Helpful information when purchasing a vehicle
Begin with a budget
It's surprising. Most people have only a vague idea of what they can afford when it comes to getting a new or used car. Some people think in terms of the basic cash price, while others think only of what the monthly payment will be.
Both approaches have flaws.
There's more to buying a vehicle than the initial cost, even if you pay cash. There are insurance, fuel costs and maintenance. Almost any new vehicle -- whether it's fresh from the showroom or new to you -- will mean higher insurance rates. Maintenance on a used car, even one just three years old, may be required sooner than you think. And going from that small sedan in your driveway to a flashy new SUV will mean shelling out more per month at the gas station.
Setting out to buy a car with just a ballpark monthly payment in mind -- whether leasing or straight financing -- is a surefire way to pay more than you might otherwise.
Determine your budget
So sit down and look at all your household expenses, as well as cash on hand and your take-home pay and determine what you can reasonably afford to pay for a new car. If you've never done it before, take this opportunity to build a household budget. You will find a downloadable interactive spreadsheet you can use to build your own budget HERE.
Need a general rule of thumb? If you're devoting more than 15 to 20 percent of your household income to transportation, you should probably scale back.
Check your credit first
Right off the bat, this is where the great majority of car buyers go wrong. After budgeting for an auto purchase, this is the very next thing you should do.
But most people leave it to the very end: Once they've decided on a car, driven it around the block and hammered out a price with the salesman and his manager, only then do they apply for credit and find out what their credit score is.
Do it the smart way: Check your credit up front, before you set foot in a dealer's showroom. Start this process months before you plan to purchase, if possible, because if you have incorrect or outdated information that's lowering your score -- and therefore raising the interest rate you'll have to pay -- it can removed, but it takes at least 60 to 90 days.
Get your credit report
There are three national credit reporting agencies, Equifax, Experian and Trans Union. You will need to get your report from all three agencies:
If you're married, make sure to get one on your spouse as well.
First, check to see what your FICO score is. Named after Fair Isaac Corp., the firm that developed the scoring model back in the 1950s, FICO compares the information in your credit report to what's on the credit reports of thousands of other customers.
FICO scores range from about 300 to 900. The higher your score, the better a credit risk you will be considered. It's very difficult to say what's a "good" or "bad'' score, though, since lenders have different standards for how much risk they will accept.
A used car lot that boasts it will finance anyone likely will not care if your FICO score is 500. That's because they will have jacked up the price on their cars and their interest rates to cover their costs of repossessing the vehicles they sell to high-risk customers who default.
How is credit score determined?
Your credit score is based on five factors:
• past payment history
• outstanding debt
• how long you've had credit
• how much new credit you've sought recently
• the types of credit you have
The vast majority of people fall into the 600 to 700 range, and the best auto financing rates are generally available only to those who score above 700.
Correct mistakes
Next, check the report for misinformation, such as accounts that don't belong to you, accounts that have been closed but still show as open, billing disputes that were resolved, incorrect credit limits or balances. Look for outdated information. As a general rule, a negative report stays on your record for seven years; a bankruptcy for 10 years. The credit reporting company has to support the information it has on you. No support -- no black mark. So ask to see it. If the support is erroneous, write to the company with which you originally did business. Send it copies of any documents you have supporting your position, and request that it send corrected information to the credit bureaus it reports to.
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