to correct any errors that appear on it, and to get a feel for the scale of the problems (if any) you face.

  2. Resolve to pay every single one of your bills on time, even if you're making only minimum payments.

  3. Reduce your "credit utilization ratio" by paying down balances -- particularly on credit cards -- as quickly as you can.

FICO is the company behind America's most widely used credit-scoring system, and its website reveals the weighting that it places on the different aspects of your financial behavior. In order of importance, these five are:

  1. Payment history (35 percent) -- Paying on time is the single most important influence on your score.

  2. Amounts owed (30 percent) -- This includes that key credit utilization ratio. Try to keep the balance on each credit card below 30 percent of its credit limit.

  3. Length of credit history (15 percent) -- The longer the better.

  4. New credit (10 percent) -- How many accounts you've opened (and how many credit inquiries about you have been made) recently. Having too many of these is is presumably what tripped up Keith Meintjes.

  5. Types of credit (10 percent) -- Your score's likely to be better if you've a good mix of different types of credit. FICO lists "credit cards, retail accounts, installment loans, mortgage, consumer finance accounts" as examples.

Cheap auto loans

It can take a lot of work, commitment and sacrifice to repair a seriously damaged credit score. But having a healthy one can save you many thousands of dollars, so it's well worth the effort. Just make sure that, having gone through all that, you don't blow some of those hard-earned savings by signing up for the first finance package your car dealer offers you. Shop around first for the best quotes for auto loans, both here online, and through your bank or credit union. Only then talk to your dealer.


About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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